Can an S-Corporation Pay Qualified Dividends?

Qualified dividends come only from regular, i.e. C corporations.

Look at it this way, since net profit on page one of the 1120S is taxed, you wouldn't also want to pay more tax on "supposed" dividends, right?

ChEAr$, Harlan Lunsford, EA n LA

I was trying to find a way to offer qualified dividends to someone offering debt financing to an S Corporation, so taxes to the shareholder aren't the main issue.

For the case of a C Corporation, can qualified dividends be issued to a bond holder, or are they only for shareholders?

nish

Qualified dividends are paid out of profits to shareholders.

I had a thought. There is such a thing as a convertible bond. Normally it's a bond that can be converted into stock. But what about the other way around - common stock that at some point does or can get converted into a bond?

Stu

Does any of this juggling act void the "S" election because it'd be treated as a second class of stock?

In any event, how the company wants to handle their interest payments is their thing. I suspect the IRS would treat the receipt of interest income (off the debt) as interest and void the hoop jumping act to try that tries to change the receipt of interest into the receipt of qualified dividends.

And.....once they start looking at stupid tricks like that, what's to slow them down from looking deeper into the company - either of them.

"nish" wrote

I would think the loss of the interest expense would be of importance to the real owners here.

Dividends paid are not a business deduction regardless of if it's an "S" or a "C" corporation.

Interest paid on business debt, however, is deductible by the business.

By definition, dividends are paid on stock. Whether or not the stockholders also own bonds is irrelevant.

Look up "preferred stock"; it pays (qualified) dividends at a fixed rate. Like other dividends, the amount paid is not deductible by the corporation. Interest on bonds is fully taxed to the recipient, but deductible by the corporation.

Seth

Excellent point. That's a very fine legal point and really needs to be dealt with by an attorney and OP in personal contact.

Yes, the IRS does like to recharacterize transactions to reflect "economic reality." So you're probably right.

Yes, that happens, too.

Stu

What's the purpose? Dividends paid while it's a stock are paid out of after-tax corporate income, and can be qualified. After conversion to a bond, coupons are deductible to the company and ordinary (interest) income to the bondholder.

Seth

changing the priority of recovery in a default situation?

In article , Gil Faver >>the other way around - common stock that at some point does or can get

That priority is written into the instrument's indenture, so it seems the company could be arbitrary about it. There's no reason preferred stock couldn't be senior to some bonds, or an instrument have seniority that varies over time.

(I can't remember the company but there has been at least one with inconsistent priorities specified: X, Y, and Z are equal according to one document, but payments for Y would go to X and Y holders get nothing until X is paid in full; do Z holders get anything from Y?)

Seth

Pay attention, everybody! This is a Subchapter S corporation. It CANNOT PAY DIVIDENDS to anybody unless it has Subchapter C earnings and profits hanging around from a time when it was a C corporation. In that case it could pay a dividend, which I presume would be a qualified dividend -- but only to its stockholders. An S corporation must make distributions proportionally to all stockholders; it can't distribute dividends from C corp E&P to some stockholders and not to others. If it has no C corp E&P, it can't pay dividends at all.

The answer to the original question is simply: NO.

Katie in San Diego