An S corporation is a legal entity that has a limited number of stockholders and elects not to be taxed as a regular corporation. Business gains and losses are passed on to the stockholders. An S corporation has many of the characteristics of a partnership. Stockholders are taxed at their individual tax rates for their proportionate share of ordinary income, capital gains, and other taxable items.
The ordinary income for an S corporation is reported on IRS Form 1120S, with each shareholder’s share of the income reported on IRS Form 1120S, Schedule K-1.
Because this income from the distribution of corporate earnings may or may not be distributed to the individual shareholders, the lender must determine if the borrower received a cash distribution from the S corporation.
The cash flow of an S corporation is otherwise evaluated similarly to that of a regular corporation. For additional information, see the following: