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Invest Through Your Corporation and Deduct 70% of Your Dividends

by

Adam Starchild


There are numerous incentives for small-business owners to manage at least part of their investment portfolios through their corporations. One incentive is that corporations are allowed to deduct from gross income 70% of the dividends received from other U.S. corporations that are subject to U.S. income tax. (The deduction rises to 80% of dividends if your corporation owns 20% or more of the corporation paying the dividends, and to 100% if the corporations are considered "affiliated" under the tax code.) Dividends that exceed the dividends-received deduction can be offset by other corporate expenses, including passive losses. In addition, any net investment income should be taxed at the regular corporate income tax rates, which start at 15%.

To qualify for the deduction, the corporation must hold the dividend-paying stock for more than 45 days. You generally cannot reduce your risk of loss by hedging the stock position with options or other strategies. Your dividends-received deduction is reduced if you used debt to buy the stock paying the dividends. Ordinary dividend distributions from mutual funds qualify for the deduction.

Consider shifting at least part of your investment portfolio to your corporation. High-income stocks and mutual funds might generate a higher after-tax return when investments are made through the corporation. If you are selling a business, consider selling the assets and keeping the sale proceeds in the corporation. You can take advantage of the dividends-received deduction, pay yourself a salary and benefits that can be deducted against the investment income, and take advantage of low corporate tax rates.

When most of the corporation's income is earned from investments, the personal holding company tax might apply. The tax can be avoided by distributing most of the corporation's net income through salary, benefits, and dividends.

A highly recommended service for forming a orporation in any state is:

INC PLAN USA
Attn: Incorporation Information Package
Trolley Square, Suite 26C
Wilmington DE 19806



About the Author
For twenty years Adam Starchild has been writing books about these subjects, and they are published by a variety of publishers. They are available in many bookstores or public libraries.

For more information on tax planning, see The Tax Library.

Copyright © 1995 by Adam Starchild
The Investor's Library has reprinted this copyrighted article with the permission of the author.




 
 
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