Liquidating vs nonliquidating distributions 18 and 29 dating
A cash liquidation distribution, also known as a liquidating dividend, is the amount of capital returned to the investor or business owner when a corporation is partially or fully liquidated.When a company goes out of business and its assets are liquidated, the firm either issues non-cash liquidating distributions, cash liquidating distributions, or both.While there are differences, the S corporation basis system is similar to the rules that apply to partnerships.The tax consequences of distributions by an S corporation to a shareholder depend on the shareholder’s basis in the S corporation stock.The shareholder will also have two tax consequences from the liquidation.
The IRS mandates in section 331(a) of the IRS Tax code that distributions of 0 or more must be reported on Form 1099-DIV.
Any taxable amount the investor receives is reported on Schedule D, the capital gains and losses statement that is filed with the IRS form 1040 during yearly tax filings. When he receives a cash liquidation payment of , of that is a return of capital and is not taxable, while is the gain and is taxable. When she receives her payment of , it does not cover his original cost basis in the stock.
Payments in excess of the total investment are capital gains, subject to capital gains tax.
Because the income of S corporations is taxed to the owners when the income is earned, a mechanism is needed to ensure that the shareholder is not taxed again when the earnings are distributed.
This is done through a system of rules that track and adjust the shareholder’s stock basis.