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What are Dividends?

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  • Essay length: 2165 words
  • Submitted: 19/06/2006
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University Degree Accounting

The first 200 words of this essay...

DIVIDENDS

Dividends to shareholders are taxable only to the extent the payments are made from either Net Income (current earnings and profits) or Retained Earnings (accumulated earnings and profits).

* Return on Investment: EARNINGS AND PROFITS

* Return of Investment: CAPITAL cannot be chosen by a taxpayer

* Capital Gain: LIABILITIES

When a corporation issues a simple stock dividend, the shareholder does not realize income. However, if the shareholder has the option of receiving cash instead, he/she must realize the value of the stock received, rather than the cash rejected.

TAX BENEFIT RULE

If a taxpayer obtains a deduction for an item in one year and in a later year recovers all or the portion of the prior deduction, the recovery is included in gross income in the year received.

Example: In 1999 Mimi deducted as a loss a $1,000 receivable from the customer when it appeared the amount would never be collected. The following year, the customer paid $700 on the AR. Mimi must report that $700 as gross income in 2000.

INCOME FROM DISCHARGE OF INDEBTEDNESS

A transfer of appreciated

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