S corporation shareholders are taxed on their share of the corporation’s profits, not necessarily their distributions. Distributions that are not dividends are considered a return of capital. Profit or loss from the corporation is included in the shareholder’s basis, and any distributions would decrease the shareholder’s basis. The shareholder would be taxed on distributions that exceed the amount of their basis as a capital gain on Schedule D (Form 1040) Capital Gains and Losses.

Dividend distributions, however, are paid out of profits and earnings, and therefore would be taxed as ordinary income unless they meet the requirements to be taxed as a capital gain.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the webpage or document at the time it is accessed.