 Welcome to the session in which you would look at the distribution from the corporation's perspective. Simply put, when the S corporation have a distribution, how does the S corporation treat that distribution? In an S corporation, we have two types of distribution, liquidating and non-liquidating. So in a non-liquidating distribution, a non-liquidating distribution means the company is not going out of business. They're gonna distribute some cash property, but they're gonna be remaining in business. An S corporation recognizes a gain, but not a loss for the difference between the distributed property, fair value, and its adjusted basis. Well, if we have a gain, the gain increases the AAA, as well as the shareholder basis. Just basically, we have a gain, and the gain espaces to the shareholders. Now, think of it this way. The distribution, it's as if the S corporation sold the asset, and if the asset is sold for more than the adjusted basis, the asset will have a gain. So simply put, we're gonna compare the fair market value minus the adjusted basis. And if you did sell it, you're gonna have a gain. Guess what? Go ahead, recognize the gain, and the gain will increase the basis for the shareholder, as well as the AAA account. In a non-liquidating distribution, the S corporation recognize gains and losses, and those will be passed to the shareholder. Increasing or decreasing their basis, but this is liquidating. For now, we're gonna be dealing with non-liquidating. The best way to illustrate this concept is to take a look at an example. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. Sophia and Anna are equal shareholders in SA Inc., which has been operating in an S corporation since its formation. During 20x3, the S corporation made the following non-liquidating distribution. A land with an adjusted basis of 50 and a fair market value of 80 to Sophia. The land was subject to a $15,000 liability that was transferred to Sophia. For Anna, we gave Anna cash of 20,000, and a machinery with an adjusted basis of 50 and a fair market value of 45. Well, now we need to determine the amount of the gain or the loss that SA Inc., which is an S corporation, would recognize on this distribution. Well, let's start with Sophia first. Well, we distributed a piece of land with a fair market value equal to 80,000 minus the adjusted basis of 50. Do not worry, when you're computing the gain or the loss for the corporation, the liability has nothing to do with the gain or the loss. Therefore, we have a gain of 30,000. So Sophia will have a gain of 30,000, the difference between 80,000 and 50,000. Anna, she received cash. Well, easy. Cash, the fair market value of the cash is 20, it's adjusted basis is 20, there is no gain, no loss. Now we look at the machinery that Anna received. The machinery has a basis of 50 and a fair market value of 45. What does that mean? It means if they sell this machine today, they would incur a loss. Well, there is a loss. Do we recognize the loss? We don't recognize the loss. The loss is not reported. So make sure you are aware of this. Now what's the value of the distribution to the shareholders? Well, let's take a look. The distribution of the shareholder equal to the amount of the cash distributed. Of course, if you gave someone $10,000 in cash, the value to them is $10,000 plus the fair market value of the property minus any assumed liability. So if I gave you today, let's assume I gave you a piece of land. It has a fair market value of $100,000. You'll be, OK, great. You gave me $100,000 of value. Now with that piece of land, I attached. In other words, that piece of land has a liability. In other words, there's a lien from the bank. So there is a debt on that land, a debt equal to $20,000. So if I gave you that piece of land and with that piece of land, you're responsible for the debt. Basically, what I gave you $80,000 of value because to own this land, you don't really own the land until you pay off the bank. So if you sell it today, you sell it for $100,000. You would have $100,000 in your hand. You're going to go to the bank, pay the bank $20,000, and you're left with $80,000. Therefore, we'll take the fair market value of the property distributed and we deduct with it any assumed liability. That's the amount realized to you. Now, how are you taxable? Well, you'll take the cash received. So let's assume I gave you $10,000 in cash, $100,000 in fair market value of property, and there's a liability of $10,000 attached to that property. Well, the amount realized in total is $100,000. Then you compare that to your basis, whatever basis you have for that property or whatever basis you have equal to your taxable gain or taxable loss. Let's take a look at an example. Let's continue with the prior example. Okay, basically what we did, determine the value of the distribution received by each shareholder. Well, let's look at Sophia. She received $80,000 land. There's a liability of $15,000. As far as Sophia is concerned, she received $65,000 in amount realized. Well, for Anna, the $20,000 again equal to $20,000 plus a fair market value of the machinery of $45,000, a distribution of $65,000 as well. Notice the distribution are the same for both. We gave them both $65,000. They're equal shareholders. They're equal shareholders. This is important. You wanna treat them equally. That's the S corporation perspective. What should you do now? Well, go to Farhat Lectures and look at additional MCQs through false exercises, resources that's gonna help you understand this concept better. This is an important concept. Don't underestimate the distribution from the corporate perspective. How is that distribution treated? Well, if you have a gain, the corporation would recognize a gain. And if there's a loss, they will not recognize the loss. From the shareholders perspective, they receive something that's the fair market value. If there's a liability against that something, we will deduct the liability. Good luck, study hard, and of course, stay safe.