Understanding Nondividend distributions vs Liquidation Distributions for C-corps

I'm trying to wrap my head around the differences between nondividend distributions and liquidation distributions as we're planning to dissolve our family C-corporation next month. From what I gather, both seem to be ways to return capital to shareholders, but anything above the original investment basis becomes taxable. My main question is about Form 5452. Will I need to file this for liquidation distributions when dissolving the corporation? I noticed there's a checkbox B on the form to indicate if distributions are part of a liquidation, but then when I read further into the instructions, it cuts off... Has anyone gone through this process? What other forms might I need? We've had the business for about 15 years and I want to make sure we're handling the dissolution correctly from a tax perspective since there will be distributions to the 3 shareholders (all family members).

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21 comments

Ava Johnson

•8M

Yes, you'll need to file Form 5452 for the liquidation distributions when dissolving your C-corporation. The checkbox B you mentioned is specifically there to indicate these are liquidation distributions rather than regular non-dividend distributions. Form 5452 helps the IRS track the distributions made during liquidation to ensure proper tax treatment. When you liquidate a C-corporation, the corporation recognizes gain or loss on the distributed property as if it had sold it to the shareholders at fair market value. Then shareholders recognize gain or loss based on the difference between the fair market value of what they receive and their stock basis. You'll also need to file Form 966 (Corporate Dissolution or Liquidation) within 30 days of adopting the plan of liquidation. Additionally, file a final tax return for the corporation with Form 1120 and check the "Final return" box. Your shareholders will receive Forms 1099-DIV reporting the liquidation distributions, with amounts in boxes 8 or 9 depending on whether it's a complete or partial liquidation.

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Ava Johnson

•8M

Shareholders will report the liquidation distributions on their personal tax returns, typically on Schedule D and Form 8949. The gain or loss is generally treated as capital gain/loss (often long-term if they've held the stock over a year). They'll use the information from the 1099-DIV forms the corporation provides. For determining fair market value of assets like equipment, you should get a professional appraisal for significant items. The fair market value minus the corporation's adjusted basis in the asset determines the gain/loss the corporation recognizes. Even fully depreciated equipment that's still usable will likely have some market value, which means the corporation will recognize gain on distribution.

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Zainab Ahmed

•8M

I had a similar situation last year and used https://taxr.ai to analyze all my corporate documents before filing the final dissolution paperwork. It really helped me understand the differences between nondividend distributions and liquidation distributions for my specific case. The software parsed through our corporate bylaws, previous distribution history, and shareholder basis information to give me a clear picture of the tax implications. It flagged that some of our previous distributions had actually reduced shareholder basis already, which affected how the final liquidation distributions would be taxed.

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Zainab Ahmed

•8M

It definitely helped with the Form 5452. The system extracted all the relevant distribution information from our records and organized it in exactly the format needed for the form. It even identified which distributions qualified as liquidating distributions versus regular dividends based on the timing and corporate resolution language. For your skepticism, I was initially concerned too. The biggest value was catching that we had some distributions in prior years that were actually returns of capital that had reduced shareholder basis. Without identifying that, we would have calculated the final liquidation gains incorrectly. It's not just about filling out forms - it's understanding how your entire distribution history affects the final tax outcome.

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Connor Byrne

•8M

Just wanted to follow up that I tried https://taxr.ai after reading about it here. I uploaded our corporate records, shareholder meeting minutes, and past tax returns. It actually identified that two of our distributions from 2022 were incorrectly classified as dividends when they should have been nondividend distributions! This completely changed our calculations for the liquidation distributions we're planning. The system broke down exactly how to properly complete Form 5452, including the amount to enter for each shareholder's remaining basis. It also generated a detailed explanation of why our situation required checking box B for liquidation distributions, which I can include with our filing to prevent any confusion. Definitely worth it compared to what my accountant was charging!

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PixelPioneer

•8M

After struggling for weeks to get through to the IRS about some questions on my Form 5452 liquidation reporting, I finally used https://claimyr.com to get connected to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had specific questions about how to report distributions of appreciated property versus cash in a corporate liquidation, and the online guidance was confusing. The service got me connected to an IRS representative in about 20 minutes (compared to the 3+ hours I spent on hold previously). The agent clarified exactly how to handle the reporting when shareholders receive mixed distributions of cash and property.

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PixelPioneer

•8M

It's actually pretty simple how it works. They use an automated system that navigates through the IRS phone tree and stays on hold for you. When an actual human IRS agent comes on the line, you get a call connecting you. No need to stay on hold yourself for hours. There's nothing shady about it - they're not claiming to have special access or cutting the line. They're just handling the waiting part so you don't have to waste your time. And yes, it absolutely does work better than calling yourself unless you want to spend half your day on hold. I spoke with an actual IRS specialist who answered my specific questions about liquidation distributions versus nondividend distributions, which saved me from potentially filing incorrectly.

