An S Corporation with AEP wants to distribute cash to shareholders but avoid dividend treatment. It has no AAA. What planning strategy could create AAA to allow tax-free distributions?

Answer options:

Make a property distribution.

Generate ordinary income or recognize built-in gains.

Contribute capital to the corporation.

Take out a loan.

How to approach this question

AAA is generated by S Corp Income. Capital contributions go to Basis, not AAA.

Full Answer

B.Generate ordinary income or recognize built-in gains.✓ Correct

IRC §1368. AAA is increased by separately and non-separately stated income items. Capital contributions increase shareholder basis but do not affect AAA.

Common mistakes

Thinking capital contributions increase AAA.

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