In general, an S corporation does not pay a tax on its income.
Instead, its income and expenses are passed through to the
shareholders, who then report these items on their own income tax
If you are an S corporation shareholder, all current year income or
loss and other tax items are taxed to you at the corporation's year
end (generally, the end of the calendar year) whether or not you
actually receive any amount. Generally, those items increase or
decrease the basis of your S corporation stock as appropriate. For
more information on basis adjustments for S corporation stock, see
Stocks and Bonds under Basis of Investment Property
in chapter 4.
Generally, S corporation distributions, except dividend
distributions, are considered a return of capital and reduce your
basis in the stock of the corporation. The part of any distribution
that is more than your basis is treated as a gain from the sale or
exchange of property. The corporation's distributions may be in the
form of cash or property.
Dividends of an S corporation generally are paid only from
accumulated earnings and profits from years before 1983 or before it
became an S corporation.
Reporting S corporation income, deductions, and credits.
The S corporation should send you a copy of Schedule K-1
(Form 1120S) showing your share of the S corporation's income,
credits, and deductions for the tax year. You must report your
distributive share of the S corporation's income, gain, loss,
deductions, or credits on the appropriate lines and schedules of your
For more information about your treatment of S corporation tax
items, see Shareholder's Instructions for Schedule K-1
Limit on losses and deductions.
The deduction for your share of losses and deductions shown on
Schedule K-1 (Form 1120S) is limited to the adjusted basis of
your stock and any debt the corporation owes you. Any loss or
deduction not allowed because of this limit is carried over and
treated as a loss or deduction in the next tax year.
Passive activity losses.
Rules apply that limit losses from passive activities. Your copy of
Schedule K-1 and its instructions will explain the limits and
tell you where on your return to report your share of S corporation
items from passive activities.
If you have a passive activity loss from an S corporation, you must
8582, Passive Activity Loss
Limitations, to figure the amount of the allowable loss to enter
on your return. See Publication 925
for more information.