Return of Capital, on dividends

Well, let's see ...

In H&B 2006 (and quite a few preceeding versions) there's the "Return of Capital" transaction.

How much more do you need?

db

Well, as one investment (Gabelli Convert funds), around 17-24 % of their dividends are in the form of return of capital. so-- useing Quicken, HOW do you know WHEN the return has exceeded the cost basis of the fund (and, then pay long term capital gains taxs on THOSE proceeds, without haveing to calculate by hand, each year)??? IF there is a way for Quicken to do it for you, would save several HOURS adding up these, especially when you reinvest the dividends! Again, these funds are NOT taxable, until you sell it, or the cost basis is exceeded, and then the amount is taxed at capital gains rates (short, medium, or long term, depending on the holding period, NOT as normal Income Tax). It is a book- keeping headache, and there is no way I can see to handle it with Quicken! Jim

danbrown wrote:

Hi, Jim.

Yes, just use Quicken's Return of Capital transaction to report receipt of these distributions. As in your example, a $2 distribution on shares that cost you $8 simply reduces your basis to $6. This is not "gross income" and need not be reported on your tax return, but you might as well, since the

1099-DIV shows it and TurboTax will handle it automatically.

When your stock basis is $6 and you get a Return of Capital distribution of $10, then the first $6 reduces your basis to zero. The remaining $4 is gain, so it is gross income, probably a capital gain, to you. Your return should report this as a "sale" of the stock for $10, less your $6 remaining "adjusted" basis, producing a $4 gain. If you get another such distribution next year, say $3, report it again as a sale with zero basis and $3 selling price and a $3 gain. (Quicken and TurboTax should handle this automatically - but see below for my disappointment with Quicken. I haven't installed TurboTax in this beta version of Vista, so I can't load the program and remind myself of how it handles this.)

Note two things that Return of Capital distributions are NOT. First, they are not actually sales of the shares, although you might need to report them that way, because you still own the stock. Second, they are not "capital gain distributions"; those happen when the corporation (usually a mutual fund) sells capital assets at a profit and distributes the gain to shareholders. (If the fund sold for $300 assets that had cost it $200 and distributed the whole $300, then $100 would be a capital gain distribution and $200 would be a return of capital.)

Hmmm... I just tested this in Quicken 2006 Basic - and was disappointed. In a "dummy" account, I recorded a return of capital distribution of $1,000 on a stock with a basis of $300. Quicken happily shows that I now have a NEGATIVE $700 basis in that stock - and the capital gains report shows nothing. :>( Maybe someone here has done some research and/or testing to come up with a good way to get the right result in Quicken.

When I Googled for "return of capital distribution", this was the first hit and it does a pretty good job of explaining the subject:

But it doesn't tell how to make Quicken get the right answer.

RC

Hi, Oilcan.

That's a fairly common situation, unfortunately.

Taxable income, as computed in accordance with the Internal Revenue Code, quite often is different from net income for financial reporting purposes, according to generally accepted accounting principles, as required by the SEC.

Often the differences are temporary and will reverse with time, such as accelerated depreciation deductions that are claimed on tax returns in years earlier than for financial reports. Other differences are permanent and will not reverse, such as tax-exempt interest from a mutual fund's investments in municipal bonds, which IS income, but is non-taxable to the mutual fund investors. Some differences are predictable, such as depreciation and tax-exempt interest. Others cannot be determined until after the year is over, or happen very late in the year; a hurricane or other disaster may cause a loss that wipes out year-to-date earnings, out of which a dividend has already been paid.

These are only a few of the many situations that can cause the taxable/non-taxable status of dividends to be unclear until after the books have been closed for the year. Sometimes, the reported status must be changed retroactively after an audit is done years later; amended returns may be required, for both the company and its shareholders.

About all we can do in these cases is to record the dividend as we think it should be when we receive the check. Then correct our entries when we receive the 1099 or other official notification, probably a few months after year-end.

RC