The Dos and Don’ts of Tax Documentation for Dividends

You did it. After months of laborious work, your startup is doing really well, possibly even turning a significant profit. Congratulations! Now you can begin to think about sending dividends out to your shareholders. Overall, the process is fairly simple if you understand the tax documentation process for dividends. No matter where you are in the process, Kruze Consulting is here to help. Here are some dos and don’ts when it comes to distributing dividends to your shareholders.

HEALY JONES
HEALY JONES
VP OF FP&A AT KRUZE CONSULTING

Tax Documentation for Dividends

Don’t Show Favoritism 

When sending dividends, your business needs to send them out to your shareholders on a pro-rata ownership percentage basis. Refrain from showing favoritism to certain shareholders even if you prefer some shareholders to others. Each shareholder should receive an equal percentage of the total dividends your company is preparing to pay. After which, you can mail the checks out to shareholders or transfer money via wire transfer; whichever is easiest for your company. 

Do Complete Form 1099-DIV

In January of the following year, go ahead and fill out the tax form 1099-DIV. This tells shareholders and individuals who receive dividends that the dividends are taxable income. Each recipient will need to declare their dividends on their personal tax return, and fill out Box 1A on tax form 1099-DIV which is the total ordinary dividends that you distributed to your shareholders.

Don’t Fill Out the Wrong Box

Dividend distributions are not filled out in the same box as non-dividend distributions. Non-dividend distributions are filled out in Box 3 of tax form 1099-DIV. A startup would distribute a portion of their non-profitable capital from investors to shareholders prior to being bought out. However, this is for solely non-dividend distributions. If you’re concerned with non-dividend distributions, watch this video to learn more. 

Do Send Tax Forms to Shareholders

Make sure to send the appropriate tax documentation to your shareholders. This allows them to give their personal accountants the necessary documentation to have their taxes filed properly. 

Don’t Hesitate to Answer Shareholder Questions

In all actuality, it is quite rare for startups to have the ability to send out dividends. Shareholders may have a few questions concerning this process and how you got here. Don’t be afraid to field their questions! Kruze Consulting has seen different companies over the years who are able to send out dividends. While it is a rare accomplishment, you have exceeded expectations and should feel confident fielding shareholder questions.

Do Be Careful 

This is a happy moment, the kind that communicates to your shareholders that they made the right decision investing in your company. However, make sure to only distribute excess cash and excess capital that you will not need to continue building your business. You do not want to be forced to raise money later down the line. There is no need to be in a hurry to send out dividends.

If your business has not yet distributed dividends, Kruze Consulting hopes your company becomes a public company or grows to be big and profitable enough in the future that it will be able to do so. In the meantime, if you are in need of expert accounting services or startup tax help tailored towards your growing business,tax returns for seed stage companies or more, talk with us! We may be exactly what you need to get your business to the level.

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