Are there any tax or regulatory considerations related to the preferred stock distributions that could affect investor returns?

Tax and regulatory backdrop

Eagle Point Income Company (EIC) is a publicly‑traded BDC/closed‑end fund that must distribute at least 90 % of its taxable income each year to retain its tax‑exempt status under the Internal Revenue Code (IRC § 856 for REIT‑like structures) and to avoid the corporate‑level tax that regular corporations pay. Because the preferred shares are not “common stock dividends,” the quarterly preferred distribution is generally treated as ordinary‑income dividend (not a qualified dividend) for U.S. investors, and it is taxed at the individual’s ordinary‑income rate (plus the 3.8 % net‑investment‑income tax for high‑income taxpayers). If the payout exceeds the company’s earnings‑and‑profits, the excess is classified as a return‑of‑capital (ROC) distribution, which reduces the shareholder’s cost basis and is taxed as a capital gain when the basis is exhausted.

For non‑U.S. holders, the 30 % (or treaty‑reduced) withholding tax on the preferred dividend can further erode returns, and there is no automatic credit for the ROC portion. Additionally, BDCs are subject to the “distribution‑as‑deduction” rule: if the company fails to meet the 90 % distribution requirement, the excess becomes nondeductible for the company and is taxed as a non‑qualified dividend to the holder, raising the effective tax rate. Investors in high marginal tax brackets should therefore calculate the after‑tax yield rather than the headline 4–5 % quarterly yield. The preferred’s fixed‑rate nature also means the tax‑impact is relatively stable versus common‑stock dividends that can fluctuate between qualified and non‑qualified status based on the issuer’s classification.

Trading implications

1. After‑tax yield assessment – Adjust the quoted 4–5 % quarterly distribution for your marginal tax rate (e.g., 32 % ordinary‑income tax + 3.8 % NIIT ≈ 35–36 % effective tax). This can lower the effective yield to roughly 2.8–3.0 % after taxes, which may be less attractive versus comparable high‑yield stocks with qualified‑dividend treatment.
   
2. Cost‑basis and capital‑gain risk – Since a portion may be ROC, expect a gradual reduction in cost basis; monitor the cumulative ROC amount to gauge when future distributions will be taxed as capital gains. This is especially relevant for long‑term holders.
   
3. Position sizing – For investors in high tax brackets, the preferred may be better suited to tax‑advantaged accounts (IRAs, 401(k)s) where the ordinary‑income tax is deferred or avoided. If you hold the shares in a taxable account, consider allocating a smaller percentage of your portfolio to EIC’s preferred class or offsetting the tax drag with higher‑growth or qualified‑dividend assets.
   

Actionable takeaway: Calculate the after‑tax yield for your specific tax bracket, and if the effective yield falls below your target (e.g., 3 % after tax), consider reducing exposure or shifting the holding to a tax‑advantaged vehicle. For tax‑sensitive investors, the preferred may still be attractive for its stable cash flow, but the net return should be measured on an after‑tax basis, not the headline distribution rate.