Final answer:
The statement is true; the dividends received deduction cannot create a net operating loss but can reduce taxable income to zero.
Step-by-step explanation:
The dividends received deduction allows corporations to exclude dividends received from taxable income. While the deduction can reduce income to zero, it cannot create a net operating loss or reduce income below zero. This means that a corporation cannot use the deduction to generate a tax refund or carry forward any losses.
For example, if a corporation receives $10,000 in dividends and has $12,000 in taxable income, it can use the deduction to reduce its taxable income to zero. However, it cannot use the deduction to create a net operating loss of -$2,000.According to U.S. corporate tax law, the dividends received deduction (DRD) is designed to prevent triple taxation of the same income. Corporations can deduct a portion of the dividends they receive from their taxable income, but this deduction cannot create or increase a net operating loss (NOL). The purpose behind this limitation is to prevent companies from utilizing the DRD to generate losses that could be carried forward or backward to offset taxable income in other years. The DRD can reduce a corporation's taxable income to zero, but it will not allow the taxable income to go below zero, which would generate a net operating loss.