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) 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.
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 100% dividends-received deduction? ›
To qualify for the 100-percent dividends-received deduction, a dividend must be distributed out of the earnings and profits of the distributing corporation or a predecessor corporations for a tax year during each day of which the paying and receiving corporation were members of the same affiliated group (Reg.
What is the DRD deduction rate? ›
Application. Generally, if a corporation receives dividends from another corporation, it is entitled to a deduction of 50 percent of the dividend it receives. If the corporation receiving the dividend owns 20 percent or more, then the amount of the deduction increases to 65 percent.
How often does DRD pay dividends? ›
DRDGOLD Dividend Information
DRDGOLD has a dividend yield of 2.81% and paid $0.22 per share in the past year. The dividend is paid every six months and the next ex-dividend date is Sep 13, 2024.
What is an example of a dividend deduction? ›
Dividend and share income expenses
the portion of your costs that are for managing your investments, such as: some travel expenses, for example to attend the annual general meeting of a company you hold shares in. the cost of specialist investment journals and subscriptions. borrowing costs and interest.
How much tax do I pay on dividends received? ›
This is a freeview 'At a glance' guide to the taxation of dividends. Dividend income is treated as the top band of income. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Before 6 April 2022, these rates were: 7.5%, 32.5%, and 38.1%.
What is DRD? ›
The term dopa-responsive dystonia (DRD) is applied to several disorders characterized by stiff movement, abnormal gait, and sometimes abnormal mouth movements. These abnormalities are often severe, especially in the afternoon. It can be considered a form of childhood Parkinson's disease.
Is dividend received deduction 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 is the holding period for DRD? ›
The holding period must generally be met during the 90-day period that begins 45 days before the stock becomes ex-dividend. Register for a complimentary trial to unlock this document, plus gain access to so much more, including: Expert insights into the industry's hottest topics.
Taxation of dividend income
Taxpayers can claim a deduction of up to 20 per cent of the gross dividend income towards the interest expense incurred to earn such dividend income. However, no other expenses like commission or remuneration paid to a banker can be claimed as a deduction.
How does a corporation determine the percentage for its dividends received deduction? ›
The threshold for the dividend received deduction is based on the percentage ownership of the company that the corporation owns. As you can see below, if the C corporation owns 0% to 20% of another company, then they will receive a 50% deduction. Ownership of 20% to 80% results in a 65% deduction.
What is the DRD dividends received deduction? ›
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.
What is the 100 DRD deduction? ›
A 100% DRD is provided for the foreign-source portion of dividends received by a US corporation from certain foreign corporations with respect to which it is a 10% US shareholder.
Who qualifies for DRD? ›
The DRD is only available to C corporations; not LLCs, S corporations, or individuals. There is a 45-day minimum holding period for common stock. The DRD does not apply to preferred stock. If a corporation is entitled to a 70% DRD, it can deduct dividends only up to 70% of its taxable income.
What is the deduction in respect of dividend? ›
How is the TDS threshold determined for dividend income? "Tax Deducted at Source (TDS) on payment of dividend is applicable under section 194 of the Income Tax Act, 1961. The normal rate of TDS is 10% on dividend income paid in excess of Rs 5,000 from a company or mutual fund.
What is the dividend received exclusion? ›
The purpose of excluding these received dividends is to shield them from double taxation or even triple taxation. Under current U.S. tax law, corporations are able to exclude all or part of their received dividends through the dividends-received deduction (DRD).
What is the 245A DRD deduction? ›
The TCJA added new IRC Section 245A, which generally allows domestic corporations to deduct 100% of the foreign-source portion of any dividends received from a specified 10%-owned foreign corporation for distributions made after December 31, 2017.
What does DRD mean in insurance? ›
The Insurance Branch in IRS Chief Counsel's National Of- fice. recently issued a Chief Counsel Advice (CCA) mem- orandum regarding the Dividends Received Deduction (DRD) in the separate account partnership fund context.
