Question

Comment on the following statement in detail:

Dividends received by a corporation on an investment in the common and preferred stock of another corporation, where ownership in the dividend paying corporation is less than 20%, is subject to 70 percent exclusion for tax purposes.

Answer 1

The concept discussed in the question is of Dividend Exclusion which refers to a provison of Internal Revenue System which allows the corporations to deduct a portion of dividend received from their taxable income.

It allows corporations to deduct a portion of dividends from taxable income to ensure that the dividends received are  taxed only once.This deduction allows only to domestic entities and not foerign entities. It is a Federal tax write off system only form eligible domestic corporations. It prevents the same portion of income to be taxed thrice, once from the dividend paying company, once from the dividend receiving comany and once from the shareholders of the dividend receiving company.

Before the passage of new Tax Cut and Jobs act in the late 2017, corporations that owned less than 20% were allowed to deduct 70% of dividends received from the calculationof taxable income. Beginning from January 1,2018, the new regime lowered the standard deduction to 50% from 70%.