Business Glossary

distribution of cash resulting from depreciation tax savings, the sale of a capital asset or of securities in a portfolio, or any other transaction unrelated to retained earnings . Returns of capital are not directly taxable but may result in higher capital gains taxes later on if they reduce the acquisition cost base of the property involved. Also called return of basis.

a distribution from a corporation that is not paid out of earnings and profits. It is a return of the shareholder's investment in the stock of the company. A return of capital is first applied to reduce the basis of the shareholder's stock to zero. Any distribution in excess of that amount is taxed as a capital gain. If a corporation has current earnings and profits or accumulated earnings and profits, distributions are treated as taxable dividends to such extent, not as a return of capital.