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Simple English definitions for legal terms
dividend-received deduction
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A quick definition of dividend-received deduction:
Dividend-Received Deduction: A special rule that allows a company to reduce the amount of taxes it owes on dividends it receives from other companies based in the United States. This deduction is only available to corporate shareholders and is governed by specific sections of the Internal Revenue Code.
A more thorough explanation:
Definition: The dividend-received deduction is a tax deduction that allows a corporation to reduce its taxable income by the amount of dividends received from another domestic corporation. This deduction is provided under the Internal Revenue Code (IRC) sections 243-247.
Example: Suppose a corporation, ABC Inc., owns 1,000 shares of XYZ Inc. and receives a dividend of $10,000 from XYZ Inc. In this case, ABC Inc. can claim a dividend-received deduction of $9,000 (90% of $10,000) on its tax return. This means that ABC Inc. will only pay taxes on $1,000 of the dividend income instead of the full $10,000.
Explanation: The dividend-received deduction is a tax incentive provided to encourage corporations to invest in other domestic corporations. The deduction allows the receiving corporation to reduce its taxable income by a percentage of the dividend income received. In the example above, ABC Inc. received a $10,000 dividend from XYZ Inc. and was able to claim a deduction of $9,000, which reduced its taxable income. This deduction helps to reduce the overall tax burden on corporations and encourages investment in the domestic economy.