Why do companies issue liquidating dividends
For taxpayers in the 10% or 15% ordinary tax brackets, there is no tax on most long-term capital gains and dividends realized after 2009 and before 2013.
Caution: Shareholders may want to evaluate the sale or disposal of stock by the end of 2012 to take advantage of the 15% dividend tax rate, lower individual income tax rates, and lower capital gain tax rates set to expire on Dec. Guidance on the tax treatment of these items in 2013 and subsequent tax years is uncertain, so practitioners should watch for future legislation.
Distributing profits to shareholders signals a healthy future for the company and gives it additional publicity when it declares dividends.
The primary disadvantage of paying dividends is a decrease in the company’s retained earnings, which could be used to cover unforeseen expenses and debt obligations.
Instead, the liability reduces the amount realized by the shareholder.
The maximum tax rate for both long-term capital gains (realized after May 5, 2003, and before 2013) and dividends (for tax years beginning after 2002 and before 2013) is 15%.A dividend is a portion of the company's profits that you as a shareholder are entitled to as and when declared by the company.You own some shares, so you get a small percentage of whatever the company has earned.Unfortunately, no clear-cut guidance exists regarding the period over which liquidating distributions can be made. Shareholders should maintain documentation that multiple distributions are liquidating distributions whenever multiple distributions are necessary (especially if they will span several tax years and, therefore, result in tax deferral). The request limits the time for assessing tax or beginning a court action to collect the tax to 18 months from the date the request is filed. One example of a situation when a request for prompt assessment might be appropriate is the liquidation of a corporation because of shareholder differences. Keller, and Robert Popovitch, published by Thomson Tax & Accounting, Fort Worth, Texas, 2012 (800-323-8724; ppc.thomson.com).For example, a plan of liquidation documented in the corporate minutes could state that multiple liquidating distributions will occur and explain the business reasons for this. It does not extend the time in which an assessment can be made beyond three years from the date the return was filed (Regs. If the IRS assesses an additional tax liability after the assets have been divided among the shareholders, disagreements could arise regarding who is responsible for the deficiency. The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.
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However, the IRS has stated that a shareholder that assumes such a liability will receive capital loss treatment when the liability is ultimately paid by the shareholder (Rev. The corporation recognizes gain or loss for the receivable when it distributes the receivable to the shareholder.