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QuestionfromProfessor.docxQuestion from Professor: There are different tax treatments for dividends received by a corporation that is a member of an affiliated group. Discuss and provide an example of what creates a dividend received deduction and the tax consequences of the dividend. Solid academic writing is expected and any sources used should be cited. Participate in a follow-up discussion by using classmates' facts and provide at least two potential tax benefits associated with the dividends they described.
1 posts
Re: Topic 4 DQ 1
Generally, corporations are taxed on income received in the form of dividends from stock they own in another corporation. However, in order to mitigate double or even triple taxation, the IRS allows corporations to claim a dividends-received deduction for domestic corporations and some foreign corporations (Anderson et al., 2020). The deduction amount is usually based off the percentage of ownership the corporation owns in the other corporation. For example, if corporation A owns 20% of corporation B’s stock, then corporation A can deduct up to 50% of the dividends received from corporation B, thus lowering corporation A’s tax liability for the year.
An affiliated group is a parent corporation and all of its domestic subsidiaries (Anderson et al., 2020). To qualify as an affiliated group, the parent corporation must own at least 80% of stock in one or more includible corporations and at least 80% of the stock in each corporation must be owned by the parent corporation or other group members. An includible corporation is any member of the group that does not have some sort of special tax status. Some types of corporations that do not qualify as an includible corporation include life insurance companies, foreign corporations, regulated investment companies, real estate investment trust, or S corporations. Each member in an affiliated group may claim a 100% dividends-received deduction for all dividends received from other group members in the affiliated group (Anderson et al., 2020). As previously stated, this is beneficial because it allows the corporations to lower their tax liability. For example, let’s say corporations A, B, C, D, and E are members of an affiliated group with corporation A being the parent corporation. Throughout the year corporation A receives many dividends from its subsidiaries. Also, corporation C pays dividends to corporation D and E. Corporation E distributes dividends to corporation B and B pays dividends to corporation D. All dividends exchanged between the groups are 100% tax deductible because they are members in an affiliated group. None of the corporations within the group have to include in their gross income any dividends received in these transactions. This deduction is especially beneficial for affiliated groups who file consolidated tax returns which are taxed primarily based off the parent corporation’s income for the year.
Anderson, K., Hulse, D., & Rupert, T. (2020). Pearson’s Federal Taxation 2020 Corporations, Partnerships, Estates, & Trusts. Hoboken, NJ: Pearson Education, Inc. Retrieved from https://etext-ise.pearson.com/courses/5948317/products/147974/pages/47?locale=&platformId=1030&isTpi=Y&iesCode=j5cTPuosYM
1 posts
Re: Topic 4 DQ 1
Generally, there are many advantages that corporations use as tax treatments for dividends that are members of an affiliated group. First, in business terms, an affiliation is an official attachment of one business entity to another. Two companies are affiliated when one is a minority shareholder of the other, and an official attachment implies a contract or agreement between the affiliated companies. Companies are affiliated when one company is a minority shareholder of another. In most cases, the parent company will own less than a 50% interest in its affiliated company. The term is sometimes used to refer to companies that are related to each other in some way. A company may become an affiliated company of another when it is bought out or taken over by a company that now holds a minority interest, or a company may also spin off a part of its business into a new affiliate as well. Next, 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. The amount of DRD that a company may claim depends on its percentage of ownership in the company paying the dividend (Anderson, Hulse, & Rupert, 2020).
For example, 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. Also, corporations are allowed a dividends-received deduction to prevent abuse in situations where a corporation is closely held. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Furthermore, corporations are allowed a dividends-received deduction to mitigate the effects of multiple taxation of corporate earnings partially or fully. Dividends received by a domestic corporation from another domestic corporation (other than S corporations) qualify for the special 70%, 80%, or 100% deduction. Distributions that receive capital gain treatment, most dividends from foreign corporations, dividends on stock held 45 days or less, and dividends on debt financed stock are not eligible.
Anderson, K., Hulse, D., & Rupert, T. (2020). Pearson’s Federal Taxation 2020 Corporations, Partnerships, Estates, & Trusts. Hoboken, NJ: Pearson Education, Inc. Retrieved from https://etextise.pearson.com/courses/5948317/products/147974/pages/47?locale=&platformId=1030&isTpi=Y&iesCode=j5cTPuosYM
