Liquidating dividends and tax treatment

Nonliquidating corporate distributions are distributions of cash and/or property by a continuing corporation to its shareholders.

At the shareholder level, a nonliquidating corporate distribution can produce a variety of tax consequences, including taxable dividend treatment, capital gain or loss, or a reduction in stock basis.

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kyoshino/Getty Images Companies that earn a profit can do one of three things: pay that profit out to shareholders, reinvest it in the business through expansion, debt reduction or share repurchases, or both.

When a portion of the profit is paid out to shareholders, the payment is known as a dividend.

It was literally said on Wall Street, “the purpose of a company is to pay dividends”.

Today, the investor’s view is a bit more refined; it could be stated, instead, as, “the purpose of a company is to increase my wealth.” Indeed, today’s investor looks to dividends and capital gains as a source of increase.

Florence Delva/Getty Images Regular cash dividends are those paid out of a company’s profits to the owners of the business (i.e., the shareholders).

A company that has preferred stock issued must make the dividend payment on those shares before a single penny can be paid out to the common stockholders.

Cash dividends literally represent money sent to you in the mail or direct deposited into your bank account.

The goal of successful investing is to be able to have cash dividends pour into your life regularly so you don't need to work unless you desire.

Before a company can pay cash dividends to shareholders, it has to go through a legal checklist that includes declaring a declaration date, ex-dividend date, date of record, and distribution date.

As an investor, you need to know what these represent.

The preferred stock dividend is usually set whereas the common stock dividend is determined at the sole discretion of the Board of Directors (for reasons discussed later, most companies are hesitant to increase or decrease the dividend on their common stock).

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