I am mostly familiar with corporations; I've got zero experience with flow-through entities.

If an S Corp makes $1MM, with 60/40 owners, as I understand it each owner is issued a K1 with their pro-rata share of the profit.

Ok fair enough.  I also understand that the business must pay a shareholder that works in the business a "reasonable" salary.  (i.e. more than $1 per year, or whatever)

Is there a provision to allow an owner to defer or exclude a certain amount of income based on movements in the balance sheet above and beyond what might be allowed for a C Corp?

In other words, if I buy part of an undercapitalized business that's break-even (book P&L), take a very minimal salary (say minimum wage) and fatten up the balance sheet with inventory and capex spend, I presume that comes off the bottom to a more or less cash basis tax P&L.

Is that correct?

And anything different than the calc on a C Corp?

My understanding is that you don't have to pay yourself a salary if the business is losing money or breaking even.  You will get into trouble by not having a salary if the business is making money and you take distributions.  The IRS will be unhappy and want you to pay payroll taxes on said distributions.  You can also get into trouble if the business is making money and your salary is too low.

When the business is turned around, you will need to start paying yourself a reasonable salary.