Dividends Received Deduction (DRD)

What Is the Dividends Received Deduction (DRD)?

The dividends received deduction (DRD) is a federal tax deduction in the United States that is given to certain corporations that get dividends from related substances. The amount of the dividend that a company can deduct from its income tax is tied to the amount of ownership the company possesses in the dividend-paying company. In any case, there are criteria that corporations must meet to fit the bill for the dividends received deduction (DRD).

How the Dividends Received Deduction (DRD) Works

The dividends received deduction permits a company that receives a dividend from one more company to deduct that dividend from its income and reduce its income tax in like manner. Notwithstanding, several technical rules apply that must be followed for corporate shareholders to be qualified for the DRD. The amount of DRD that a company might claim relies upon its percentage of ownership in the company paying the dividend.

The Tax Cuts and Jobs Act (TCJA) rolled out major improvements to the taxation of corporations, including decreasing the DRD percentages for dividends received from domestic corporations. In tax years beginning after Dec. 31, 2017, assuming the corporation getting the dividend claims under 20% of the corporation distributing the dividend, the getting corporation can deduct (inside certain limits) half of the dividends received. Subject to certain limits, the getting corporation can deduct 65% of the dividends received assuming that it possesses 20% or a greater amount of the distributing corporation's stock. Nonetheless, the half or 65% deduction limit doesn't have any significant bearing in the event that a corporation has a net operating loss (NOL) for the given tax year.

The deduction received looks to reduce the expected results of triple taxation. Triple taxation happens when a similar income is taxed in the hands of the company paying the dividend, then in the hands of the company getting the dividend, and again when the ultimate shareholder is, thus, paid a dividend.

Small business investment companies are permitted to deduct 100% of the dividends they receive from taxable domestic corporations.

Special Considerations

Certain types of dividends are excluded from the DRD and corporations can't claim a deduction for them. For instance, corporations can't take a deduction for dividends received from a real estate investment trust (REIT). In the event that the company distributing the dividend is exempt from taxation under section 501 or 521 of the Internal Revenue Code for the tax year of the distribution or the previous year, then, at that point, the getting company can't take a deduction for the dividends received. A corporation can't take a deduction on capital gain dividends received from a regulated investment company.

Dividends from foreign corporations have different deduction rules than those for domestic corporations. Much of the time, corporations can deduct 100% of the foreign-source portion of dividends from 10%-possessed foreign corporations. Corporations must hold the foreign corporation stock for somewhere around 365 days to meet all requirements for the deduction.

Illustration of a Dividends Received Deduction (DRD)

Accept that ABC Inc. possesses 60% of its affiliate, DEF Inc. ABC has a taxable income of $10,000 and a dividend of $9,000 from DEF. In this way, it would be qualified for a DRD of $5,850, or 65% of $9,000.

Note that there are certain limitations on the total deduction for dividends a corporation might claim. At times, the corporation should decide whether it has a net operating loss (NOL) by computing the DRD without the half or 65% of the taxable income limit. For more information, see IRS Publication 542 or the guidelines remembered for Form 1120, Schedule C (or the applicable schedule of your income tax return).

Features

• The dividends received deduction (DRD) applies to certain corporations that receive dividends from related substances and eases the possible outcomes of triple taxation.
• For instance, corporations can't take a deduction for dividends received from a real estate investment trust (REIT) or capital gain dividends received from a regulated investment company.
• There are various tiers of potential deductions, going from a half deduction of the dividend received up to a 100% deduction.
• There are several rules that corporate shareholders need to follow to be qualified for the DRD.
• Dividends received from domestic corporations have different deduction rules than those received from foreign corporations.