The Dividends Received Deduction allows a C corporation to deduct a portion of dividends received from domestic corporations. The rule prevents multiple layers of corporate‑level tax and encourages investment inside the U.S. corporate system.
Only C corporations qualify. Personal holding companies and personal service corporations cannot claim the deduction.
Deduction percentages
The deduction depends on the corporation’s ownership in the dividend‑paying corporation:
- Less than 20% ownership → 50% deduction
- 20% to 79% ownership → 65% deduction
- 80% or more ownership → 100% deduction
Affiliated groups and small business investment companies also qualify for the 100% deduction.
Dividends that do not qualify
A corporation cannot claim the DRD for dividends received from:
- REITs
- Tax‑exempt corporations
- Stock not held long enough
- Preferred stock with short holding periods
- Positions with related payment obligations
Holding‑period rule
To claim the DRD, the corporation must hold the stock for more than 45 days during the 91‑day window around the ex‑dividend date. Preferred stock with long dividend periods requires more than 90 days of holding during a 181‑day window.
Taxable income limitation
The DRD is generally limited to a percentage of taxable income (computed before the DRD):
- 50% limit for <20% ownership
- 65% limit for 20–79% ownership
Exception
The taxable income limit does not apply if claiming the full DRD would create or increase a net operating loss (NOL). In that case, the corporation deducts the full percentage based on ownership.
Three‑step DRD calculation
- Maximum DRD Dividend × DRD percentage
- Taxable income limit Taxable income × DRD percentage
- Apply NOL exception
- If the maximum DRD creates an NOL → use the maximum
- If not → use the taxable‑income‑limited amount
Summary
The DRD reduces corporate‑level tax on domestic dividends. Key principles:
- Deduction percentage depends on ownership
- Certain dividends are excluded
- Holding‑period rules apply
- Taxable income limits apply unless the full DRD creates an NOL
These rules come directly from IRC §243–§246, Form 1120 instructions, and IRS.gov.