Non-dividend distribution or return of capital is a payment that is not derived from a company's earnings or profits. In fact, it is a return on the shareholder's initial investment. Although not immediately taxed, these distributions decrease the investment's cost basis. If the cost basis is reduced to zero, any additional non-dividend distributions are considered capital gains and will be taxed. Box 3 of Form 1099-DIV is where non-dividend distributions are typically reported. Accurate tax filing requires proper adjustment of your cost basis and reporting of these distributions.

Examples that could be included in a non-dividend distribution include:

• Dealing with distributions when a business is liquidated partially or completely.
• When a company has more cash than it needs for operations or future investments, it will return excess capital.
• Non-earnings sources such as asset sales or other non-earnings sources are used to distribute certain mutual funds or REITs.

To illustrate how to record the non-dividend distribution when liquidating a company, I will use an example.

When you dissolve a company the assets of the company are distributed to shareholders which may trigger gain or loss to the shareholders.

• After all liabilities are settled, shareholders receive the remaining assets of a dissolving company. Depending on the value of the distribution and their cost basis in the shares they hold, shareholders may experience taxable events through this process.
• When the value of the distributed assets goes beyond the cost basis of the shareholder's company shares, the difference is considered a capital gain. Taxes may be levied on this gain.
• A capital loss is considered if the value of the distributed assets is less than the shareholder's cost basis. For tax purposes, this loss could potentially be used to offset other capital gains.