Is there any guidance out there for computing proportional S corporation distributions. Specifically, I have 3 shareholders. Mother & two children. The mother has been gifting shares to the children over the last few years. so the ownership % has been changing each year. There has been undistributed profits for each year and there has not been any distributions until this year. How do you compute a proportional distribution? Based on the current ownership % or a prior ownership % or an average?

An S corporation generally is required to distribute the profit and loss that is reported on the K-1 based strictly on percentage ownership. The distribution is clearly based on actual amount withdrawal by the individual shareholder, however, I think what you really mean is how should the shareholder report their respective share of undistributed profits!

Since, the percentage ownership has been changing, the S corporations shareholders will report their distributive share of the profit based on the average percentage share of ownership during the year.

Thus the K-1 would reflect a distributive share of profit based on the average ownership percentage during current year, whereas, the distributions would reflect actual amounts by each shareholder.

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The K-1's that were issued in the past were based on the ownership %'s for that year. That is not the problem. The problem is that the profits for those years were never distributed. THe shareholders already paid the tax on the profits they just never received the cash. So now they want to distribute the cash. And I know there are strict rules that the amounts distributed have to be based on the ownership %. But as of when....when the profits were earned? the current ownership %? some average?

For S corporations it is generally based on % of ownership and this % cannot change unless the partnership ownership % changes. The respective partners cannot base their distribution based on the amount of profit or loss incurred at a given time period. In this manner, the S corporation is generally inflexible in allocating profits or losses when compared to a partnership.

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