Tax treatment of liquidating dividends


21-Aug-2017 02:44

The following Q&A and Cost Basis Calculator are designed to help you understand the tax implications of the initial liquidating distribution of .20 per share paid to shareholders in December 2016 and the remaining liquidating distributions.

Please note that this information is provided for illustrative purposes only and to help give you a general understanding of the consequences of the recent liquidating distributions. Shareholders must contact their tax advisors for specifics regarding the taxation of their individual investments.

At one time, taxpayers could lower their effective tax rate with the use of a collapsible corporation.

Instead of making and selling goods and services, the collapsible corporation was created solely for tax purposes and terminated when its usefulness ended.

For federal tax purposes, the entity is subject to income tax under Subchapter C of the Internal Revenue Code and is referred to as a “C corporation.” Since Subchapter C treats corporations as distinct taxpayers, the net income or loss doesn’t carry over to the personal tax returns of shareholders.

The Internal Revenue Service collects both income taxes and capital gains taxes, but sets varying rates for your earnings, depending on how you earned them.

When a corporation ceases its business operations, all assets owned by the company must be distributed.

This process is known as liquidation and is necessary, even in cases when the corporation is being sold or converted into a different business structure.

This liquidation results in an initial tax on the corporation for any gains on the property.

An S corporation is a regular corporation that has made a special election with the Internal Revenue Service to pay taxes as if it was not a corporation.

Although S corporations have special tax status, they operate like other corporations in many ways since they are still legally a regular corporation under state laws.

If the stocks are transferred instead, this will result in a capital gains tax on any appreciated value in the stocks at both the corporate and shareholder level.

Many owners choose this option because the capital gains tax rate is lower than the rate applied to the sale of appreciated assets.

Corporations are the most widely known business forms, providing limited liability to shareholders and allowing ownership to be freely transferred through the buying and selling of stock.