Guaranteed payments are essentially salary payments to a partner in the practice, however, they are treated differently as it is a payment to an owner of the entity.

Property distributions by C corporations that are the result of earnings and profits are treated as taxable distributions to shareholders (as dividends), while distributions by S corporations may be taxable if the basis of the property is in excess of a shareholder’s basis or if the S corporation had undistributed prior C corporation earnings. Only in general partnerships, LLCs, or LLPs would a nonliquidating property distribution not be taxable.

For nonliquidating distributions, the basis of the cash and property received cannot exceed the partner’s basis in the partnership, unless cash alone exceeds the partner’s basis. Cash is considered first in reducing the partner’s basis, which would lower the partner’s basis from $5,000 to $2,000. Then, if the partner’s basis is less than the NBV of the property received, the basis in the property is equal to the partner’s remaining basis, bringing the partner’s basis in the entity to zero.

For nonliquidating distributions, none of the amount is taxable so long as the basis of the property and cash received (FMV is not considered) are not in excess of partner basis. Since the partner’s basis was $70,000, there was no cash received, and the property received had a NBV of $65,000, no gain or loss is recognized.

$30,000 - $24,000 = $6,000. The basis of property received in a distribution other than in liquidation of a partner’s interest, will generally be the same as the basis in the hands of the partnership immediately prior to distribution.

Gain is only recognized to the extent that cash distributed exceeds the adjusted basis of the partner’s interest in the partnership immediately before the distribution.

At-risk provisions apply when determining a possible deduction for a partner on their share of the partnership’s losses.

Eligibility requirements for S corps include limitations on who may be a shareholder (such as individuals, estates, trusts, and charitable organizations); the number of shareholders (no more than 100); and only one class of common stock (preferred stock is not permitted). However, differences in common stock voting rights are allowed. 

Once an S corporation has elected to terminate its status, the corporation must wait until the beginning of the fifth year after the year of termination before it can reelect S status.

Election for S corporation status requires the agreement of all voting and nonvoting shareholders. Additionally, eligibility for election to S status is the same as eligibility for S corporations themselves: only certain persons may be a shareholder (such as individuals, estates, trusts, and charitable organizations – corporations and partnerships are not allowed); there may no more than 100 shareholders; and there may be only one class of common stock (preferred stock is not permitted).