Earnings and Profits (E&P)

[Snaggletooth]

Brick and Brack begin a C Corp and elect a fiscal year Aug 1 to Jul 31. Their first year begins 08/01/16. Each shareholder contributes $5,000 and the combined $10,000 becomes capital stock. The money is needed for inventory, as this is a merchandising business.

In order to buy Christmas presents for their families, $2000 apiece is withdrawn by each shareholder on Nov 25, 2016, and there is cash available to pay them. The shareholders do not wish to be obligated to pay the money back to the corp.

Fast forward to 01/31/17 - time to issue 1099s and such. This brings up whether 1099-DIV statements should be issued to Brick and Brack for $2000 apiece.

Since the first fiscal year will not end until 07/31/17, it is not known whether the corporation has Earnings and Profits to support dividends. Since cash was available at the time, it might be assumed that the corporation was making a profit, but that is still an unknown, and we still have another six months in which the operation could go sour.

Should 1099-DIVs be issued for 2016? If so, should boxes other than taxable be considered?

[Roland Slugg]

If this is a "real" situation (except for the dates), I hope you will advise the shareholders not to treat the corporation like a personal bank account. It might have been better (and cheaper) if they had simply started out as a partnership or an LLC.

It would be a lot easier if the "withdrawals" can be treated as either, (A) bona fide loans, or (B) salaries. If they don't want to do that, then the distributions are, indeed, dividends. The taxation thereof depends on whether or not there are E&P at the time the dividends are paid. In order to know that, the books will have to be accurately updated right to the date of the distributions. To the extent there are current E&P as of that date, the distributions are qualified dividends. The excess, if any, is a nontaxable distribution, reportable, I believe, in Box 3 of forms 1099-DIV.

Beware: "E&P" as defined in the tax laws is not necessarily the same as taxable income. Adjustments will have to be taken into account. (Code §312(n))