When an S corporation distributes noncash property to a shareholder, the tax consequences differ based on whether the S corporation is distributing appreciated property (fair market value of the property exceeds the basis of the property) or loss property (fair market value of the property is less than the basis of the property).
If the S corporation is distributing appreciated property to a shareholder, this will be treated as if the S corporation sold the property to the shareholder and a gain will be recognized. The gain (the character of which depends on the type of asset) will then be passed through to shareholders, who will each be taxed on their pro rata share of the gain.
If the S corporation is distributing loss property to a shareholder, the loss will not be recognized. Thus, it is not good tax planning for an S corporation to distribute loss property to a shareholder; it would be better for the S corporation to sell the property to an unrelated party, recognize the loss, and then distribute the cash proceeds from the sale of the property to the shareholder.
Distributions of noncash property to shareholders will also affect the stock basis of the shareholder receiving the property and the corporation's accumulated adjustments account (AAA). Whether the property being distributed is appreciated property or loss property, the shareholder receiving the property will take a fair market value in the property they are receiving.
0:00 Introduction
0:23 Appreciated property
1:22 Loss property
3:30 Example (appreciated property)
7:20 Example (loss property)
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