Corporate Distributions

• Dividends and return of capital.
• Rent payments.
• Fringe benefits.
• Wage for services.
• Loans.

Corporate distributions made to stockholders out of the earnings and profits of the corporation are generally considered taxable dividends. Corporate distributions which are considered a return of capital are not taxable. 

A corporate distribution in excess of the earnings and profits of the corporation is generally nontaxable to the stockholder. The amount of the corporate distribution must first reduce the adjusted basis of the stock in the hands of the corporate stockholder. Any amount in excess of the stockholder’s adjusted basis will be treated as a gain from the sale or exchange of property.

Generally, a corporation does not recognize gain on a corporate distribution of cash to its shareholders. If a corporation distributes appreciated property (other than its own securities or stock), gain is recognized as if the corporation sold the property at FMV.

Corporate distributions of cash or property to shareholders will reduce a corporation’s earnings and profits, but not its taxable income. Corporate distributions of appreciated property will increase E&P to the extent of the appreciation, and decrease E&P to the extent of the property’s FMV.

When a corporation distributes property in satisfaction of a declared dollar dividend amount, it is a taxable exchange. The dollar amount of the corporate dividend is the amount considered received by the corporation in exchange for its property. However, if the corporation declares a dividend in property, the corporation generally does not realize income on the distribution of the property.

Form 5452, Corporate Report of Nondividend Distributions, must be filed when nontaxable distributions are made to corporate shareholders. These include distributions that are fully or partially nontaxable because the corporation’s earnings and profits are less than the corporate distributions. The form does not need to be filed for corporate distributions of tax-free stock dividends, or distributions exchanged for stock in liquidations or redemptions.

• Distribution in lieu of money.
• Disproportionate distribution.
• Distribution with respect to preferred stock.
• Distribution of certain convertible preferred stock (there are exceptions).
• Distribution of common and preferred stock resulting in the receipt of preferred stock by some common shareholders, and receipt of common stock by other common shareholders.

Even if a corporate distribution of stock or stock rights falls into one of the above five categories, it will not be considered a taxable dividend unless there is sufficient earnings and profits.

A corporation must report distributions made to its corporate stockholders on Form 1099-DIV. Corporate distributions reported on Form 1099-DIV include taxable dividends, capital gain distributions, nontaxable distributions, and distributions in liquidation.

Reasonable Compensation: Wages paid to a corporate shareholder as an employee of a corporation are deductible by the corporation and taxable to the shareholder. Wages are not double taxed, as is the case with dividend distributions. This creates an incentive for a shareholder in a C corporation to take as high a wage as possible in order to minimize overall taxes on corporate earnings. This is in contrast to an S corporation, where incentives exist for a shareholder to take as low a wage as possible. Wages paid to the corporate shareholder must be based on services rendered. Although the amount of wages paid to corporate shareholders is often considered an integral factor in tax planning, the amount is subject to scrutiny. The IRS will reclassify a portion of the wages as dividends if they do not represent "reasonable compensation."