Under the dividends received deduction, what portion of dividends are tax exempt when the taxpayer owns between 20% and 80%?

• A. 70%
• B. 80%
• C. 100%
• D. 60%

Answer: (B)

The key idea is that the dividends received deduction reduces how much dividend income a corporation has to tax, and the amount you can deduct depends on how much ownership you have in the paying corporation. When ownership is between 20% and 80%, a large portion of those dividends is tax-exempt under this framework. Specifically, 80% of the dividends are excluded from taxable income, so only 20% remains taxable. This reflects the idea that a substantial ownership stake signals enough influence to warrant a large relief from tax on those dividends.

For example, if a company receives $100 in dividends from a subsidiary it owns within this range, $80 would be exempt, and $20 would be included in taxable income. In other ownership ranges, the exempt portion is different (e.g., higher ownership can lead to full exemption, and much smaller ownership typically yields a smaller DRD).