Capital Southwest Announces U.S. Federal Income Tax Treatment of 2023 Dividends

Rhea-AI Summary

Capital Southwest Corporation announced the U.S. federal income tax treatment of its 2023 dividends, totaling $2.42 per share, with 100.00% of those dividends comprised of ordinary income, including net short-term capital gains. Approximately 94.17% of the dividends relate to interest and short-term capital gains. Non-U.S. Shareholders in a RIC are exempt from U.S. withholding tax on both 'interest-related' dividends and short-term capital gains in accordance with Sections 871(k) and 881(e) of the Code.

Insights

Tax Advisor

The classification of Capital Southwest's dividends as 100% ordinary income, inclusive of net short-term capital gains, is significant for both U.S. and non-U.S. shareholders. For U.S. investors, the entire dividend amount is taxable at their respective income tax rates. This contrasts with qualified dividends, which are typically taxed at a lower capital gains rate. The absence of long-term capital gains, which also benefit from lower tax rates, means shareholders may have a higher tax liability relative to companies that pay a mix of ordinary and qualified dividends.

For non-U.S. shareholders, the tax implications are nuanced. Under Sections 871(k) and 881(e) of the Internal Revenue Code, interest-related dividends and short-term capital gains are not subject to U.S. withholding tax. Consequently, the high percentage (94.17%) of dividends classified in this manner could be advantageous for non-U.S. investors, potentially increasing the after-tax return on their investment in Capital Southwest.

Financial Analyst

The distribution of dividends can signal a company's financial health and stability. In the case of Capital Southwest, the consistent payments throughout the year and the total amount of $2.42 per share indicate a steady stream of income for investors. However, investors should consider the tax treatment of these dividends. The lack of long-term capital gains distributions, which are favored for their tax efficiency, might suggest that Capital Southwest's investment strategy is more focused on income generation through interest and short-term gains rather than long-term capital appreciation.

This information can influence the stock's attractiveness to different types of investors. Income-focused investors might appreciate the regular dividends, while growth-oriented investors may seek companies with a higher proportion of long-term capital gains. Additionally, the tax information provided by Capital Southwest is essential for shareholders to accurately report income and claim any eligible foreign tax credits or exemptions.

Market Research Analyst

Understanding the tax treatment of dividends is crucial for evaluating the total return on investment, especially for a business development company (BDC) like Capital Southwest, which typically operates by investing in middle market businesses. BDCs are generally required to distribute at least 90% of their taxable income to shareholders, which can lead to substantial dividend yields. However, the tax burden on these dividends can significantly affect the net yield.

Investors often look at the dividend yield in conjunction with the tax characteristics to assess the true value of their investment. In this context, Capital Southwest's announcement provides transparency which can aid investors in making informed decisions. It's also worth noting that the company's focus on middle market businesses may reflect in the type of income it generates and subsequently distributes, which in this case, is predominantly ordinary income.

DALLAS, Jan. 31, 2024 (GLOBE NEWSWIRE) -- Capital Southwest Corporation (“Capital Southwest” or the “Company”) (Nasdaq: CSWC), an internally managed business development company focused on providing flexible financing solutions to support the acquisition and growth of middle market businesses, announced today the U.S. federal income tax treatment of its 2023 dividends.

U.S. Federal Income Tax Treatment of 2023 Dividends

Capital Southwest paid dividends totaling $2.42 per share that are attributable to the tax year ended December 31, 2023, with 100.00% of those dividends comprised of ordinary income, including net short-term capital gains. The Company has posted information regarding the U.S. federal income tax characteristics of its dividends that are attributable to 2023 on its website (http://www.capitalsouthwest.com/tax-information).

