Dividends Received Deduction (DRD)

Dividends Received Deduction (DRD)

The Dividends Received Deduction (DRD) is a tax deduction available to corporations that receive dividends from other domestic corporations. This deduction is designed to mitigate the effect of triple taxation on corporate earnings—once at the corporate level when profits are earned, again at the corporate level when those profits are distributed as dividends, and finally at the individual level when shareholders pay taxes on dividends received.

The amount of the deduction varies based on the ownership percentage of the receiving corporation in the paying corporation. Generally, it is as follows:

• 50% of dividends received if the receiving corporation owns less than 20% of the paying corporation.
• 65% of dividends received if the receiving corporation owns 20% or more but less than 80% of the paying corporation.
• 100% of dividends received if the receiving corporation owns 80% or more of the paying corporation.

For example, if Corporation A receives $100,000 in dividends from Corporation B and owns 15% of Corporation B, Corporation A can deduct $50,000 (50% of the dividends) from its taxable income. This deduction reduces the overall taxable income, thereby decreasing the tax liability for the receiving corporation.