Corporate distributions of cash or property are classified as taxable dividends to the extent of the corporation's current or accumulated earnings and profits, which is a tax accounting concept that is somewhat similar to the financial accounting concept of retained earnings. Withdrawals from each layer have different tax consequences.
Creditors are always senior to shareholders in receiving the corporation's assets upon winding up.
However, in case all debts to creditors have been fully satisfied, there is a surplus left to divide among equity-holders.
They also include provisions on the timing of basis adjustments, basis computations during a loss year, computation of individual stock basis and the categorization of debt as basis.
The consequences of distributions to the shareholders and the corporation are discussed further.
In determining if a payment to a shareholder is proceeds from a tax-free loan from a corporation to a shareholder or a tax-free repayment of a loan from the shareholder to the corporation (as opposed to a potentially taxable corporate distribution to the shareholder), courts look at whether: 1. Upper-income individuals may also owe the 3.8 percent Medicare net investment income tax on dividend income.
There is a written promise to repay evidenced by a note or other document. There is a stated principal repayment schedule or balloon repayment date. For other taxpayers, the tax rate on dividends remains 15 percent.After the distributing corporation's E&P is exhausted, subsequent distributions reduce each shareholder's basis in his or her stock. S, shareholders can be subject to an almost infinite variety of taxability on distributions received from a corporation.The characterization of distributions from a C Corp will be generally determined at the end of the tax year, rather than at the point when the distribution is actually made.Depending on the tax position of the dividend recipient, a corporate shareholder may prefer to receive distributions characterized as capital gains in a year in which they have expiring capital loss carryovers, or ordinary dividends in a year in which the recipient has a tax loss. Corporations or individuals will often have foreign taxes withheld at source — generally ranging from five percent to 30 percent.When a company has more liabilities than assets, equity is negative and no liquidating distribution is made at all.