Tax Recognition of the Corporate Entity
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Temporary Extension of Carryback Period
The general NOL carryback period was temporarily extended to five years (from two years) for NOLs arising in taxable years up to 2001 and 2002. Note: The five year carryback period also applied to NOLs from these years that qualify under tax law for a three-year carryback period (i.e., NOLs arising from casualty or theft losses of individuals or attributable to certain Presidentially declared disaster areas). In 2008, the American Recovery & Reinvestment Act provided eligible small business with an election to increase the law carryback period for an applicable 2008 and 2009 NOL from 2 years to any complete number of years elected by the taxpayer that was more than two and less than six. As a result, qualified businesses had the choice to carryback NOLs three, four, or five years.
Note: The provision applied only to NOLs for any tax year beginning or ending in 2008 or 2009. The regular two year NOL carryback period returned for 2010 and thereafter.
An eligible small business was a taxpayer meeting a $15,000,000 gross receipts test. For this purpose, the gross receipt test of §448(c) was applied by substituting $15,000,000 for $5,000,000 each place it appeared.
Loss Computation
The net operating loss for a current tax year is the amount by which a corporation’s deductions exceed its gross income. Gross income for this purpose may be adjusted to reflect certain dividend deductions (§172(c), §172(d); Reg. §1.172-2). However, no NOL deduction is allowed.
The gross income adjustment allows the following special deductions, without limitation:
(1) Deduction for 70% of dividends received from domestic corporations;
(2) Deduction for dividends received on certain public utility preferred stock;
(3) Deduction for dividends received from certain offshore corporations; and
(4) Deduction for dividends paid on certain preferred stock of public utilities.
Deduction Computation
The net operative loss deduction is the total of the NOL carryovers and carrybacks from other years (§172(a)). When NOLs for more than one year is involved, the NOL deduction for any year must be determined from the aggregate carrybacks and carryovers to that year. How to Calculate Withholding and Deductions from Employee Paychecks
Dividends Received Deduction
A corporation is allowed a deduction for a percentage of certain dividends ten received during its tax year (§243).
Dividends from Domestic Corporations
A corporation may deduct, with certain limitations, 70% of the dividends received if the corporation receiving the bonus owns less than 20% of the distributing corporation. Thus, if a corporation owns stock in another domestic corporation subject to federal taxation, it may deduct from its gross income 70% of the dividends that it receives from the other corporation (§243(a)(1)).
Note: Small business investment companies may deduct 100% of the dividends received from a taxable domestic corporation (§243(a)(2)). In addition, if certain conditions are met, members of an affiliated group of corporations may deduct 100% of the dividends received from a member of the same affiliated group (§243(a)(3)).
This deduction reduces the effective federal income tax rate to 10.5% on dividends for a corporation in the 35% bracket, and 4.5% for a corporation in the 15% bracket. Dividends that are received by the corporation from regulated investment companies such as mutual funds are further limited as to deductibility (§243(c)(2)). Publication 526
80% Exception
A corporation can take a deduction equal to the lesser of 80% of dividends received or its taxable income without the dividend inclusion when it owns at least 20% but no more than 80% of the paying domestic corporation. Such a corporation is referred to as a 20%-owned corporation.
Ownership
Ownership, for these rules, is determined by the amount of voting power and value of a stock (other than certain preferred stock) the corporation owns (§243 (a)(1); §243(c)).
Limitation
Generally, the total deduction for dividends received or accrued is limited (in the following order) to:
(1) 80% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from 20% owned corporations, and
(2) 70% of the difference between taxable income and the 100% deduction allowed for dividends received from affiliated corporations, or by a small business investment company, for dividends received or accrued from less than 20%-owned corporations (reducing taxable income by the total dividends received from 20%-owned corporations) (§246(b)(1); §246(b)(3)).IRS
Denial of Deduction
No deduction is allowed for dividends received from:
(1) A real estate investment trust;
(2) A corporation exempt from tax either for the tax year of the distribution
or the preceding tax year;
(3) A corporation whose stock has been held by your corporation for 45 days
or less;
(4) A corporation whose stock has been held by your corporation for 90 days or less, if the stock has a preference as to dividends and the dividends received on it are for the time totaling more than 366 days; or
(5) Any corporation, if recipient corporation is under an obligation (pursuant to a short sale or otherwise) to make related payments for positions in substantially similar or related property (§246; §243(d)(3); §246(a)(1); §246(c)(1); Reg. §1.246-1). IRS
Debt-Financed Portfolio Stock
For dividends received on debt-financed portfolio stock of domestic corporations, the 70% (80% for any dividend received from a 20%-owned corporation) dividends-received deduction is reduced by a percentage adjusted to the amount of debt made to purchase the stock (§246A). Debt Financing
Property Dividends
When a corporation receives a dividend in the form of property other than cash from another domestic corporation,. The dividend is included in income in an amount equal to the lesser of the property’s fair market cost or the adjusted basis of the property in the hands of the distributing corporation, increased by profits recognized by the distributing corporation on the distribution (§301(b)(1)(B)).
Change to Holding Period
The TRA ‘97 modified the 46-day holding period for the dividends-received deduction (or 91-day period for certain dividends on preferred stock) to require that the holding period is met concerning each dividend received. Present law restrictions against diminishing risk of loss likewise apply to each dividend under the TRA ‘97. The TRA ‘97 is generally effective for dividends paid or accrued after the 30th day after August 5, 1997. However, the TRA ‘97 does not apply to certain dividends received within two years of the date of enactment if the dividend is paid concerning stock held on June 8, 1997, and all times after that until the dividend is received, and certain other requirements are continuously met concerning identified risk-reduction positions.