Return of capital

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Return of capital (ROC) refers to principal payments back to "capital owners" (shareholders, partners, unitholders) that exceed the growth (net income/taxable income) of a business or investment. It should not be confused with Rate of Return (ROR), which measures a gain or loss on an investment. Basically, it is a return of some or all of the initial investment, which reduced the basis on that investment.

The ROC effectively shrinks the firm's equity in the same way that all distributions do. It is a transfer of value from the company to the owner. In an efficient market, the stock's price will fall by an amount equal to the distribution. Most public companies pay out only a percentage of their income as dividends. In some industries it is common to pay ROC.

Tax consequences[edit]

There will be tax consequences that are specific to individual countries. As examples only:


Example[edit]

You start a delivery business with one employee and one contract. Your initial investment of $12,000 goes to buy a vehicle.

At the end of each year:

At the end of four years:

Conclusions[edit]

Time value of money[edit]

Some people dismiss ROC (treating it as income) with the argument that the full cash is received and reinvested (by the business or by the shareholder receiving it). It thereby generates more income and compounds. Therefore ROC is not a "real" expense.

There are several problems with this argument.