A Non Dividend distribution is a type of distribution that does not come from the profits that have been made by a corporation or mutual fund. Often it is a repayment of capital that the owner would have invested into the organization. This investment is often in the form of stock and this affects the way that it needs to be reported for tax purposes. The following article provides basic information about how you should report any non dividend distributions that you receive.
How Does A Non Dividend Distribution Get Reported?
If this type of distribution is given to you, then you should also receive a statement, or more commonly a Form 1099-DIV. A non dividend distribution will be shown in Box 3 on this form. It is worth noting that Box 3 does not actually count as part of your tax return. It is only for your own information. In most circumstances, the dividend is not taxable.
However, the basis of your stock will be reduced by these distributions. The reduction will need to be the same amount as you have entered in Box 3. This is one of the reasons why it is so useful to fill this information in. You should double check that the figure in Box 3 is the same amount that you have reduced your basis. The fact that this is a reduction in basis means that you will not need to pay tax on this until your investment has been returned in full. Taxslayer Pro notes that this type of distribution can also be called a return of capital. You are not taking any profit out of the company, you are simply being repaid money that you have already invested. This means that the money you have received does not count as an income.
What Happens If You Have Made More Than One Purchase Of Stock?
You may find yourself in a situation where you have purchased stock in the same company on more than one occasion. This means it may not be entirely clear which stock you are receiving the distribution for. This could be the case if you have made several different purchases, or you have been investing over a period of several years. In this situation you should use the distribution to reduce the basis of the purchases that you made first.
What Happens If Your Investment Gets Fully Repaid
When your investment has been repaid in full, then the basis of your stock will have been reduced to zero. Any non dividend distributions that you receive after this will be considered a capital gain. According to Fairmark, which it is not very often that this occurs, it can happen and so you need to know what to do if you find yourself in this situation. A non dividend distribution only needs to be reported when your cost basis has been reduced to zero. You cannot have a negative number for your cost basis, so once it has reached zero any amount over this will need to be reported as a capital gain.
This will need to be reported on Schedule D and you will need to use Form 8949. The length of time that you have held the stock for will determine whether it is reported as a long term or short term gain. If you have received the distribution for stock that has been held for one year or less, then this will need to be reported as a short term gain. If you have held the stock for longer than one year, then this is a long term gain. You will not receive a Form 1099-B for these gains and so you will need to ensure that Box C is checked. The name of the company that you received the distribution from will need to be included in column (a). In order to make things really clear, you may also want to make a note that this is a non dividend distribution. This should be enough to save any confusion when your return has been received by the IRS.
Will You Be Taxed Twice If You Have Reported A Non Dividend Distribution As Income?
If you have reported a non dividend distribution as income in the past, then you do not have to worry too much about being taxed twice. There are steps that you can take to rectify the situation. If the distribution has been reported as income but you have not reduced the basis of your stock yet, then you will not need to do this.
You also have the option to file an amended return as long as the mistake was not made more than three years ago. This will allow you to report the non dividend distribution correctly and then you can reduce your cost basis. FAS Bookkeeping advises that an amended return cannot be e-filed. You will need to use Form 1040X and this will need to be completed manually. It is possible that this is something which could change in the future. If you are amending more than one return, then you will need to complete a separate Form 1040X for each tax year.
Do You Need To Get Professional Tax Advice?
If you have any concerns about whether you should declare your non dividend distributions, then it is always best to get some professional advice. A tax expert will be able to look at your specific circumstances and offer tailored advice. If it has been more than three years since you declared a distribution as normal income, then an expert will be able to advise you about the action you can take to rectify the situation. If you are unsure about any aspect of your tax return, then it will be better to get advice now, rather than face problems further down the line. A quick online search can help you find a service in your local area, or you could ask family and friends for their recommendations.
Written by Allen Lee
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