If your brokerage account is a margin account, your broker may loan shares to other investors (for example, to short sellers). If your shares are entitled to receive a dividend while your shares are on loan, the holder of the loaned shares must replace the dividend you would have received on those shares. This money is then forwarded to your account. This payment is a “payment in-lieu of dividend”, sometimes called a “substitute payment in-lieu of dividend.” This payment is not eligible for preferential tax treatment as a qualified dividend, but instead is treated as ordinary income. It would normally be reported to the IRS on a 1099-MISC form as Other Income.

Resolution: There is no specific transaction in the club accounting system that covers this, so we have come up with two different work-around methods that you might use to enter this type of transaction.

Method 1

If you received only a Payment in lieu of Dividend, use the Cash Distribution transaction in the Accounting > Securities section. Select the appropriate security. Enter the date the cash was received. Change the TYPE field from Dividend to either Interest or Short-term capital gain.

If you received a dividend distribution in addition to the Payment in lieu of Dividend (This would occur if some but not all of your shares were loaned out by your brokerage.) In this case, keep Dividend in the TYPE field and enter the amount of the dividend in the amount field. Then click the link to “ADD ANOTHER TRANSACTION TYPE”. This will add another TYPE and Amount field. Change the second TYPE field to Interest or Short-term capital gain. Enter the amount of the payment in-lieu of dividend in the second amount field.

This method will keep the correct tax rate for the payment in-lieu of dividend and the correct cash flows from the security for return calculations. The disadvantage is it will overstate your interest or short-term capital gain so your records will not match the 1099 at the end of the year.

Method 2

If there is a dividend and payment in-lieu of dividend for the same security, enter just the dividend amount in the Accounting > Securities > Cash Distribution transaction, with Dividend chosen as the TYPE (just as you would record a regular dividend).

Next, enter a separate cash Income transaction (Accounting > Cash Accounts > Income) for the Payment in lieu portion.

Choose the appropriate cash account where the payment was received, and enter the amount of the payment in-lieu of dividend.

The advantages of this method are the amount will be recorded as “Other Income” for your year-end Allocation process, interest or short-term capital gain will not be overstated on your year-end tax forms, and if no other errors were committed the amounts should match those on  your 1099. The disadvantage is the payment in-lieu of dividend will not be included in the cash flows from the security. The return calculation on the Valuation Statement and other reports for the affected security will be skewed slightly lower.