A cash dividend is a distribution of a corporation’s earnings that the board of directors declares and pays to its shareholders in money. It reduces cash and retained earnings by the same amount, and it never reaches the income statement, because handing profit to the owners is not a cost of earning it. For tax, only the part of the payment covered by the corporation’s earnings and profits is a dividend at all.
Cash, Stock and Property Dividends
The three kinds split on what leaves the corporation. A cash dividend sends out money, a property dividend sends out some other asset, and a stock dividend sends out no assets at all, because the corporation issues more of its own shares to its own holders.
Tax law draws the same line. Property means money, securities, and any other property, except that the term does not include stock in the corporation making the distribution (26 U.S.C. 317(a)). Cash and property dividends are both distributions of property, a stock dividend is not, and what it does to the equity accounts is in stock split and additional paid-in capital.
Of the two that move assets, cash is the simple one. Distributing property worth more than its adjusted basis makes the corporation recognize gain as if the property had been sold to the shareholder at fair market value (26 U.S.C. 311(b)(1)), and money carries no built-in gain.
The Two Constraints on Declaring a Cash Dividend
Having the cash is not the test. State corporate law fixes the fund a dividend may come out of, in Delaware surplus or, where there is no surplus, net profits, and it leaves the decision itself discretionary, both set out in stockholder.
The second constraint settles character rather than permission. A dividend is a distribution of property out of earnings and profits accumulated after February 28, 1913, or out of earnings and profits of the taxable year (26 U.S.C. 316(a)). Earnings and profits is a computation of its own and it is not book retained earnings, so a corporation can pay out more than its earnings and profits support and report the excess as something else. What that gap does to a book figure is in dividend ratios.
Where It Lands on the Statements
Two lines move and neither is on the income statement. Retained earnings falls when the board declares and cash falls when the money goes out, so the two legs can fall in different periods. Neither is an expense, because a distribution to owners is a decrease in equity rather than a cost of earning revenue, the elements argument set out in dividend payable account.
On the statement of cash flows it is a financing outflow. Payments of dividends or other distributions to owners are cash outflows for financing activities (FASB Accounting Standards Update 2016-15, ASC 230-10-45-15). What else belongs in that section is in cash flow statement.
Declaration, Record and Payment
Three dates surround one dividend. The declaration date is when the board resolves to pay and the obligation arises, the record date decides which holders are entitled to it and moves no balance, and the payment date is when the cash leaves. The balances each one touches, and the notice a listed issuer owes before the record date, are in dividend payable account.
Common Questions
It means a dividend paid in money rather than in shares or another asset, the declared distribution defined in yield and dividend.
Better is a judgment about a corporation’s capital plan, not a property of either one. The cost can be stated plainly: a cash dividend permanently removes an asset, a stock dividend removes none, and only the first is a cash outflow.
One payment can split into three pieces, in order. The portion that is a dividend is included in gross income, the portion that is not a dividend is applied against and reduces the adjusted basis of the stock, and whatever exceeds that basis is treated as gain from the sale or exchange of property (26 U.S.C. 301(c)). Whether that first piece gets the preferential rate depends on whether it is qualified dividend income, set out in ordinary income.
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