The Internal Revenue Code states that a non-dividend distribution from an S corporation to a shareholder is tax-free to the extent that it does not exceed the stockholder's stock basis. If the S corporation had income or experienced another taxable event (i.e. sale) during the year then you would likely be subject to income taxes.
As a S corporation shareholder it is very important to understand how to compute your stock basis. Your stock basis starts with your initial capital contribution and then is increased and/or decreased based on the flow-through amounts from the S corporation.
An income item will increase stock basis while a loss, deduction or distribution will decrease stock basis. Also keep in mind that each year you should be issued a K-1 to reflect the S corporation's income, loss and deductions which are allocated to you.
S corporation tax laws can get complicated so let us know if you have any additional questions.
Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys. His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.