What Is Ordinary Dividends?

Dividends are payments out of earnings and profits from a corporation to their shareholders. Types of dividends include ordinary and qualified dividends.

Defined

Ordinary dividends are dividends paid from a company's earnings and profits.

How Ordinary Dividends are Treated for Tax Purposes

Treat ordinary dividends as ordinary income.

IRS Tax Forms with Dividend Income

Companies must send Form 1099-DIV to people who receive ordinary dividends.

Return of Capital

Any dividend that returns part of an investor's original investment is taxed as a capital gain or loss. This distribution also reduces the basis in the investment for the investor. The basis is typically the amount paid for the investment. Taxpayers use basis for tax purposes. Since part of the original investment is returned, the basis is reduced by the amount returned to the investor. As such, a return on capital is not a dividend but a return on the original cost to purchase the investment.

Corporate Accounting for Payment of Dividends

To declare a dividend, debit retained earnings and credit dividends payable. To pay a dividend, debit dividends payable and credit cash.

References

• IRS: Topic 404 Dividends