Invest Through Your Corporation and Deduct 70% of Your Dividends

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.

For information on forming a corporation in any

state, write to Incorporation Information Package, 818

Washington Street, Wilmington DE 19801.