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Newtek Business: Tax Treatment of 2016 Distributions

NEW YORK, Jan. 30, 2017 (GLOBE NEWSWIRE) — Newtek Business Services Corp. (“Newtek” or the “Company”)  (NEWT), an internally managed business development company (“BDC”), today announced the calculation of the dividend tax status for its dividends paid in 2016.  The Company announced that approximately 53.0% of the regular quarterly cash dividends paid in 2016 will be taxed as ordinary income, 34.8% will be taxed as qualified dividends and 12.2% will be taxed as long-term capital gains. 

Long-term capital gains and qualified dividends paid to non-corporate taxpayers (including individuals) qualify for favorable tax treatment under the Internal Revenue Code and, for 2016, will generally be subject to a maximum 20% U.S. federal income tax rate (plus a 3.8% Medicare surtax, if applicable). Shareholders should consult their own tax advisors concerning the U.S. federal tax treatment of dividends reported as qualified dividends in light of their unique circumstances.

The following table provides a summary by payment date of the U.S. federal income tax characteristics of Newtek’s dividends that are attributable to 2016: 

Payable
date
Distribution
amount per
share
Taxable Long-term
capital gains
Qualified Non-
Qualified
Total
1/19/2016 $   0.40 88.3 % 11.7 % 37.8 % 62.2 % 100.00 %
3/31/2016 $   0.35 86.6 % 13.4 % 35.3 % 64.7 % 100.00 %
6/30/2016 $   0.35 86.6 % 13.4 % 33.6 % 66.4 % 100.00 %
9/30/2016 $   0.43 89.1 % 10.9 % 33.6 % 66.4 % 100.00 %
12/30/2016 $   0.40 88.3 % 11.7 % 33.6 % 66.4 % 100.00 %

Barry Sloane, President, Chairman and Chief Executive Officer of Newtek said, “We are pleased to announce the calculation of the tax status for our dividends paid in 2016 and that approximately 47% of our 2016 quarterly cash dividends qualify for preferential tax treatment.  This is a direct function of our business model where, historically, our controlled portfolio companies have provided a reoccurring stream of income which is taxed at the portfolio companies before being paid to the company.”

Extract from the press release.

 

INTRODUCTION

The BDC Reporter has previously tackled tax reporting disclosures from Main Street Capital (MAIN) and Ares Capital (ARCC).

Before we make a couple of comments about Newtek Business Services (NEWT), we re-iterate that we are not in any way tax experts and everything we say should be superseded by your tax advisor.

DIFFERENT

NEWT is an anomaly in the BDC sector. The company is both a lender and a provider of “business solutions” to lower middle market companies.

That probably explains why such a high proportion of taxable income (47%) qualifies for lower tax rate treatment, as CEO Barry Sloane suggests above.

There’s no reason that should not continue in the year ahead.

Everything else being equal the “preferential” tax treatment leaves a U.S. tax payer with more jingle in their pocket after the taxman has had his/her due.

IGNORING THE FOREIGN SHAREHOLDERS

Unlike Main Street, Ares Capital, Prospect Capital (PSEC) and many other peers, NEWT has not shown the portion of its income related to interest income.

As we discussed when reviewing MAIN and ARCC’s tax announcements (both of whom have done the calculations), that income is not subject to withholding on certain non-U.S. investors.

This is a subject that the BDC sector has been slow to address, and each BDC in its own way, which makes tax planning for our foreign investor friends very difficult.

LOOKING FORWARD

Notice that the press release never adds up the total distributions paid in 2016, so we’ll do the math for our readers: $1.93 a share, thanks to a supplementary distribution taking payments to 5 on the year.

Taking out the IVQ 2015 $0.40 distribution paid in 2016, the BDC paid out $1.53 a share in 2016. That’s just above what the CEO projected at the beginning of 2016.

Gazing into the 2017 crystal ball, Newtek is promising a similar number:

“We are reaffirming our full year 2017 dividend forecast of $1.57 per share, which forecast includes the 2.6 million shares of common stock issued in conjunction with the equity offering we closed today.  We expect to pay our 2017 forecasted dividend out of adjusted net investment income, and in accordance with our dividend policy.”

Reference is made to the recent equity secondary, which the BDC Reporter has reviewed previously, and was just formally closed with 2,587,500 new shares issued.

That’s grown the share count by about 10%.

CONCLUSION

Over the last couple of years Newtek’s actual distributions have been all over the place due to Special Distributions being paid out.

However, the running rate-and the base line which management wants to be measured by-is just over $1.50 a share, and is projected to go up marginally in 2017.

For U.S. taxpayers, the fact that nearly half of the income is in the form of “qualified” income lessens the tax blow.

Non U.S. shareholders: You’re on your own.