The answer to your question is that a nondividend distribution (one, or more, it doesn't matter) actually won't affect your taxes at all this year and won't directly appear anyplace on your tax return (Form 1040 or elsewhere).  However, nondividend distributions may be applicable to calculating your taxes in a future year, and thus are still an important item.  Please allow me to explain this, in detail.

You won't report your nondivided distribution to the IRS, and so it doesn't get entered on any line of your real tax return for this year.  There is, of course, a box (number 3 on Form 1099-DIV) for you to input the nondividend amount in TurboTax, just as there is in all comparable tax software programs -- but the input field is simply there as a matter of completeness (so the software screen matches the 1099-DIV document you receive from your financial institution). 

A nondividend distribution is just another way of saying "return of capital."  It is meant for your information only, and that of your brokerage or financial firm.  A non-dividend distribution, you see, is a return of some portion of your original investment; and as such you would need to reduce the cost basis of your stock, bond, mutual fund, other security, etc. as a result of the distribution.  While it doesn't matter in the current tax period, this cost basis adjustment does matter in future tax periods, because it is the difference between basis and net proceeds on which capital gains taxes are applied.  Perhaps a numerical example will be illustrative.

Let's say you buy a single share of stock at $100.  That's your original cost basis.  Then, one day your company issues you a non-dividend distribution of $20.  Your stock's adjusted basis is now $100 - $20 = $80.  When you later sell your share of stock to an unrelated third-party for $110, your taxable capital gain is now $30 (the difference between $110 and $80), and not $10 (the difference between $110 and $100).  Does that make sense?

The IRS instructions for Form 1099-DIV Box 3, found on Page 5, will tell you much the same thing:

https://www.irs.gov/pub/irs-access/f1099div_accessible.pdf

Another way of looking at it is you have simply been given back part of your original investment.  If you were to receive a 1099-DIV statement, with an amount printed in Box 3 (nondividend distribution), then you could certainly type that number into the TurboTax data entry screen for the 1099-DIV tax form . . . but it won't actually do anything.  Truthfully, the Box 3 entry field only exists to "match" the boxes that a taxpayer has on their own 1099-DIV document.  By having an entry field there it not only reassures customers that the software is accurately capturing all of their tax information, but it helps avoid data entry mistakes (improves accuracy) by not asking people to "skip" a box on their tax document.  That is the whole purpose, not only in TurboTax, but in all the other competing tax preparation programs.

However, the important thing to note about a nondividend distribution, and something that does require action, is that of the taxpayer's own recordkeeping.  If you have a brokerage firm holding this asset, it is likely that they will adjust the cost basis for you in their records (and thus in yours too).  But if you hold this asset on your own, outside of any financial institution, then you'll need to adjust your own basis and own records.

What you will not have to do, however, is to either enter or disclose this item anywhere on your tax return, either federal or state (if applicable).

Thank you GeoffreyG.  This is the most well written and understandable explanation of this subject I have read. 

@GeoffreyG 

Your response that the box 3 nondividend distribution amount will not affect taxes seems confusing. When I look at the brokerage statements I received throughout the year, the total amount of distributions including nondividend distributions are all added together in the box 1 total. Therefore, since nondividend distributions are not taxable as ordinary income in the current year, it seems that Turbox needs to deduct the nondividend distribution amount from the total amount shown in box 1 for purposes of calculating income taxable in the current tax year. Can you explain why that is not happening or what needs to be done to get Turbotax to reduce the total amount shown in box 1 by the nondividend distribution amount shown in box 3?

Yes, I can explain.  TurboTax does not know when the nondividend distribution should be nontaxable. If you know you have not yet recovered your cost/investment, you must make the adjustment to reduce the taxable dividend.

The reason is that as you receive this specific distribution it requires a manual reduction to your original cost basis/investment.  As previously detailed by @GeoffreyG, this is a return of your capital investment.  Each time you receive a return of capital (nondividend distribution) you must reduce your cost basis/investment.  The nondividend distribution remains nontaxable until you recover your investment, once that is completely recovered, all future nondividend distributions become taxable.

@DianeW777 , 

Thank you for your response. What is missing from the response is how to actually make the adjustment in Turbotax. Do I manually subtract the amount from box 1 by the amount in box 3 of the 1099-div and update the actual amount shown in the 1099-DIV to be the calculated version? Or is there another way to enter the data that shows the Box 1 amount was reduced by the Box 3 amount and the box 3 amount is reducing the basis in the investment?

What forms need to be included in the return to document how the two values are being handled?

Yes, you must make a manual adjustment to the taxable dividends if you know you  have not yet recovered your cost basis/investment.  Keep good records should the IRS ask you about your total taxable dividends in the future.

@equillen

Are you sure the nondividend distributions are included in the box 1 figure on your 1099-DIV?

I use Ameritrade, and for my WPC dividends, the nondividend distributions are not included in box 1a. Ameritrade provides the detailed breakdown of each dividend (e.g. qualified dividend, unrecaptured section 1250 gain, nondividend distribution, etc.) further down in the 1099 document. And I have not recouped my original investment in WPC via the cumulative nondividend distributions.

I highly doubt that different brokers would fill out the 1099-DIV boxes differently. And unless you've held the securities for a long time, it's unlikely you've recouped your investment.

Thus, I'm confident you should not manually subtract line 3 from line 1a before entering line 1a into TT.

How does it work when you have multiple purchases and sales of a stock that paid non-dividend distributions?  Say you buy 5 blocks of the stock over time at different prices.  You hold it for two years and get the distributions for two years.  Then you sell one block of the shares.  How is the basis for that block calculated?

The basis of all shares owned is reduced by the nondividend distributions as follows. The nondividend distribution is based on the number of shares you own when it occurs.  Based on that you should be dividing the total distribution by all shares owned at the time and reduce the cost of each share by that amount. When you sell one 'block of shares' reduce the cost basis by the amount per share calculated.  

• For example, if you originally paid $100/share for 100 shares , the cost basis of all the shares is  $1,000.  If you get a $5/share principal payment (return of capital, also referred to as nondividend distributions), instead of having a cost basis for the 100 shares of $1,000, you now have a cost basis of $500 ($1,000 original cost basis minus $500, which is 100 shares times the $5 per share nondividend distribution).

@RonR11 

100 shares at $100 per share is $10,000 not $1000.  With a distribution of $5 per share, that would reduce the basis to $9500, not $500.  Please check your math before posting a response

Your brokerage may track this for you already. Ameritrade has a detailed cost basis tracker, and distributes the basis reduction for each nondividend distribution across all share lots held at the time of the distribution, as DianeW777 described it. Thus when you sell any shares, Ameritrade will properly report the reduced basis accordingly. In fact, Ameritrade even shows you the history per lot, so you can see each basis reduction for each lot.

Also note that Quicken uses the same strategy, if you recategorize the appropriate portion of your dividends as "Return of Capital" transactions.

thank you