Overview
Corporations

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The most common types of corporate distributions are ordinary dividends, capital gain distributions, and non-dividend distributions. You will normally receive Form 1099-DIV if you received dividends or other distributions of $10 or more, but you may also receive distributions through partnerships or subchapter S corporations. These would be reported on Schedule K-1 (Form 1065 for a partnership and Form 1120S for a subchapter S corporation).

Dividends

Dividends are distributions of corporate earnings, and can be paid on both common and preferred stock. There are two types of dividends - ordinary dividends and qualified dividends. Ordinary dividends are taxed as ordinary income at the normal personal income tax rates in effect. Qualified dividends are ordinary dividends that meet certain requirements and receive special tax treatment, effectively being taxed at the same rates as capital gains.

Ordinary Dividends

Ordinary dividends are the most common type of corporate distributions. They are normally reported in box 1a of Form 1099-DIV, and must be included on either Form 1040A or 1040. If the total amount of dividends you received during the year is more than $1,500 and you are filing Form 1040A, the dividends must be reported on Schedule I, Part II. If you are filing Form 1040, the dividends would be reported in Part II of Schedule B.

Qualified Dividends

Qualified dividends are ordinary dividends that are subject to the 5% or 15% maximum tax rates that apply to net capital gains. These dividends are reported in box 1b of Form 1099-DIV.
In order to be considered a qualified dividend, the following tests must be met:

  • 1. The dividends must have been paid by a U.S. corporation or a qualified foreign corporation (including foreign personal holding companies and foreign investment companies). A qualified foreign corporation must be incorporated in a U.S. possession, must be eligible for the benefits of a comprehensive income tax treaty the U.S. has with that country (listed in Publication 550, Investment Income and Expenses, under Tax Treaties), or its stock (including ADRs) must be readily tradable on an established securities exchange in the U.S.
  • 2. The dividends must not be specifically excluded under dividends that do not qualify (see below).
  • 3. You must meet the holding period requirement – you must have held the stock for at least 60 days during the 121-day period that begins 60 days before the ex-dividend date. For preferred stock, the holding period is 90 days during the 181-day period that begins 90 days before the ex-dividend date. Days on which your risk of loss is reduced do not count toward meeting the holding period requirement. Your risk of loss is reduced under any of the following conditions:

    • 1. You had an option to sell, or had made, but not closed, a short sale of substantially identical stock.
    • 2. You granted an option to buy substantially identical stock.
    • 3. You hold one or more positions in substantially identical stock to reduce your risk of loss.

Dividends That Do Not Qualify

Dividends that are not treated as qualified dividends for purposes of the 5% or 15% tax rates include:
  • Capital gain distributions.
  • Dividends on deposits with savings and loan associations, or similar financial institutions. These are taxable as interest income.
  • Dividends from a tax-exempt organization or farmer’s cooperative.
  • Dividends on securities held by an employee stock ownership plan.
  • Dividends on shares for which you are obligated, under a short sale or otherwise, to make payments for positions in substantially similar stock.
  • Payments in lieu of dividends.

Reinvested Dividends

If you reinvest dividends and buy more stock, you will still have to report dividend income.

If you reinvest the dividends and buy additional stock at a price equal to its fair market value (market price) on the dividend date, you report the amount of the dividends as income.

If you have a dividend reinvestment plan that lets you buy more stock at a price lower than its fair market value, you report the fair market value of the additional stock on the dividend payment date as dividend income.

If under the dividend reinvestment plan, you can invest more cash to buy additional shares at less than their fair market value, you report as dividend income the difference between the cash you invest and the fair market value of the stock on the dividend payment date.

Non-Dividend Distributions

Non-dividend distributions are not paid from a corporation’s earnings and are not taxable income. These should be reported in box 3 of Form 1099-DIV. These distributions are actually a return of capital and reduce your basis in the stock, until all your investment is recovered. If you buy stock in different lots at different times, you should reduce the basis of the earliest purchases first. Once all your basis has been recovered, any additional non-dividend distributions would be reported as capital gains, either short-term or long-term, depending on how long you held the stock.

