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 entities. The amount of the dividend that a company can deduct from its income tax is tied to how much ownership the company has in the dividend-paying company. However, there are criteria that corporations must meet in order to qualify for the dividends received deduction (DRD).
Key Takeaways
- The dividends received deduction (DRD) applies to certain corporations that receive dividends from related entities and alleviates the potential consequences of triple taxation.
- There are different tiers of possible deductions, ranging from a 50% deduction of the dividend received up to a 100% deduction.
- There are several rules that corporate shareholders need to follow to be entitled to the DRD.
- For example, corporations cannot take a deduction for dividends received from a real estate investment trust (REIT) or capital gain dividends received from a regulated investment company.
- Dividends received from domestic corporations have different deduction rules than those received from foreign corporations.
How the Dividends Received Deduction (DRD) Works
The dividends received deduction allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax accordingly. However, several technical rules apply that must be followed for corporate shareholders to be entitled to the DRD. The amount of DRD that a company may claim depends on its percentage of ownership in the company paying the dividend.
The Tax Cuts and Jobs Act (TCJA) made major changes to the taxation of corporations, including reducing the DRD percentages for dividends received from domestic corporations. In tax years beginning after Dec. 31, 2017, if the corporation receiving the dividend owns less than 20% of the corporation distributing the dividend, the receiving corporation can deduct (within certain limits) 50% of the dividends received. Subject to certain limits, the receiving corporation can deduct 65% of the dividends received if it owns 20% or more of the distributing corporation's stock. However, the 50% or 65% deduction limit does not apply if a corporation has a net operating loss (NOL) for the given tax year.
The deduction received seeks to alleviate the potential consequences of triple taxation. Triple taxation occurs when the same income is taxed in the hands of the company paying the dividend, then in the hands of the company receiving the dividend, and again when the ultimate shareholder is, in turn, paid a dividend.
Special Considerations
Certain types of dividends are excluded from the DRD and corporations cannot claim a deduction for them. For example, corporations cannot take a deduction for dividends received from a real estate investment trust (REIT). If 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 preceding year, then the receiving company cannot take a deduction for the dividends received. A corporation cannot 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. In most cases, corporations can deduct 100% of the foreign-source portion of dividends from 10%-owned foreign corporations. Corporations must hold the foreign corporation stock for at least 365 days to qualify for the deduction.
Example of a Dividends Received Deduction (DRD)
Assume that ABC Inc. owns 60% of its affiliate, DEF Inc. ABC has a taxable income of $10,000 and a dividend of $9,000 from DEF. Thus, it would be entitled to a DRD of $5,850, or 65% of $9,000.
Note that there are certain limitations on the total deduction for dividends a corporation may claim. In some cases, the corporation will need to determine if it has a net operating loss (NOL) by calculating the DRD without the 50% or 65% of the taxable income limit.For more information, see IRS Publication 542 or the instructions included in Form 1120, Schedule C (or the applicable schedule of your income tax return).
FAQs
The dividends received deduction (DRD) applies to certain corporations that receive dividends from related entities and alleviates the potential consequences of triple taxation. There are different tiers of possible deductions, ranging from a 50% deduction of the dividend received up to a 100% deduction.
What is the DRD dividend received deduction? ›
The dividends received deduction (DRD) is a U.S. federal corporate tax deduction. It allows corporations to deduct a portion of the dividend income they receive from a related entity on their taxes. The deduction shields a company from the potential of triple taxation on that dividend income.
What is the DRD deduction rate? ›
Dividends Received Deduction Percentages
| Percentage of Stock Ownership | Dividends Received Deduction Percentage |
|---|
| Less than 20% | 50% |
| 20% to less than 80% | 65% |
| 80% or more or a small business investment company | 100% |
Feb 17, 2023
To determine the amount of dividends qualifying for this deduction, multiply the "percent qualifying for deduction" (shown in the table) by the amount of your total ordinary dividends. Please note that ordinary dividends of a fund includes, if applicable, net short-term capital gains and foreign taxes paid.
What is the 243 dividends received deduction? ›
Dividends-Received Deduction
The deduction equals 50 percent of dividends received if the corporation receiving the dividend owns less than 20 percent of the distributing corporation (IRC § 243(a)(1)).
What is a DRD? ›
Developmental reading disorder (DRD) or dyslexia occurs when there is a problem in areas of the brain that help interpret language. It is not caused by vision problems. The disorder is an information processing problem. It does not interfere with thinking ability.
What are the benefits of DRD? ›
Benefits of Drd Capsule
Drd Capsule belongs to a group of medicines called proton pump inhibitors. It reduces the amount of acid your stomach makes and relieves the pain associated with heartburn and acid reflux. You should take it exactly as it is prescribed for it to be effective.
What does DRD mean in finance? ›
'DRD 'stands for Dividend Received Deduction and is an exemption regime for companies that invest in individual shares of other companies. However, dividends and capital gains from these investments can only be exempt from (double) taxation under strict conditions.
Is DRD a permanent difference? ›
Dividends received deductions are not considered as expense items for calculating net income. This will always result in a permanent tax difference.
What are the limitations on dividend received deduction? ›
Income Limitations
The DRD cannot exceed the corporation's taxable income. For example, to take a 50% deduction on a qualifying dividend, this deduction amount cannot exceed 50% of the corporation's taxable income. However, if a corporation has a net operating loss for the year, these income limitations do not apply.
What is dividend deduction? Dividend deductions refer to the expenses such as interest and borrowing costs on loans taken to invest or management fees etc., credits or charges, that a company deducts from its dividend payments to shareholders.
How do I claim dividend income deduction? ›
Dividends are taxable at the hands of the investor while a TDS of 10% is applicable on dividend payouts exceeding INR 5,000 in a financial year. If an individual's total income including the dividend income is below the personal income tax exemption limit, they can submit the 15G/15H, as applicable, to avoid TDS.
What is DRD in tax? ›
The Dividends Received Deduction, or DRD, is a tax deduction that C corporations receive on the dividends distributed to them by other companies whose stock they own. As a C corporation's equity interest in a dividend-paying company increases, so does the amount of the DRD as shown below: Percent. Ownership.
Is the dividends received deduction a tax deduction? ›
The dividends received deduction allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax accordingly.
What is the 245 dividend received deduction? ›
Section 245A allows an exemption for certain foreign income of a domestic corporation that is a U.S. shareholder (within the meaning of section 951(b)) by means of a 100% dividends received deduction (DRD) for the foreign source portion of dividends received from “specified 10%-owned foreign corporations.” The 100% DRD ...
What is the 50% dividend received deduction? ›
The dividends received deduction (DRD) applies to certain corporations that receive dividends from related entities and alleviates the potential consequences of triple taxation. There are different tiers of possible deductions, ranging from a 50% deduction of the dividend received up to a 100% deduction.
What is the 245A DRD deduction? ›
Section 245A allows an exemption for certain foreign income of a domestic corporation that is a U.S. shareholder (within the meaning of section 951(b)) by means of a 100% dividends received deduction (DRD) for the foreign source portion of dividends received from “specified 10%-owned foreign corporations.” The 100% DRD ...
What is the tax exemption on dividend received? ›
Dividends are taxable at the hands of the investor while a TDS of 10% is applicable on dividend payouts exceeding INR 5,000 in a financial year. If an individual's total income including the dividend income is below the personal income tax exemption limit, they can submit the 15G/15H, as applicable, to avoid TDS.
