Dividends Received Deduction
The dividends received deduction is meant
to reduce the negative effects of the double tax on C corporation profits
distributed to corporation shareholders as dividends.
A corporation may deduct (subject to
certain limitations) 70% of the dividends received from another domestic
corporation if the receiving corporation owns less than 20% of the
distributing corporation. If a corporation owns 20% or more of the
corporation distributing dividends, the receiving corporation may deduct
80% of the dividends received. Exceptions:
• Certain dividends from Federal Home
Loan Banks.
• Capital gain dividends from a regulated investment company or real
estate investment trust, and return of capital distributions do not
qualify.
• Small business investment companies may deduct 100% of the dividends
received from taxable domestic corporations.
• Members of an affiliated group of corporations may elect, if certain
conditions are met, to deduct 100% of the dividends received from a member
of the same affiliated group. [IRC §243]
• Certain limitations apply to regulated investment company dividends
received.
• Special rules apply to dividends received from foreign corporations.
[IRC §245]
• No deduction is allowed for dividends received from:
1) Real estate investment trusts.
2) Corporations exempt from tax.
3) A corporation, to the extent the receiving corporation is under an
obligation (pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related
property.
4) A corporation whose stock has been held by the receiving corporation
for 45 days or less (90 days or less if the stock has preference as to
dividends and the dividends received are attributable to a period or
periods totaling more than 366 days). Effective for dividends paid or
accrued after September 5, 1997.
