The dividends received deduction (DRD) is a tax code provision that applies to certain corporations that receive dividends from related entities. It applies as a reduced income tax rate on the dividend income, lessening the potential consequences of triple taxation. Without the DRD, dividend income would be subject to taxation at both the corporate and individual level.

The DRD tiers range from a 50% deduction of the dividend received, up to a 100% deduction. Qualifying dividends are those that come from domestic corporations, meaning the corporation is created or based in the U.S. Qualifying dividends may include taxable dividend income and tax-exempt dividend income. Domestic corporate dividends are taxed at a minimum DRD rate of 20% while foreign corporate dividends are taxed at a minimum DRD rate of 10%.

In addition to these minimum taxes on qualifying dividends, other rules apply in order for a shareholder to be eligible for a DRD on the dividend received. For example, corporations cannot take a deduction for dividends received from a real estate investment trust (REIT) or capital gain dividends received from a regulated investment company. A shareholder may also not take a DRD for distributions that come from a corporation that is either insolvent or bankrupt.

The DRD can benefit the shareholder of corporation that receives dividends from related entitles by mitigating the triple taxation that would normally occur. The DRD tiers and minimum taxes on different types of dividends provide flexibility in the taxation rate of corporate shareholders. As such, it is important for shareholders to be aware of the tax laws governing dividends, including any applicable rules and possible deductions. Knowing the rules and possible deductions related to the DRD can allow corporations to optimize the tax benefits that they receive on their dividends.