Business Entities · Corporations in general

Special deductions and credits (e.g., dividends received deduction, charitable deduction)

Verification 2026 Verified
tax year · reviewed 2026-08-21 · Draft for I. Ohu review

Two deductions dominate this topic and each has a condition that is routinely dropped from the summary. The dividends received deduction is described as a function of ownership percentage, and its top rate is not: it depends on affiliated group membership and an election. The corporate charitable deduction is described as capped at a percentage of taxable income, and from this year it also has a floor beneath which nothing is deductible at all.

The rule

The rates. 50 percent of dividends received from a domestic corporation; 65 percent where the dividend is received from a 20-percent owned corporation; and 100 percent for a qualifying dividend and for dividends received by a small business investment company (IRC § 243(a), (c)(1))^TY2026

Where the middle rate begins. a 20-percent owned corporation means any corporation of which 20 percent or more of the stock, by vote and by value, is owned by the taxpayer — so the 65 percent rate begins at exactly 20 percent, not above it, and stock described in IRC § 1504(a)(4) is left out of the count (IRC § 243(c)(2))^TY2026

What the top rate actually requires. a qualifying dividend, on which the 100 percent deduction depends, is one received by a corporation that at the close of the day of receipt is a member of the same affiliated group as the distributing corporation, and that is distributed out of earnings and profits of a year of the distributing corporation ending after 31 December 1963 on each day of which both were members of that group. Affiliated group takes its IRC § 1504(a) meaning without §§ 1504(b)(2) and 1504(c), and the election under IRC § 243(b)(2) binds every member and is revocable only with the consent of the Secretary (IRC § 243(b))^TY2026

The ceiling on the deduction. the aggregate deduction allowed by IRC § 243(a)(1), IRC § 245(a) and (b) and IRC § 250 may not exceed a percentage of taxable income computed without those deductions and without IRC §§ 172 and 199A, without any IRC § 1059 adjustment and without any capital loss carryback. The limitation is applied first to dividends from 20-percent owned corporations at 65 percent, then separately to other dividends at 50 percent with taxable income reduced by the 20-percent-owned dividends (IRC § 246(b)(1), (3))^TY2026

And when the ceiling does not apply. the taxable income limitation does not apply for any taxable year for which there is a net operating loss as determined under IRC § 172 — so a corporation pushed into a loss by the full deduction takes the full deduction (IRC § 246(b)(2))^TY2026

A holding period condition. no deduction is allowed under IRC § 243, § 245 or § 245A on a dividend on a share held for 45 days or less during the 91-day period beginning 45 days before the ex-dividend date, or to the extent the taxpayer is obliged to make related payments on substantially similar or related property; for preference dividends attributable to a period exceeding 366 days the test is 90 days within a 181-day period (IRC § 246(c))^TY2026

Charitable contributions, from this year. allowed only to the extent the aggregate exceeds 1 percent of taxable income and does not exceed 10 percent of taxable income — a floor as well as a ceiling, both applying to taxable years beginning after 31 December 2025 (IRC § 170(b)(2)(A) as amended by Pub. L. 119-21 § 70426(a), (d))^TY2026

What that replaced. a single ceiling of 10 percent of taxable income with no floor — the rule for taxable years beginning before 2026, and before that a temporary 25 percent ceiling for certain cash contributions in 2020 and 2021 that has long since lapsed^TY2026

And the carryover. contributions disallowed by the 10 percent ceiling carry to the succeeding year and expire after the fifth taxable year following the year first taken into account, on a first-in first-out basis — with current-year contributions absorbed before carried amounts, and amounts disallowed by the 1 percent floor carried forward only from a year in which the 10 percent ceiling was also exceeded (IRC § 170(d)(2))^TY2026

Current figures

Item	Rule	Authority
Deduction rates	50 percent of dividends received from a domestic corporation; 65 percent where the dividend is received from a 20-percent owned corporation; and 100 percent for a qualifying dividend and for dividends received by a small business investment company (IRC § 243(a), (c)(1))^TY2026	IRC § 243(a), (c)
20-percent owned corporation	a 20-percent owned corporation means any corporation of which 20 percent or more of the stock, by vote and by value, is owned by the taxpayer — so the 65 percent rate begins at exactly 20 percent, not above it, and stock described in IRC § 1504(a)(4) is left out of the count (IRC § 243(c)(2))^TY2026	IRC § 243(c)(2)
Qualifying dividend	a qualifying dividend, on which the 100 percent deduction depends, is one received by a corporation that at the close of the day of receipt is a member of the same affiliated group as the distributing corporation, and that is distributed out of earnings and profits of a year of the distributing corporation ending after 31 December 1963 on each day of which both were members of that group. Affiliated group takes its IRC § 1504(a) meaning without §§ 1504(b)(2) and 1504(c), and the election under IRC § 243(b)(2) binds every member and is revocable only with the consent of the Secretary (IRC § 243(b))^TY2026	IRC § 243(b)
Taxable income limitation	the aggregate deduction allowed by IRC § 243(a)(1), IRC § 245(a) and (b) and IRC § 250 may not exceed a percentage of taxable income computed without those deductions and without IRC §§ 172 and 199A, without any IRC § 1059 adjustment and without any capital loss carryback. The limitation is applied first to dividends from 20-percent owned corporations at 65 percent, then separately to other dividends at 50 percent with taxable income reduced by the 20-percent-owned dividends (IRC § 246(b)(1), (3))^TY2026	IRC § 246(b)
Net operating loss exception	the taxable income limitation does not apply for any taxable year for which there is a net operating loss as determined under IRC § 172 — so a corporation pushed into a loss by the full deduction takes the full deduction (IRC § 246(b)(2))^TY2026	IRC § 246(b)(2)
Charitable floor and ceiling	allowed only to the extent the aggregate exceeds 1 percent of taxable income and does not exceed 10 percent of taxable income — a floor as well as a ceiling, both applying to taxable years beginning after 31 December 2025 (IRC § 170(b)(2)(A) as amended by Pub. L. 119-21 § 70426(a), (d))^TY2026	IRC § 170(b)(2)(A)

How it works in practice

The dividends received deduction exists to stop the same corporate profit being taxed three times — once at the paying corporation, once at the receiving corporation, and once at the ultimate individual shareholder. The rate rises as the corporate ownership rises, on the theory that the closer the two corporations are to being one enterprise, the less justification there is for a second corporate-level tax.

