Legal Definitions - dividend-received deduction

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.