Question

We've all heard that corporate income is subject to double taxation; once at the corporate level and again at the individual level after dividends are distributed. Congress has put in place a dividends received deduction to mitigate a similar problem at the corporate level. In what situations does this deduction apply? How many times is such income subject to taxation? If double/triple/etc. taxation is so onerous, why are limits in place on this deduction? If this is okay at the corporate level, why, in your opinion, hasn't it been implemented to mitigate against double taxation when paid to individuals?

Answer 1

In what situations does this deduction apply?

The dividend received deduction under the US federal law is available to receiving party such as if a business entity received dividend income from another business entity due to ownership. In other words we can say that when a company owns some shares in other company then company will receive regular dividend income from other company and receiving company will get tax deduction benefits.

How many times is such income subject to taxation? If double/triple/etc. taxation is so onerous;

Triple taxation has been removed, in absence of this dividend income is taxed in the hand of the business entity that earned, in the hand of corporate shareholder and in the hand of individual shareholder. But as per new scheme, it has been reduced to two times taxation in compare to triple taxation.

Why are limits in place on this deduction?

There are some limitations;

1. The receipts of dividends deduction is limited with reference to taxable income of the corporate shareholder.

2. The company should hold the shares of the other company which is paying dividends, upto a maximum limit of 45%

3. The dividends received deduction is only available with respect to dividends attributable to stock financed through other sources except debts.

Yes, it is true that double taxation is good in compare to triple taxation because in case of double taxation only dividend distributing party and dividend receiving party is responsible for taxation. In other words we can say that a company is distributing dividend will be responsible for dividend distribution tax whereas receiving party will be responsible for dividend receipt tax. Thus we can say that company will not be double taxed.