This Daily Tax Tip Spotify Podcast and/or WordPress Blog Post is in response to requests for general information on the tax treatment of Dividends Received by a Corporation.
As you may know, all taxpayers are required to include dividends they receive in gross income. However, a corporation that receives dividends from another corporation may be able to take a full or Partial Deduction for those dividends.
The Deductible Percentage depends on the corporation’s ownership interest in the corporation paying the dividends and certain other factors. There is also a:
- Taxable Income Limitation,
- a Holding Period Requirement, and
- a basis adjustment requirement in the case of Extraordinary Dividends.
There is a special rule that Reduces the Deduction for Dividends Received on:
- Debt Financed Portfolio Stock,
- as well as a special rule allowing a deduction for the foreign-source portion of dividends received by domestic corporations from specified 10 Percent owned Foreign Corporations.
A corporation’s deduction for dividends it receives from a domestic corporation generally is equal to 50 Percent of the amount of the Dividends Received.
However, the deduction percentage is:
- 65 Percent if the corporation owns 20 percent or more of the voting power and value of the stock of the corporation from which it receives the dividends;
- 100 percent if, on the day of the dividend distribution, the corporation is a member of the same affiliated group as the corporation from which it receives the dividends and certain other requirements are met; and
- 100 Percent if the corporation is a small business investment company operating under the Small Business Investment Act of 1958.
Under the Taxable Income Limitation, the aggregate amount a corporation’s dividends received deduction is limited to:
- 65 Percent of Corporation’s Taxable Income for dividends it receives from 20-percent-or-more-owned corporations and
- 50 Percent of the corporation’s taxable income for dividends it receives from a less-than-20-percent-owned corporation.
Under the holding period requirement, a deduction is allowed for dividends received on stock only if the stock has been held for more than 45 days during the 91-day period that begins on the date 45 days before the date on which the share becomes ex-dividend with respect to such dividend. If the stock is Preferred Stock, no deduction is allowed if the corporation held the stock for 90 days or less during the 181-day period beginning on the date that is 90 days before the date on which such share becomes ex-dividend with respect to such dividend.
These Holding Periods are reduced by any periods during which the corporation:
(1) has an option to sell, is under contractual obligation to sell, or has made (but not closed) a Short Sale on substantially identical stock or securities;
(2) is the Grantor of an Option to buy substantially identical stock or securities; or
(3) has diminished its Risk of Loss by holding one or more other positions with respect to substantially similar or related property.
An even longer holding period applies with respect to stock held by a domestic corporation where a portion of the dividends received on that stock are from a specified 10 Percent owned Foreign Corporation. In that case, the stock of the corporation paying the dividend must have been held for more than 365 days during the 731-day period that begins on the date 365 days before the date on which such share becomes ex-dividend with respect to such dividend.
In addition, the 10 Percent owned Foreign Corporation must be a specified 10 percent owned foreign corporation at all times during the holding period and the domestic corporation must be a U.S. shareholder of that corporation at all times during the holding period
Dividends received from certain types of Domestic Corporations are not deductible. No deduction is allowed for dividends received:
(1) from a Corporation that is Exempt from tax for the tax year the dividends are paid or the preceding tax year;
(2) on deposits or withdrawal accounts in Mutual Savings Banks, building and loan associations, cooperative banks, and similar organizations; or
(3) from a Real Estate Investment Trust (REIT).
Dividends received from a Regulated Investment Company (RIC) are subject to special limitations, and capital gain distributions received from a RIC do not qualify for the deduction.
A corporation can take a deduction for dividends it receives from a foreign corporation only if it owns 10 Percent or more of the voting power and value of the stock of the foreign corporation. Even then, it can take a deduction only for the U.S. source portion of the dividends. The deduction percentage for the U.S. source portion of dividends received from a 10 percent owned foreign corporation is:
(1) 50 Percent if the corporation owns between 10 and 20 percent of the voting power and value of the stock of the foreign corporation; or
(2) 65 percent if the corporation owns 20 percent or more of the voting power and value of the stock of the foreign corporation.
However, a corporation can take a 100 Percent Deduction for dividends received from a foreign corporation if it owns all the outstanding stock of the foreign corporation and all of the foreign corporation’s gross income is effectively connected with the conduct of a trade or business within the United States.
A corporation can also take a 100 Percent Deduction for certain dividends received from a foreign sales corporation. Finally, special rules are provided for the foreign source portion of dividends received from specified 10 percent owned foreign corporations.
Please call me at your convenience if to discuss how the rules on the Dividends Received Deduction apply to your particular situation.
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
P.S. My firm is based upon referrals. Please feel free to refer my firm to anyone you know that is looking for a new CPA and/or tax preparer. Thank you in advance.
(Updated 07032021-01 320-608)