An S-corp distribution is just the corp paying money to its owner. It is NOT a salary, not a dividend, not a loan. It’s a return of the owner’s investment plus accumulated profits. As long as you have basis (see the basis article), distributions come out tax-free.
How distributions stack against basis
You started with $20,000 of basis. The corp had $80,000 of profit, which boosted your basis to $100,000. The corp distributed $30,000 to you. Your basis drops to $70,000, distribution tax-free. Easy.
The corp distributed $130,000 instead. The first $100,000 reduces basis to zero, tax-free. The remaining $30,000 is taxed as a long-term capital gain.
The AAA: tracking what’s yours
The Accumulated Adjustments Account (AAA) tracks the cumulative S-corp profits and losses that have not yet been distributed. Think of it as the corp’s side of your basis. When AAA goes positive, distributions come out tax-free (assuming you have basis). When AAA goes negative (more losses than gains over time), you can’t take more distributions tax-free until AAA recovers.
If the corp used to be a C-corp
Old C-corp earnings (called Accumulated E&P) sit in their own bucket. When the corp distributes, the IRS stacks the distribution in order: first AAA (tax-free up to basis), then E&P (taxed as a dividend), then any other equity (tax-free or capital gain). The corp can elect to "bypass AAA" and treat distributions as coming from E&P first, occasionally useful for QBI planning.
Shareholder loans: very different
If you LEND money to your S-corp (not contribute as equity), the corp owes you back. Loan repayments are NOT distributions; they’re returns of principal, with separately taxed interest.
If the corp is in a loss position and your stock basis is used up, your loan basis can absorb more losses. But repaying a loan when your loan basis has been reduced creates ordinary income (gain on repayment to the extent of basis reduction).
For a loan to be respected as debt (not deemed equity), it needs: a written note, a stated interest rate at or above the applicable federal rate, a reasonable repayment schedule, and actual repayment in practice. Without these, the IRS can recharacterize the loan as a capital contribution.
The deadly trap: borrowing FROM the corp
If the corp lends to you (the shareholder), it had better be a real loan: documented, interest-bearing, with a repayment schedule, and actually repaid. Otherwise the IRS will treat it as either a distribution (taxable if it exceeds basis) or unreported wages (with payroll tax exposure on top of income tax).