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Software Club 210: Light Red
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1997-01-01
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@051 CHAP 8
┌─────────────────────────────────────────────────┐
│ DIVIDENDS RECEIVED DEDUCTION FOR CORPORATIONS │
└─────────────────────────────────────────────────┘
Corporations (other than S corporations) are entitled to a
significant tax break on their investments in dividend
paying common or preferred stocks. A so-called "C
corporation" (which is simply a regular corporation that
hasn't made an S corporation election) gets to exclude from
taxable income 70% of the dividends it receives from another
corporation (80% if it owns 20% or more of the stock of the
other corporation). This can be a significant tax benefit
of being a C corporation if your company has funds to
invest, as compared to an S corporation or an unincorporated
business.
┌──────────────────────────────────────────────────────┐
│EXAMPLE: If your corporation receives $1,000 in │
│dividends from an investment in General Motors stock, │
│only $300 is taxable for federal income tax purposes. │
│Even if your corporation were in the 34% corporate tax│
│bracket, the federal tax on those dividends would be│
│34% of $300, or $102, which is a maximum effective tax│
│rate of only 10.2% of the dividends received. The │
│effective rate would only be 4.5% if the corporation │
│were in the 15% tax bracket. │
└──────────────────────────────────────────────────────┘
Note, however, that this deduction will be reduced if your
corporation borrows money (on which it pays interest) to
purchase dividend-paying stocks.
@IF118xx]NOTE: @NAME is not a C corporation.
@IF118xx]
@IF118xx]Thus, even though your business is incorporated, as an S
@IF118xx]corporation, it will not qualify for the dividends received
@IF118xx]deduction on any dividend income it receives.
@IF118xx]
@CODE: HI CA AZ
@CODE:NF
DIVIDENDS RECEIVED DEDUCTION DIFFERS IN @STATE
@CODE:OF
@CODE: HI
Hawaii does not allow a "dividends received" deduction to
corporations, generally, unlike the federal 70% or 80%
deduction. However, Hawaii does allow an 80% dividends
received deduction in certain limited situations, such as
the following:
. Dividends received from banks and insurance
companies doing business in Hawaii;
. Dividends received from a corporation that
does at least 15% of its business in Hawaii;
or
. Dividends received from a corporation that is
95%-owned by corporations doing business in
Hawaii, if the paying corporation is subject
to tax in another jurisdiction (another state,
for example).
@CODE:OF
@CODE: CA
California allows corporations a dividends received
deduction of a sort, which is now somewhat similar to the 70%
or 80% deduction allowed under the federal tax law. Under
the California franchise tax law, the percentage of dividends
received that may be nontaxable is based on the percentage of
the income of the payor corporation that is subject to tax in
California (a percentage that can be obtained by contacting
the California Franchise Tax Board). This percentage, once
determined, is then multiplied by another percentage, based
on the amount of the stock of the payor that is owned by the
taxpayer corporation, as follows:
Over 50% of stock owned - 100%
20% to 50% stock ownership - 80%
Under 20% stock ownership - 70%
The resulting percentage is the portion of the total dividend
that is non-taxable to the recipient corporation under
California tax law. For example, if CALCO owns under 20%
of the stock of XYZ Corporation, and 40% of XYZ's income is
subject to tax in California, CALCO would be entitled to
a deduction of 70% x 40%, or only 28% of any dividends it
received from XYZ. This is not nearly as advantageous as
the 70% deduction that would be allowed under federal tax
law in the same situation.
@CODE:OF
@CODE: AZ
Under Arizona's tax regulations (Regulation R15-2-1128),
cash dividends that a corporation receives from another
corporation may be subtracted from the Arizona gross
income of the recipient corporation if, for the tax year
preceding payment of the dividend:
. the paying corporation was required to (and did) file an
Arizona income tax return;
. the income of the corporation that paid the dividend was
subject to Arizona income tax; and
. the corporation paying the dividend attributed at least
50% of its net income to Arizona.
@CODE:OF