Lesson 5.6.1 Qualified Dividends: Concepts

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From the course by University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

11 оценки

University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

11 оценки

Course 3 of 5 in the Specialization U.S. Federal Taxation

This course provides an introduction to the U.S. federal income taxation of corporations and their shareholders. The course focuses on the relevant provisions of Subchapter C of the Internal Revenue Code, as well as related Treasury Regulations and judicial opinions, governing corporate formation, operations, distributions, and liquidation. Practical in-class study problems facilitate self-discovery of technical tax knowledge along with the development of a variety of professional skills and attitudes.

From the lesson

Module 5: Corporate Non-Liquidating Distributions

In this module, you will learn about corporate non-liquidating distributions. First, earnings and profits (E&P) will be discussed, and you will learn how to calculate E&P. Next, you will analyze the treatment of cash distributions followed by property distributions. You will then cover the treatment of stock distributions. Finally, treatment of constructive dividends and qualified dividends will be explored.

Lesson 5.6.1 Qualified Dividends: Concepts3:38

Lesson 5.6.2 Qualified Dividends: Applications2:23

Meet the Instructors

Michael P Donohoe, PhD, CPA
Associate Professor of Accountancy and PwC Faculty Fellow
Department of Accountancy, Gies College of Business

[MUSIC]

In prior lessons, you learned that non-liquidating distributions of after-tax

profits can take many forms, such as cash, property, stock, and

constructive elements like excessive compensation.

You also learned that a distribution to the extent of current and

accumulated E&P is a dividend for

tax purposes that is generally included in a shareholder's gross income.

But what tax rates apply?

In general, the tax treatment of dividends depends on whether the shareholder

receiving them is another corporation or not.

All corporations treat dividends as ordinary income but receive some tax

relief from the dividends-received deduction if certain ownership and

other conditions are met.

Individual shareholders, however, apply preferential tax rates to

so-called qualified dividends and ordinary tax rates to non-qualified dividends.

In this lesson you will learn about the taxation of qualified dividends, a concept

introduced as part of an economic stimulus legislation in the early 2000s.

After you learn the concepts,

you will then apply them to scenarios involving Sunchaser Shakery.

Dividends are an important and often controversial tax issue,

because they form the basis of double taxation.

Some commentators claim that taxing both corporate income and

dividends incentivizes investors to invest in non-corporate forms and

motivates corporations to finance operations with debt,

rather than equity, to obtain tax deductions for interest expense.

Others argue that the taxation of dividends helps regulate

the concentration of economic power held by publicly-traded corporations.

There are many other arguments both for and against the taxation of dividends.

However, one argument in particular that seems to resonate with Congress is that

many of the US's trading partners only assess tax at the corporate level.

Thus, some argue that eliminating the double tax would make the US

more globally competitive.

As somewhat of a compromise between elimination of double taxation and

treating dividends as ordinary income, Congress provides for

a reduced tax rate on so-called qualified dividends.

To be considered qualified,

a dividend must first be paid by a domestic corporation.

Dividends from foreign corporations are permitted if they meet several

tax treaty and information-sharing agreements with the US government.

A dividend must also be paid on stock that has been held greater than 60 days during

the 121 day period beginning the 60 days before the ex-dividend date.

Note that the ex-dividend date,

which determines who receives the dividend when stock is traded near the distribution

date, is typically two days before the date of record on a dividend.

Finally, the dividend cannot be paid to a shareholder who holds both long and

short positions in the stock.

Qualified dividends are subject to a maximum tax rate of 20% for

individual taxpayers.

Notice that this is a maximum rate.

In fact, qualified dividends are exempt from tax that is subject to a 0% tax

rate for taxpayers in the 10% or 15% individual income tax brackets.

In contrast,

taxpayers in the 39.6% tax bracket pay a 20% tax rate on qualified dividends.

Other taxpayers with qualified dividends generally pay a 15% tax rate.

These preferential tax rates only apply to individuals.

Corporations still treat dividends as ordinary income potentially subject to

the dividends-received deduction.

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