Dividends received deduction
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The dividends-received deduction[1] (or "DRD"), under U.S. federal income tax law, is a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake.
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[edit] History
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[edit] Impact
This deduction is designed to reduce the consequences of double taxation. Otherwise, corporate profits would be taxed to the corporation that earned them, then to the corporate shareholder, and then to the individual shareholder. While Congress allowed for double taxation on corporations, it did not intend a triple - and potentially infinitely-tiered - tax to apply to corporate profits at every level of their distribution.
The dividends-received deduction complements the consolidated return regulations, which allow affiliated corporations to file a single consolidated return for U.S. federal income tax purposes.
[edit] Application
Generally, if a corporation receives dividends from another corporation, it is entitled to a deduction of 70 percent of the dividend it receives.[2] If the corporation receiving the dividend owns 20 percent, however, then the amount of the deduction increases to 80 percent.[3] If, on the other hand, the corporation receiving the dividend owns more than 80 percent of the distributing corporation, it is allowed to deduct 100 percent of the dividend it receives.[4]
Note than in order for the deduction to apply, the corporation paying the dividend must also be liable for tax (i.e., it must be subject to the double taxation that the deduction is intended to prevent).[5]
