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between making the election and forgoing it is merely the Read ourprivacy policyto learn more. Distributions to shareholders during the PTTP are treated as reductions of basis (or gain if the distribution exceeds a shareholder's basis) to the extent of the corporation's AAA balance on the last day of the final S corporation year (Sec. 1.1377-2 stated that only persons who were shareholders on the final day of the last S corporation year are eligible to characterize PTTP distributions as if they were from the corporation's AAA.37, In 2019, the IRS proposed an amendment to this regulation to state that any shareholder who receives distributions during the PTTP treats the distributions as coming from AAA, not just those who were shareholders as of the final day of the last S corporation year. Final regulations issued: In July 2020, the IRS and Treasury released final regulations under Sec. "The Organization is organized exclusively for charitable and educational purposes"; "The Organization shall not have members"; and, "Upon dissolution of the organization, its assets shall be distributed as directed by a two-thirds majority vote of the directors in office for (i) one or more exempt purposes . This site was created as a gathering place for tax and accounting professionals. In (3) Lastly, where a corporation makes disproportionate distributions from year 2011 through 2014 to shareholders in order to help the shareholders satisfy their tax liability incurred from the income generated by the S-Corporation itself, but begins making proportional distributions in 2015, this can fall under the exception. From an accounting viewpoint, this position made sense: Gross income deduction = Exclusion nondeductible expense. For a more thorough review of your question please contact our office for a consultation. 2019). To provide a transition period for resulting changes in S-Corp ownership, tax law offers a grace period of 2 years for certain trusts. These were unilateral transactions in which the properties were placed in the trusts without any involvement from the beneficiaries. outstanding stock, (2) a shareholder redeems 20% or more Of course, B would not want the Can An S Corporation Make Disproportionate Distributions? The court, quoting from Rev. If a partnership or an S corporation makes a "specified income tax payment" during a tax year, the partnership or S corporation is allowed a deduction for the specified income tax payment in computing its taxable income for the tax year in which the payment is made.