The amounts shown in the table below represent the final classification of the Company’s 2023 dividends. This information supersedes any estimated information you may have received during the year. Calendar-year 2023 dividends are classified as follows:

Form 1099-DIV Reporting					Box 1a			Box 1a and Box 1b			Box 2a			Non-U.S. Shareholder		Non-U.S. Shareholder
Record Date	Payment Date	Distribution per Share			Ordinary Dividend Per Share (i)			Qualified Dividends Per Share (i), (ii)			Long-Term Capital Gain Per Share (iii)			% of Interest-Related and Short-Term Capital Gain (iv)		% of Distributions Exempt from U.S. Withholding Tax (v)
03/15/23	03/31/23	$	0.5800		$	0.5800		$	-		$	-		94.17	%	94.17	%
06/15/23	06/30/23	$	0.5900		$	0.5900		$	-		$	-		94.17	%	94.17	%
09/15/23	09/29/23	$	0.6200		$	0.6200		$	-		$	-		94.17	%	94.17	%
12/15/23	12/29/23	$	0.6300		$	0.6300		$	-		$	-		94.17	%	94.17	%
		$	2.4200		$	2.4200		$	-		$	-
	% of Total Dividend
	Paid Per Share		100.00	%		100.00	%		0.00	%		0.00	%	94.17	%	94.17	%

(i) Form 1099-DIV Box 1a includes the combined amounts of the columns "Ordinary Dividend Per Share" and "Qualified Dividends Per Share," contained within table above.

(ii) The portion of the dividend reported in Box 1a treated as Qualified Dividend is reported on Form 1099-DIV in Box 1b.

(iii) Net Capital Gain Dividend is reported on Form 1099-DIV in Box 2a.

(iv) The Company designates the above percentages of each of the total dividends by payment date as Interest-Related Dividend and Short-Term Capital Gain Dividend in accordance with Sections 871(k) and 881(e) under the Internal Revenue Code (the "Code").

(v) The percentages designate the portion of Capital Southwest's dividends received by Non-U.S. Residents and Foreign Corporation Shareholders that constitute Interest-Related Dividends, Short-Term Capital Gains Dividends, and Net Capital Gain Dividends to total amount of the dividends derived which generally are exempt from U.S. withholding tax for these periods for Non-U.S. Residents and Foreign Corporation Shareholders.

Non-U.S. residents and foreign corporation shareholders ("Non-U.S. Shareholders") in a regulated investment company ("RIC"), such as Capital Southwest, are exempt from U.S. withholding tax on both "interest-related" dividends and short-term capital gains in accordance with Sections 871(k) and 881(e) of the Code. In addition, Non-U.S. Shareholders in a RIC are also exempt from U.S. withholding tax on long-term capital gains. Approximately 94.17% of Capital Southwest’s 2023 dividends relate to interest and short-term capital gains.  See the "Tax Treatment of 2023 Dividends for Non-U.S. Shareholders" posted on the Company's website for more details (http://www.capitalsouthwest.com/tax-information).

Dividends distributed to Non-U.S. Shareholders may have been withheld to pay U.S. federal income tax. Non-U.S. Shareholders should contact their tax advisor with any questions regarding this information, and its application to any claim for refund of taxes paid to the U.S. Internal Revenue Service.

About Capital Southwest

Capital Southwest Corporation (Nasdaq: CSWC) is a Dallas, Texas-based, internally managed business development company with approximately $1.4 billion in investments at fair value as of December 31, 2023. Capital Southwest is a middle market lending firm focused on supporting the acquisition and growth of middle market businesses with $5 million to $35 million investments across the capital structure, including first lien, second lien and non-control equity co-investments. As a public company with a permanent capital base, Capital Southwest has the flexibility to be creative in its financing solutions and to invest to support the growth of its portfolio companies over long periods of time.

Investor Relations Contact:

Michael S. Sarner, Chief Financial Officer
214-884-3829

 

FAQ

What is the U.S. federal income tax treatment of Capital Southwest Corporation's 2023 dividends?

The U.S. federal income tax treatment of Capital Southwest Corporation's 2023 dividends is that they totaled $2.42 per share, with 100.00% of those dividends comprised of ordinary income, including net short-term capital gains.

How much of the dividends relate to interest and short-term capital gains?

Approximately 94.17% of the dividends distributed by Capital Southwest Corporation in 2023 relate to interest and short-term capital gains.

Are Non-U.S. Shareholders in a RIC exempt from U.S. withholding tax?

Yes, Non-U.S. Shareholders in a regulated investment company (RIC), such as Capital Southwest Corporation, are exempt from U.S. withholding tax on both 'interest-related' dividends and short-term capital gains in accordance with Sections 871(k) and 881(e) of the Code.