Lesson 5.6.1 Qualified Dividends: Concepts

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Из курса от партнера University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

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University of Illinois at Urbana-Champaign

Taxation of Business Entities I: Corporations

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Курс 3 из 5 — 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.

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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: Concepts3:47

Познакомьтесь с преподавателями

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

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 the 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 received 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.

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.

Dividends are 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 attain 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 U.S. 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 U.S. 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 a dividend when stock is trading 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 owns both long and short positions in the stock.

Qualified dividends are subject to

a maximum tax rate of 20 percent for individual taxpayers.

Notice that this is a maximum rate.

In fact, in 2018,

qualified dividends are exempt from tax,

that is subject to a zero percent tax rate,

for single taxpayers would taxable income up to $38,600 or $77,200 for joint filers.

In contrast, the 20 percent tax rate on

qualified dividends applies to single taxpayers with

taxable income over $425,800 or $479,000 for joint filers.

Other taxpayers in between generally pay a 15 percent tax rate on qualified dividends.

These preferential tax rates apply only to individuals.

Corporations still treat dividends as

ordinary income potentially subject to the dividends received deduction.

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