IRS Tax Debt - Corporate Distributions

Taxpayers can develop tax debt problems from many different sources. One of those areas is corporate distributions. If you are the part owner of a corporation it is entirely possible incur a tax liability and never tangibly receive income from the corporation. This income, although never received directly, is reported to the IRS and needs to be recorded on IRS Form K1 and subsequently reported on the taxpayer’s federal form 1040.

Sometimes taxpayers overlook this when preparing their income tax returns. Failure to report this will most likely result in an increased tax liability. The amount of distribution reportable to the business owner is calculated by taking the total deposits and subtracting the total withdrawals for the year. The resulting number, either positive or negative, is then divided according to each business owner’s percentage of ownership and then reported on form K1 as a corporate distribution and is treated as taxable income.

This is something that happens to new business owners who may be unfamiliar with all the rules regarding corporate accounting. There are many other rules that must be followed to avoid incurring an IRS tax debt related to corporate matters. When in question it is always best to consult a tax professional.