What are ordinary dividends defined as?

Ordinary dividends are defined as payments made out of a corporation's earnings and profits. This definition is critical because it highlights that dividends represent the distribution of a company's profits. Ordinary dividends do not come from just any funds available; they specifically derive from the earnings that a corporation has generated, which reflects its profitability.

In terms of taxation, understanding that ordinary dividends come from earnings and profits is important because they are typically taxable to the shareholders as ordinary income. This treatment contrasts with certain other types of distributions, which may not be as straightforward in terms of tax implications.

Recognizing that dividends should originate from verified earnings ensures clarity in what constitutes a dividend and holds relevance in scenarios involving taxable income and corporate financial structure. This foundational understanding aids taxpayers in correctly reporting dividends on their tax returns and comprehending their financial implications as a shareholder.