Question

For the Dividends Received Deduction, if a corporation owns a percentage of stock in another corporation and receives dividends, what portion may be deducted from income?

Answer 1

The Dividends Received Deduction allows a corporation to deduct 50% of dividends if it owns less than 20% of the stock, 65% for 20-80% ownership, and 100% if ownership exceeds 80%, minimizing double taxation of dividends.

Step-by-step explanation:

When a corporation receives dividends from its investment in another corporation, the Dividends Received Deduction (DRD) allows it to deduct a certain portion of these dividends from its taxable income. The deductible portion can vary depending on the percentage ownership the corporation has in the entity paying the dividends. Generally, the deductible percentages are as follows:

• If the corporation owns less than 20% of the stock of the company paying the dividend, it can usually deduct up to 50% of the dividends.
• For ownership between 20% and 80%, the deduction may be up to 65%.
• When ownership exceeds 80%, up to 100% of the dividends received may be deductible.

This deduction is intended to alleviate the potential for double taxation of dividends at the corporate level: once when the profit is earned and again when the dividend is paid out to shareholders.