• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What are Dividends?

Extracts from this document...

Introduction

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 property (FMV > AB) in satisfaction of debt is an event that triggers the realization of income. ...read more.

Middle

If the taxpayer is in a business same as or similar to that being investigated, all investigation expenses are deductible in the year paid or incurred. When the taxpayer is not in a business that is the same as or similar to the one being investigated, the tax result depends on whether the new business is acquired or commenced. If actual acquisition or commencement occurs, the expenses must be capitalized or amortized over the period of 60 months or more. If new business does not launch, the deduction is not allowed. HOBBY LOSSES Business or investment expenses are deductible only if the taxpayer can show that the activity was entered into for the purpose of making a profit. Hobby loss rule applies if the activity is not engaged in for profit and the expenses are deductible to the extent of hobby income. In addition, the Code provides a rebuttable presumption that an activity is profit seeking, if it shows profit 3-out-of-5 years (exception for horse-breeding activity presumption is 2-out-of-7 years). Hobby expenses must be deducted in the following manner: (1) Otherwise deductible expenses (2) Expenses that do not affect AB Itemized Deduction, subject to 2% of AGI (3) ...read more.

Conclusion

BAD DEBTS Noncollectible debt is a type of incurred by all businesses. We must distinguish business bad debts (from the business of lending money) from personal bad debts. The Code allows "above the line" deduction in both cases; however, the timing of deduction is different. Business Bad Debt is deductible as an ordinary loss in the year incurred. The deduction can be taken in the year of partial or total worthlessness (no need for final settlement). Personal Bad Debt is deductible only in the year of total worthlessness. Partial bad debt is not deductible unless there is a final settlement. Nonbusiness bad debt is treated as a short-term capital loss subject to all limitation. Bankruptcy is generally an indication of partial worthlessness of the debt, but it is not necessarily a final settlement in itself. WORTHLESS SECURITIES Worthless securities are not same as penny stocks; they are completely worthless. A loss is allowed during the year of worthlessness, and it is treated as capital loss deemed to have occurred on the last day of the taxable year. Example: Wilson bought $3,000 stocks of Wolt Corporation on May 1, 2001. The company went bankrupt and the stock became worthless on April 1, 2002. Since we deduct the capital loss on the last day of the taxable year, we will treat $3,000 as long-term capital loss (May 1, 2001 - December 31, 2002 = 19 months). ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Accounting report managment accounting

    Method of investigation (Overhead Absorption & Job Costing) The methods that will be used on this task are: * Table * Calculation * Cost sheet Findings (Overhead Absorption & Job Costing) The way to get the overhead into cost unit is: Direct variable cost add overhead portion and add the profit.

  2. UK BUSINESS Tax

    Doing this may negatively impact the UK economy in the short term as cost would be induced, but it would increase business activities and create more jobs and skills to improve the economy in the long term. Business Tax rates could be reduces to be more competitive against other appealing

  1. Horizontal effect of directives: A missed opportunity.

    not require them to set up a single institution for all categories of employees. It followed that persons employed as company directors could not derive a right directly from the directive to claim payment of their unpaid salaries from guarantee institutions set up for other categories of employees.

  2. When I met Mr. P.N. Sharma, Chief Manager, Allahabad Bank, Rajmahal Road, Baroda office, ...

    A high level of creditors with low maturity against a high volume of debtors with long maturity may threaten the very existence of the business. Creditors include bills payable; the only difference is that bills are drawn by the suppliers on the firm incorporating therein the contracted terms of credit which when accepted by the firm becomes bills payable.

  1. Two-page report if an aggressive takeover should occur on BHP Billiton Ltd

    The country has about 80,000 state-owned mining enterprises and 200 000 collectively owned mines. Over the years, China has established a mining industry system with a complete range of departments including geology, production, construction, scientific research, design, equipment manufacture, management, education and training.

  2. Capital budgeting: advantages and limitations

    The investments are required to be made immediately but the returns are expected over a number of years. In other words, capital budgeting decisions can be complex. They often require projecting cash flows for a wide range of uncertain outcomes.

  1. Microsoft Audit Planning - 8 Steps

    Quick ratio describes solvency in the near future. Cash ratio shows if there is enough means for uninterrupted execution of current transactions. All three ratios for Microsoft Corporation are calculated in the following table. Liquidity ratio Value Change (col.3 - col.2)

  2. This report will incorporate an analysis of Blackmores LTD including, the level of leverage ...

    The company has a multibillion dollar market capital in the area of developing and marketing branded vitamins and supplements. The analysis Blackmores in this report include: * Capital structure and leverage policy o Operational and financial leverage o Capital expenditure, financing and structure o Assessment of bankruptcy risk and cost

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work