ETAX S Corporation REG21-240X

The order of accounting for distributions from an S corporation with earnings and profits.

1. A first portion of distribution is nontaxable, up to the amount in the accumulated adjustment account.
2. A second portion of the distribution is treated as dividend income, up to earnings and profits.
3. Any remaining distribution reduces basis; however, basis cannot go below zero.
4. Excess over basis is a capital gain.