qualified dividends

[Trnr395]

I have a corporation that has two owners. One of the owners took out $15,000 from the corporation at the end of 2010. Can this classify as qualified dividends or just ordinary dividends? They are a domestic corporation and they have been in business for around 25 years.

Thanks

[JohnH]

Yes. Provided the ownership test is met, qualified dividends are the same regardless of whether it's a closely-held corp or a publicy-traded corp.

[Gail in Virginia]

But, can one owner have dividends while the other owner does not? I know this would disqualify it from being an S-Corp, and I thought that it would maybe mess up this being a qualified dividend if it is not proportional to ownership.

[Trnr395]

I actually called the IRS and asked them about this and all they could do was to refer me to the instructions for dividends....which i have read 4000 times and still am not 100% clear. The two owners of the corporation basically just decided throughout the year if they want some additional money other than their paychecks. Then they write themselves a check for 15,000 or 30,000 dollars, etc. There is a lot of accumulated wealth that has just sat in a savings account and appreciated throughout the years...now they want some of it. It would basically mean that they wouldn't pay any tax on the dividends if it is qualified.

[GERALD]

This may or may not be what you are looking for, but here is my thought. Any C corporation, be it Mom & Pops Diner or GE has to follow the rules, although I know it is not done in a lot of small businesses. To pay a dividend, the Board of Directors must meet and declare a dividend of $xxx per share, payable a certain date to shareholders on a certain date. Since that was not done, you do not have a dividend. You have a advance?, bonus? Uncle Sam would undoubtedly call it ordinary income to the s/h in most situations. My suggestion is to have him pay it back,with interest, and do it right for 2011, and it would have to be for both shareholders. Then it would be a qualifying dividend.

[kcjenkins]

I'm with Gerald on this, Form is as important as Substance in many IRS situations, and this is one that could bite them in the rear end if they don't do it right, but would be easy to 'fix'. Just make sure that if one takes $50K and the other takes $40K, only the $40K is shown as a Dividend, and the rest as either income or a properly documented 'loan'. Remind them that the tax savings are worth a little extra effort to 'do it right'. And be sure your fee is increased to cover the value of that advice!