New rules on S corporation distributions

Beginning in 1997, each shareholder or partner adds to stock basis any positive amounts of gain or income allocated to them for the year. After making this addition, distributions from the S corporation are considered. Distributions from these entities are now first applied as a reduction in the shareholder's basis in stock. Only after distributions have been considered is the basis in stock reduced by any losses or expenses allocated to the shareholder. Should the distribution exceed stock basis before considering any losses, the excess distribution is treated as capital gain to the shareholder.