Liquidating Dividends

Liquidating dividends are another form of non-dividend distributions and would be treated in the same manner. Liquidating dividends should be reported in box 8 or 9 of Form 1099-DIV.

If you own more than one block of stock in a corporation and you receive a complete liquidation distribution, you divide the distribution among the blocks of stock you hold in proportion to the number of stocks in each block. If the distribution is more than your basis, you would have to report the difference as a capital gain. On the contrary, if the distribution is less than your basis, you may be able to claim a capital loss.

Stock Dividends and Stock Rights

Generally, dividends in the form of additional stock in the corporation or stock rights or options are not taxable. They would only be taxable if:
  • You or any other shareholder could choose cash or other property instead of stock or stock rights.
  • Some shareholders receive cash and others receive a percentage increase in their shareholdings.
  • The distribution is in convertible preferred stock.
  • Some shareholders receive preferred stock and others receive common stock.
  • The distribution is on preferred stock, except when it is an increase in the conversion ratio of convertible stock, in order to take into account a stock dividend or stock split.
If your stock dividend is taxable, it would be included in your income at its fair market value at the time of distribution. Also, if the stock dividend is not taxable, your basis in the stock or stock right received is its fair market value at the time of distribution.

How To Report

Ordinary Dividends

You cannot use Form 1040EZ if you receive any dividend income. You may be able to use Form 1040A. Ordinary dividend income is reported on line 9a of Form 1040A or 1040. If you receive any non-dividend distributions that have to be reported as capital gains, you will need to use Form 1040.

If you file Form 1040A, you will need to complete Schedule I, Part II if your dividends are more than $1,500, or if you received dividends as a nominee for someone else. If you file Form 1040 you will need to complete Part II of Schedule B under the same circumstances. Dividends should be reported separately by payer (which can be a brokerage firm).

Qualified Dividends

Qualified dividends are reported on line 9b of either Form 1040A or 1040, and the tax is calculated using the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040A or 1040 instructions. If you have other capital gains or losses and are filing Schedule D, you would use the Schedule D Tax Worksheet to calculate the tax on your qualifying dividends.

Capital Gain Distributions

If you have other capital gains or losses and are filing Schedule D, you would include your capital gain distributions on Schedule D. Otherwise, you can report capital gain distributions directly on Form 1040A or 1040.

Capital gain distributions are paid, or credited to your account, by mutual funds (regulated investment companies), or real estate investment trusts. They are treated as long-term capital gains, regardless of how long you owned your shares. Distributed capital gains are reported in box 2a of Form 1099-DIV.

Non-Dividend Distributions

You would only need to report non-dividend distributions if you recovered more than your basis in the stock, or you recovered less than your basis in a total liquidating distribution. In the case you receive more than your basis, you would report the gain as a capital gain on Schedule D. If you receive less than your basis in a liquidating distribution, you would report your loss as a capital loss on Schedule D. The gain or loss would be short-term if you held the stock for one year or less, and long-term if you held the stock for more than one year.

Undistributed Long-Term Capital Gains

The mutual fund or real estate investment trust (REIT) may keep their capital gains and pay tax on them. In this case, they will be reported on Form 2439, Notice to Shareholders of Undistributed Long-Term Capital Gains, but you must still pay tax on them. You report these undistributed gains on Schedule D, Capital Gains and Losses.

Part or all of the undistributed capital gains may correspond to one or more of the following categories, and this will be indicated on Form 2439:
  • Unrecaptured section 1250 gain (box 1b). This must be included in the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D. There it will be included with any amounts you may have to report from Schedule 4797 to determine the amount subject to tax.
  • Section 1202 gain from qualified small business stock (box 1c). You can generally exclude half this gain if the qualifying small business stock was held for more than five years. The taxable part would be a 28% gain. You report the entire gain on Schedule D and directly below the amount of the gain, you report the excludable amount in parentheses.
  • Collectibles (28%) gain (box 1d). This must be included in the 28% Rate Gain Worksheet in the Schedule D instructions.