The key distinction between dividend distributions and non-dividend distributions is their taxation and their relation to the corporation's finances:

Dividend Distributions

The distributions made to shareholders from a corporation's earnings and profits (E&P) are known as dividends. They hold a portion of the company's profits.

Tax treatment for shareholders:

• Qualified dividends are taxed at long-term capital gains rates, which are generally lower than ordinary income tax rates.
• The ordinary income tax rate for the shareholder is the same as the tax on ordinary dividends.

    Corporate Perspective:

• The corporation's dividends are not eligible for tax deduction.
• The payment is made using post-tax income (profits that have already been taxed at the corporate level).

Non-Dividend Distributions

Instead of earnings and profits, non-dividend distributions come from the corporation's capital. The shareholder's investment is represented by a return on their investment.

The tax treatment for shareholders:

• It was not taxed at the beginning. The stock's shareholder's basis (the original cost of investment) is reduced by them instead.
• Capital gains are taxed on any additional distributions once the shareholder's basis reaches zero.

Corporate Perspective:

Non-dividend distributions are typically linked to the company's retained earnings or other equity changes and do not entail the same tax consequences as dividends.

An overview of the distinction

The stock basis can be reduced before potentially triggering capital gains because dividends are income distributions and taxable, while non-dividend distributions are treated as a return of investment, which are taxable.

While dividends are related to corporate profits, non-dividend distributions often relate to capital.