7929 / How is a RIC taxed?

(1)  Net capital gain is excluded;

(2)  The net operating loss deduction under Section 172 is not allowed;

(3)  The deductions for dividends paid (typically provided for corporations) is allowed, but is computed only taking into account ordinary taxable income distributed to shareholders (i.e., without regard to capital gain dividends and exempt-interest dividends). This deduction may be disallowed if the RIC issues preferential dividends to a certain class of shareholders (except that after December 22, 2010, the preferred dividend rule no longer applies to publicly offered RICs);¹ and

(4)  Any tax imposed under IRC Section 851(d)(2) and (i) are excluded (these taxes are those imposed on the RIC for failure to meet its asset diversification tests in any quarter).²

The tax imposed on ICTI is the applicable Section 11 corporate tax rate. If the RIC is a personal holding company, the highest Section 11 rate applies.³

A RIC is also taxed on capital gains. The tax is imposed on the excess of the net capital gain over the deduction for dividends paid (essentially, the tax is imposed on the RIC’s capital gains less the capital gains dividends it distributes to shareholders).⁴ See Q 7934 for a discussion of a RIC shareholder’s tax treatment of a capital gain dividend.

1.  Rev. Rul. 89-81, 1989-26 IRB 17; IRC § 562(c).