(a) Nontaxable Distributions or "return of capital" refers to those amounts reported as Nontaxable Distributions on Form 1099-DIV. To the extent taxable earnings fall below the total amount of distributions for that year, the excess is considered a nontaxable distribution/return of capital.
For income tax purposes, distributions paid to shareholders are reported as ordinary income, nontaxable distributions/return of capital, capital gains or a combination thereof. The ordinary income portion of distributions is reported as either qualified or non-qualified dividends. You should consult your own tax advisor with respect to the U.S. federal income tax, federal withholding tax, state tax, local tax, and foreign tax consequences of an investment in MCG's common stock.
The following table reconciles GAAP net income to taxable net income for the periods ended June 30, 2011 and December 31, 2010:
(in millions)
Nine Months Ended September 30, 2011
Year Ended December 31, 2010
Net Income (Loss)
($ 44.1)
($ 13.1)
Difference between book and tax losses on investments
48.9
(52.9)
Capital Losses in Excess of Capital Gains
12.6
4.9
Net change in unrealized depreciation on investments not taxable until realized
(0.5)
66.6
Timing difference related to deductibility of long-term incentive compensation
(6.1)
1.6
Taxable interest income on non-accrual loans
(0.8)
14.8
Dividend income accrued for GAAP purposes that is not yet taxable
(5.8)
(7.4)
Distributions from taxable subsidiaries
1.8
3.5
Federal tax benefit expense
0.1
1.8
Other, net
1.9
0.2
Taxable income (loss) before deductions for distributions
Since MCG is a Regulated Investment Company (RIC) for tax purposes, we receive a deduction in determining our investment company taxable income for certain distributions to our shareholders. Since our income is generally not subject to taxation, the distribution of income to our shareholders constitutes a non-qualified dividend except for any portion thereof that is considered a qualified dividend. Qualified dividends are the portion of our dividend distributions that represent qualified dividend income we receive from our investment portfolio. The dividend income received from our investment portfolio retains its character and therefore, is passed through to our shareholders as qualified dividends. The qualified dividends may be taxed differently than non-qualified dividends depending on the type of shareholder/taxpayer.