Do you own stock in any corporations? If so, you may receive dividends from the company as distribution of the property you own. Typically, dividends are paid in cash, although some corporations chose to pay dividends by offering stock in another corporation or through property.
Dividends can also be received through partnerships, trusts, estates, associations subject to tax as a corporation, or a subchapter S corporation. If you are a shareholder in any of these corporations, you can receive a dividend if the corporation has paid your debt, or you have received services from the corporation or have be granted access to use the property of the corporation. Any services you provide for the corporation may be reciprocated through dividend payments in excess of what a third party would charge for the identical services. Distributions received as stock rights or more stock in the corporation may not qualify as dividends.
Dividends are paid from the profits of the corporation and are the most common type of distribution. Dividends are divided into two categories: ordinary and qualified. Ordinary dividends are taxed in the same manner as regular income, where qualified dividends are taxed at a lower rate provided they meet special requirements.
If you receive a distribution that qualifies as a return of capital, it is not considered a dividend. If some or all of your stock is returned by a company that is considered a return of capital, this will reduce your stock holdings in a company. If the corporation you have invested in did not have any current year earnings or profits, a distribution is generally seen as a return of capital.
Capital gain distributions can come from regulated investment companies (RICs), such as mutual funds, exchange traded funds, or money market funds, or they can come from real estate investment trusts (REITs). These long-term capital gains must be reported on a Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains.
You will receive a Form 1099-DIV, Dividends and Distributions, for each payment of $10 or more. Those received through partnerships, trusts, estates or subchapter S corporations will require a Schedule K-1 from the entity that states the taxable dividends you have been paid. Form 1099-DIV should state the breakdown of received dividends into the appropriate categories. In order to avoid penalties and backup withholdings, be sure to give the correct social security number to the payer. You may want to consider paying estimated tax on dividends received in significant amounts. The IRS requires you to report all dividends regardless of whether or not you receive forms from the payers.