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Yara Abboud

•8M

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I had questions about liquidation distributions for an S-corp (different than OP's C-corp situation but similar form requirements). The service connected me with an IRS tax law specialist in about 40 minutes. My previous attempt waiting on hold myself lasted over 2 hours before I gave up. The agent confirmed that even though I'm dealing with an S-corp, Form 5452 was still required with checkbox B marked for liquidation distributions. They also explained how the different tax treatment for S-corp liquidation distributions versus C-corp works (flow-through versus corporate level taxation). Definitely changed my opinion on whether this service provides value.

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Paolo Rizzo

•8M

One thing nobody mentioned yet - make sure you're analyzing your nondividend distribution history correctly for ALL years of operation. We made a costly mistake during our C-corp liquidation by not realizing that some distributions from 5+ years ago had already returned part of the original investment basis. When we calculated our final liquidation distributions, we didn't account for this reduced basis. This resulted in underreporting capital gains on the liquidation. The IRS caught it during review, and we ended up with penalties on top of the additional tax. Form 5452 requires a complete history of distributions that reduced basis, not just recent ones.

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Paolo Rizzo

•8M

We didn't have to amend prior year returns, thankfully. The issue wasn't that we reported those old distributions incorrectly at the time - they were properly classified as nondividend distributions (return of capital) and the shareholders correctly didn't pay tax on them when received since they were return of basis. The problem happened during liquidation when we calculated each shareholder's remaining basis. We didn't account for the fact that those earlier distributions had already reduced their basis. So when we did the final liquidation distribution calculations, we used the original investment amounts as basis rather than the reduced basis figures. This meant we underreported the capital gains on the final liquidation since the shareholders had less remaining basis than we thought.

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Oliver Fischer

•8M

For anyone dissolving a C-corp soon - remember that timing can be crucial for tax purposes! We intentionally delayed our liquidation to January so the tax impact hit in the following year. This gave shareholders more time to plan for the capital gains taxes. Also, if your corporation has accumulated E&P (earnings and profits), distributions will be taxed as dividends until E&P is exhausted, before being treated as return of capital. This sequencing can significantly impact the tax treatment of your liquidation. You must exhaust your E&P through dividend distributions before you can distribute amounts that are treated as return of capital or liquidation proceeds.

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Sergio Neal

•4M

Yes, you'll typically need to file separate Form 5452s for different types of distributions during liquidation. Distributions from E&P are reported as dividends (usually on Form 1099-DIV in boxes 1a/1b), while liquidation distributions are reported separately (boxes 8 or 9 depending on complete vs partial liquidation). The timing Oliver mentioned is crucial - you must first distribute all accumulated E&P as dividends before any distributions can be treated as return of capital or liquidation proceeds. Each Form 5452 filing should clearly indicate the nature of the distributions being reported using the appropriate checkboxes. Your accountant should be able to determine if your corporation has accumulated E&P from prior years that needs to be distributed first.

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Giovanni Mancini

•4M

One important detail that hasn't been mentioned yet - when completing Form 5452 for liquidation distributions, make sure you're consistent with how you report the distributions across all shareholders AND on the corporation's final Form 1120. The IRS will cross-reference these forms, so if you report $X as liquidation distributions on Form 5452, that same amount should appear on the corporation's final return. Also, remember that the corporation must provide each shareholder with their Form 1099-DIV by January 31st following the year of liquidation - these forms will show the liquidation distribution amounts in box 8 or 9. A common mistake is forgetting to file Form 966 within 30 days of adopting the plan of liquidation. This is separate from Form 5452 and is required even for small family corporations. The IRS can impose penalties if Form 966 is filed late, so don't overlook this step in your dissolution timeline.

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Brooklyn Knight

•3M

This is exactly the kind of comprehensive guidance I was hoping to find! As someone new to corporate dissolution, the cross-referencing requirement between Form 5452 and the final Form 1120 is something I definitely wouldn't have thought about on my own. Quick question - you mentioned Form 966 needs to be filed within 30 days of adopting the liquidation plan. Does this mean 30 days from when the shareholders formally vote to dissolve, or 30 days from when we actually start distributing assets? We're planning to have the shareholder meeting next week but won't distribute assets until the following month. Also, thanks for the reminder about the 1099-DIV deadline. I assume the corporation issues these even though it's being dissolved? Do we need to maintain any corporate status just to handle these final tax reporting requirements?

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