J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

The Dividends-Received Deduction

Corporations cannot deduct the dividends they pay out to shareholders. But C corporations may be able to claim a special deduction for a percentage of certain stock dividends they receive. This is called a dividends-received deduction. Other taxpayers—individuals, partnerships, LLCs, and S corporations—cannot claim this deduction.

Percentages of the Dividends-Received Deduction

The percentage of the dividend that can be deducted depends on the amount of stock your corporation owns and the type of company paying the dividends. Other factors may operate to further limit the percentage.

FORTY-TWO PERCENT DEDUCTION

If your corporation owns less than 20% of the preferred stock issued before October 1992 of a taxable public utility, your dividends-received deduction is limited to 42% of the dividends received from that public utility. If your corporation owns more than 20% of the utility, the dividends-received deduction increases to 48%.

SEVENTY PERCENT DEDUCTION

If your corporation owns less than 20% of the stock of the dividend-paying corporation, your dividends-received deduction is 70% of the dividends you receive from that corporation.

EIGHTY PERCENT DEDUCTION

If your corporation owns at least 20% of the stock of the dividend-paying corporation, your dividends-received deduction is 80% of the dividends you receive from that corporation.

ONE HUNDRED PERCENT DEDUCTION

If your corporation and the dividend-paying corporation are members of an affiliated ...