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Posted by R. C. White on August 12, 2006, 1:00 am
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Hi, Oilcan.
That's a fairly common situation, unfortunately.
Taxable income, as computed in accordance with the Internal Revenue Code,
quite often is different from net income for financial reporting purposes,
according to generally accepted accounting principles, as required by the
SEC.
Often the differences are temporary and will reverse with time, such as
accelerated depreciation deductions that are claimed on tax returns in years
earlier than for financial reports. Other differences are permanent and
will not reverse, such as tax-exempt interest from a mutual fund's
investments in municipal bonds, which IS income, but is non-taxable to the
mutual fund investors. Some differences are predictable, such as
depreciation and tax-exempt interest. Others cannot be determined until
after the year is over, or happen very late in the year; a hurricane or
other disaster may cause a loss that wipes out year-to-date earnings, out of
which a dividend has already been paid.
These are only a few of the many situations that can cause the
taxable/non-taxable status of dividends to be unclear until after the books
have been closed for the year. Sometimes, the reported status must be
changed retroactively after an audit is done years later; amended returns
may be required, for both the company and its shareholders.
About all we can do in these cases is to record the dividend as we think it
should be when we receive the check. Then correct our entries when we
receive the 1099 or other official notification, probably a few months after
year-end.
RC
--
R. C. White, CPA [RC]
San Marcos, TX
(Retired. No longer licensed to practice public accounting.)
rc@grandecom.net
Microsoft Windows MVP
(currently running Windows Mail 7 in Vista x64 Build 5472)
> When I had a return of Capital from a stock, I didn't know until the
> end of the year when the company told me how the 'dividend' should be
> classified.
> R. C. White wrote:
>> Hi, Jim.
>>
>> Yes, just use Quicken's Return of Capital transaction to report receipt
>> of
>> these distributions. As in your example, a $2 distribution on shares
>> that
>> cost you $8 simply reduces your basis to $6. This is not "gross income"
>> and
>> need not be reported on your tax return, but you might as well, since the
>> 1099-DIV shows it and TurboTax will handle it automatically.
>>
>> When your stock basis is $6 and you get a Return of Capital distribution
>> of
>> $10, then the first $6 reduces your basis to zero. The remaining $4 is
>> gain, so it is gross income, probably a capital gain, to you. Your
>> return
>> should report this as a "sale" of the stock for $10, less your $6
>> remaining
>> "adjusted" basis, producing a $4 gain. If you get another such
>> distribution
>> next year, say $3, report it again as a sale with zero basis and $3
>> selling
>> price and a $3 gain. (Quicken and TurboTax should handle this
>> automatically - but see below for my disappointment with Quicken. I
>> haven't
>> installed TurboTax in this beta version of Vista, so I can't load the
>> program and remind myself of how it handles this.)
>>
>> Note two things that Return of Capital distributions are NOT. First,
>> they
>> are not actually sales of the shares, although you might need to report
>> them
>> that way, because you still own the stock. Second, they are not "capital
>> gain distributions"; those happen when the corporation (usually a mutual
>> fund) sells capital assets at a profit and distributes the gain to
>> shareholders. (If the fund sold for $300 assets that had cost it $200
>> and
>> distributed the whole $300, then $100 would be a capital gain
>> distribution
>> and $200 would be a return of capital.)
>>
>> Hmmm... I just tested this in Quicken 2006 Basic - and was disappointed.
>> In a "dummy" account, I recorded a return of capital distribution of
>> $1,000
>> on a stock with a basis of $300. Quicken happily shows that I now have a
>> NEGATIVE $700 basis in that stock - and the capital gains report shows
>> nothing. :>( Maybe someone here has done some research and/or testing
>> to
>> come up with a good way to get the right result in Quicken.
>>
>> When I Googled for "return of capital distribution", this was the first
>> hit
>> and it does a pretty good job of explaining the subject:
>> http://www.fairmark.com/mutual/nontax.htm
>>
>> But it doesn't tell how to make Quicken get the right answer.
>>
>> RC
>>
>>
>> > Any EASY way to handle Return of Capital on dividends in Quicken?
>> > Unlike
>> > regular dividends, Return of Capital dividends are NOT taxed, as
>> > dividends, nor income, but are used to adjust
>> > the cost basis of the stock/fund/bond. This
>> > counts against the cost of the stock (say you
>> > paid $8 for it, and received dividend of $2
>> > per share, your cost basis is now $6) Only,
>> > when the cost basis goes to $0, do you owe tax,
>> > and then the tax is paid at Capital Gains Rates!
>> > Quicken doesn't seem to be able to handle this,
>> > unlike long term, medium term, and short term
>> > cap gain rates! This usually involves Utility
>> > stocks, bur also some closed end Bond Funds!
>> > Any Ideas ?? Thought I'd ask -- Jim
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