A major difference between partnerships and S corporations involves the treatment of distributions of appreciated property.
Double taxation is the hallmark of the subchapter C regime.
Unique in the tax world, C corporations are first taxed on their income at the entity level.
A constructive dividend arises when a corporation distributes earnings and profits to shareholders without formally declaring a dividend but without the expectation of repayment.
Dividends may be formally declared or they may be constructive.
As such, the withdrawals triggered capital gains and taxable dividends for the shareholders.
Corporate Distribution Basics Non-liquidating distributions paid by C corporations to individual shareholders can potentially fall into three different layers for federal income tax purposes.In the above scenario, by distributing the property to the shareholder, the XYZ Inc will recognized 3K in capital gain (8K FVM – 5K cost basis).The shareholder will recognize 2K long-term capital gain upon redemption of his stock (12K stock value (8K FMV of land 4K Cash) – 10K stocks cost basis)).The maximum federal income tax rate on C corporation dividends is 20 percent for single people with taxable income above 0,000 (0,000 for married joint-filing couples).Upper-income individuals may also owe the 3.8 percent Medicare net investment income tax on dividend income.The XYZ Inc has only 7K in cash and it needs to come up with additional 5K.