A shareholder's basis in the stock of the S corporation initially depends on the amount of capital contributed by the shareholder.
The rules governing distributions from C corporations differ from the rules that apply to distributions from S corporations.
Unlike the rules that apply to C corporations, which tax income both at the entity and at the owner level, the partnership rules are designed to only tax income once, at the owner level.
A partnership’s income, losses, deductions, and credit are passed through to the partners for Federal tax purposes and taxed directly to them, regardless of when income is distributed. Since the partners have already paid tax on the income when it is earned, a complex system of rules applies to prevent double taxation when the income is later distributed to the partners.
These statutory adjustments include deductions that reduce taxable income but do not reduce the corporation's ability to pay dividends or vice versa.
For example, the dividends-received deduction is deductible for income tax purposes but not for the computation of E&P, since it does not reduce the amount of money available to pay dividends.