Distributions in S Corp and LLC


V

Vijay Sharma

Please explain the normal order of distributions absent any
election for the order, i.e., distributions out of AAA, PTI,
etc. Also, please explain what each (AAA, PTI, etc.)
represents?

LLCs also make distributions, so does this order apply to
them?

Thanks in advance for your help.
 
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E

Ed Zollars

ijay said:
Please explain the normal order of distributions absent any
election for the order, i.e., distributions out of AAA, PTI,
etc. Also, please explain what each (AAA, PTI, etc.)
represents?
See Section 1368 for the ordering, which is different
depending on whether a corporation has accumulated earnings
and profits or not. As well, PTI is a now ancient concept
that would only apply to S corporations that existed prior
to 1982 (used to be "previously taxed income"). I'll ignore
that one for now, since I'd have to go back and refresh on
the impact of that at this point if I run into it (which you
don't very often). Back in the old days it was a kind of
"temporary holding location" for S corporation inocme.

For corporations with E&P, the distribution order is:

1. AAA until reduced to zero (goes against shareholder
basis)
2. Accumulated earnings and profits until reduced to zero (taxable
under the dividend rules)
3. Back to going against basis

A taxpayer can elect, under Section 1368(e)(3), to first
distribute E&P, something that may be considered because
certain "nasty" problems arise only with S corporations with
accumulated earnings and profits (like the excess passive
income tax under Section 1375).

For a corporation without E&P start at 3.
LLCs also make distributions, so does this order apply to
them?
Title 26 has no such beast as an LLC--so you have to tell us
which entity it elected to be treated as under the check the
box regulations.
 
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V

Vijay Sharma

Thanks for your reply

Assuming the S Corp has no prior C Corp E & P, isn't the
"Shareholder Basis" made up of S Corp earnings and
investments/contributions to the business as separate
accounts on the balance sheet? So do we make a distinction
as to where (earnings account or investments/contributions
account) the distribution is made from? Or am I mistaken?

Partnership is the elected entity for the LLC. So how is
the distribution treated for this?
 
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