S Corp Distributions

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s About Taxes)/S corp distributions Advertisement Expert: James G Rogers CPA - 11/6/2008 I am trying to understand why it is necessary in S corp to have K1 distributions equal amounts for the partners. Why should the government care about this? There are two partners in our corp and I'd like to turn over part of my ownership to my son which would create a situation where my son and I would each have half the ownership of my current partner thus being entitled to half the K1 he receives.

[Sakeri]

Dear Clem,

Welcome to All Experts, and thank you for your question.

Generally speaking, shareholders of a Subchapter S corporation receive dividends based on their respective number of shares.  The government doesn't care about the distribution as long as it comports to the shareholder agreement or other document spelling out the allocation of dividends.

If you "turn over" half your shareholder interest to your son, you may be creating a taxable gift.  If you own, say, 500 shares in the S-corp and the value of each share is $300, then your interest would total $150,000.  If you gave your son 250 shares, that would represent a gift of $75,000, which would certainly exceed the annual gift tax exclusion amount of $12,000 in effect in 2008.

Clem, I hope the foregoing is helpful, and I wish you and your fellow shareholders every good fortune.

Sincerely,

James Rogers CPA