Dividends Received Deduction - DRD

Similar to dividend exclusion, the dividend received deduction allows companies to avoid paying taxes on the dividends they receive from their investments.

Some stocks pay out dividends, or an amount of cash for each share held. You buy 1,000 shares of Fat Payments Inc. at $50 a share. The stock pays out a $0.50 dividend per share each quarter. So once every three months, you get $500: $0.50 times the 1,000 shares you own. If a company owns Fat Payments stock, they might be in line for the dividends received deduction (which applies only to corporations). So when Mass Conglomerate Ventures Corp. buys 1,000,000 shares of Fat Payments and gets $500,000 a quarter in dividends, it can get a tax break on some of that cash.

The goal here is to avoid taxing the dividend multiple times. In this case, it avoids the dreaded triple taxation, turning dollars of profit into a quarter and change.

You also own shares of Mass Conglomerate Ventures Corp., which also pays its own dividend. If the dividend was taxed when it passed from Fat Payments to Mass Conglomerate, that money would ultimately get taxed three times. Once when Fat Payments earned the cash in the first place. Again when it paid the dividend to Mass Conglomerate. And eventually a third time when Mass Conglomerate paid out a dividend to you.