Cash Liquidation Distribution

What Is a Cash Liquidation Distribution?

A cash liquidation distribution, otherwise called a liquidating dividend, is the amount of capital returned to the investor or business owner when a corporation is somewhat or completely liquidated. At the point when a company leaves business and its assets are liquidated, the firm either issues non-cash liquidating distributions, cash liquidating distributions, or both.

The distributions are returned to investors per the capital structure of the business. On the off chance that money is left in the wake of paying bondholders, stockholders are paid a portion of the money. Distributions to investors up to their cost basis — the amount invested, including commissions and charges — in the stock is viewed as a non-taxable return of principal.

Amounts over investors' cost basis are reported as capital gains, a taxable distribution. Amounts below investors' cost basis are reported as capital losses. Credit unions send this kind of distribution to their contributors when they are liquidated, too.

Figuring out Cash Liquidation Distribution

Proceeds from a cash liquidation distribution can be either a non-taxable return of principal or a taxable distribution, contingent on whether the amount is more than the investors' cost basis in the stock. The proceeds can be paid in a lump sum or through a series of portions.

Frequently, proceeds from cash liquidation distributions are reported on Form 1099-DIV. The IRS commands that distributions of $600 or more must be reported on Form 1099-DIV. Any taxable amount the investor gets is reported on Schedule D, the capital gains and losses statement that is recorded with the IRS form 1040 during yearly tax filings.

Payments in excess of the total investment are capital gains, subject to capital gains tax. On the off chance that the amount the investor gets is not exactly their original cost basis invested in the stock, the investor might report a capital loss which lessens their tax bill. This loss must be reported once the firm issues a last cash liquidation distribution.

The duration of the holding period determines whether the capital gains are classified as short-term or long-term gains.

Illustration of a Cash Liquidation Distribution

XYZ Corporation is going through liquidation. Bob and Bette are shareholders. Bob' s cost basis of his shares in XYZ Corp. is $50. At the point when he gets a cash liquidation payment of $75, $50 of that is a return of capital and isn't taxable, while $25 is the gain and is taxable. Bette has an original cost basis of $100. At the point when she accepts her payment of $75, it doesn't cover his original cost basis in the stock. So Bette has a loss of $25.