What Form 8854 Distribution 2023-2024

Here are the facts: The company is AC corporation and has current earnings and profits of 40,000. The company distributed cash - Jordan of 25,000. Jordan had a stock basis of 5,000. The tax treatment of the $25,000 distribution should be determined based on the ordering rules for distribution. First, the $25,000 distribution comes out of current earnings and profits. The balance of current earnings and profits is 15,000. The result of the $15,000 current earnings and profits is taxable income. The next item in the ordering rules for distribution is accumulated earnings and profits. However, since there is a deficit balance in accumulated earnings and profits, we cannot take anything out of it. If current earnings and profits were negative and accumulated earnings and profits were positive, we would treat it as a taxable dividend. If the net result is a negative amount, we move on to the next item. Since we cannot take anything out of accumulated earnings and profits, we move on to the next step, which is a return of capital. In this example, the shareholder's basis is $5,000, so this is a tax-free recovery of capital. Now that we have taken out from current earnings and profits and there is no accumulated earnings and profits, the shareholder has no basis. There are no earnings or profits to recover. The final step is a capital gain distribution. The capital gain distribution in this case would be $5,000, not $10,000 as previously mentioned. This distribution is taxed as a capital gain.