| A corporation that receives dividends from a taxable domestic corporation may be entitled to a special deduction from gross income. The recipient corporation may deduct, within certain limits, 70 percent of the dividend received if the corporation receiving the dividend owns less than 20 percent of the corporation distributing the dividend. The amount of the deduction is increased to 80 percent of dividends received if 20 percent of the distributing corporation is owned by the recipient corporation.
For the purpose of the 20 percent ownership rule, preferred stock is not counted if all of the following requirements are met:
- The recipient corporation is not entitled to vote.
- It is limited and preferred as to dividends.
- It does not significantly share in corporate growth.
- It has redemption and liquidation rights that do not exceed the issue price of the stock.
- It is not convertible into another class of stock.
A corporation that qualifies as a small business investment company operating under the Small Business Investment Act of 1958 is entitled to deduct a full 100 percent of dividends received from a taxable domestic corporation.
In general, taxable distributions from corporations qualify for the dividends received deduction, but nontaxable distributions do not. Payments that purport to be dividends but are not dividends in substance do not qualify for the deduction. Distributions in partial liquidation and redemptions that are treated as proceeds of a sale and not dividends also do not qualify.
Certain dividends are not eligible for the dividends received deduction. These non-qualifying dividends come from the following types of entities:
- A real estate investment trust.
- A corporation exempt from taxation under certain sections of the Internal Revenue Code.
- A corporation whose stock was held for less than a statutory period.
- Any corporation, if the recipient corporation is under an obligation to make related payments with respect to positions in substantially similar or related properties.
The total deduction for dividends received is limited to a certain percentage of the taxable income of the recipient corporation adjusted by items such as the net operating loss deduction, the dividends received deduction, any adjustment due to the nontaxable portion an extraordinary dividend, and any capital loss carryback to the tax year at issue. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |