8956 / What is the corporate dividend exclusion?

Editor’s Note: The 2017 tax reform legislation permanently reduced the corporate tax rate from 35 percent to 21 percent.¹ The final version of tax reform did not provide a special tax rate for personal service corporations. The legislation also reduced the 80 percent dividends received deduction to 65 percent (for corporations that own at least 20 percent of the stock of another corporation) and reduced the otherwise applicable 70 percent dividends received deduction to 50 percent.² These provisions apply for tax years beginning after December 31, 2017.

A corporation, as a legal entity, may own shares in other corporations in the same manner as individuals, and is entitled to receive any dividends on such shares.

However, in computing its taxable income, a corporation, unlike an individual, may deduct 65 percent (80 percent prior to 2018) of dividends received from domestic corporations if it owns at least 20 percent but less than 80 percent of the stock.³ For corporations that own less than 20 percent of the distributing corporation the deduction is limited to 50 percent (70 percent prior to 2018) of the dividends received.⁴ Dividends received are 100 percent deductible if the recipient is a small business investment company operating under the Small Business Investment Act, or, subject to certain conditions, if the recipient is a member of the same affiliated group of corporations as the issuer of the dividends (generally meaning 80 percent or more common ownership).⁵