The three rates are easy to recall and the boundaries are where the errors are. Fifty percent is the default. Sixty-five percent applies to a dividend from a 20-percent owned corporation, and the definition is “20 percent or more of the stock … by vote and value” — so a corporation holding exactly twenty percent gets sixty-five percent, not fifty. Note also that the test is conjunctive: twenty-five percent of the vote and fifteen percent of the value is not a 20-percent owned corporation.

The hundred percent rate is the one most often stated wrongly, because it is usually described as applying above eighty percent ownership. That is a shorthand for a longer condition. IRC § 243(a)(3) allows the deduction for a qualifying dividend, which IRC § 243(b)(1) defines by reference to affiliated group membership at the close of the day of receipt, and to the dividend being paid out of earnings and profits of a year throughout which both corporations were members. Affiliated group takes its meaning from the consolidated return definition (IRC § 1504(a)), which does carry the eighty percent test, so the shorthand is not wrong about the percentage — but the corporations must also satisfy that section’s other conditions, and an election under IRC § 243(b)(2) must be in place. That election binds every member of the group and is revocable only with the Secretary’s consent.

The taxable income limitation in IRC § 246(b) is the second condition that is often omitted. The deduction may not exceed a percentage of taxable income computed before the deduction itself and before several other items, and the percentage matches the deduction rate: sixty-five for 20-percent-owned dividends, fifty for the rest, applied separately and in that order. The hundred percent deduction on qualifying dividends is outside the limitation entirely.

IRC § 246(b)(2) is the release valve and it produces a striking result. The limitation does not apply for any year in which there is a net operating loss. So a corporation whose full deduction would create a loss takes the full deduction — the limitation only bites where the corporation remains profitable after it. Whether a net operating loss exists is therefore tested after allowing the deduction in full, which is circular in appearance and settled in practice.

The holding period in IRC § 246(c) is the same test that gates qualified dividend income for individuals, borrowed here for a different purpose. More than forty-five days within the ninety-one-day window around the ex-dividend date, and more than ninety days within a hundred-and-eighty-one-day window for long-period preference dividends.

On the charitable side, the position changed for taxable years beginning after 2025 and the change is structural rather than a rate adjustment. There is now a floor as well as a ceiling: contributions are deductible only to the extent they exceed one percent of taxable income, and only up to ten percent. A corporation giving less than one percent of its taxable income deducts nothing at all — a result with no analogue in the previous regime, and one that most corporate giving programmes were never designed around.

Scenarios

The ninety percent holding without the election

Corporation A owns ninety percent of the stock of Corporation B by vote and value. B pays A a dividend of $100,000. No election under IRC § 243(b)(2) has been made, and A and B have never filed on a consolidated basis or otherwise acted as an affiliated group for tax purposes.

A cannot take a hundred percent deduction on those facts alone. The hundred percent rate in IRC § 243(a)(3) applies to a qualifying dividend, and IRC § 243(b)(1) requires the recipient to be a member of the same affiliated group as the distributing corporation at the close of the day of receipt, with the dividend paid out of earnings and profits of a year throughout which both were members — and IRC § 243(b)(2) requires an election that binds every member of the group. Ninety percent ownership makes affiliation available; it does not make the deduction automatic. Without the election A is on the sixty-five percent rate, because B is a 20-percent owned corporation.

Exactly twenty percent

A corporation owns precisely twenty percent of another corporation's stock, measured both by voting power and by value, and receives a $60,000 dividend.

The rate is sixty-five percent, giving a $39,000 deduction. IRC § 243(c)(2) defines a 20-percent owned corporation as one of which "20 percent or more of the stock … (by vote and value) is owned by the taxpayer", so the higher rate begins at exactly twenty and not above it. The common summary "twenty percent or less gets fifty percent" misstates the boundary, and a question set precisely at twenty percent is testing that word.

The deduction that created a loss

A corporation has taxable income before the dividends received deduction of $40,000, which includes $200,000 of dividends from a corporation in which it holds twelve percent. The fifty percent deduction would be $100,000.

The full $100,000 is allowed. The IRC § 246(b)(1) limitation would cap the deduction at fifty percent of the $40,000 of taxable income, so $20,000 — but IRC § 246(b)(2) disapplies the limitation for any year in which there is a net operating loss, and allowing the full deduction produces taxable income of negative $60,000. The corporation takes the whole deduction and carries a $60,000 net operating loss. Had its income before the deduction been $250,000, the limitation would have applied and no loss would have arisen.

The corporate giving programme that stopped working

A corporation with taxable income of $8,000,000 has for years given about $50,000 annually to local charities, comfortably inside the ten percent ceiling. It makes the same gifts in 2026.

It deducts nothing. For taxable years beginning after 2025, IRC § 170(b)(2)(A) as rewritten by Pub. L. 119-21 § 70426 allows the deduction only to the extent contributions exceed one percent of taxable income — here $80,000 — and only up to ten percent. The $50,000 does not clear the floor, so none of it is deductible. Nor does the ordinary carryover help: IRC § 170(d)(2)(C) permits amounts disallowed by the floor to be carried forward only from a year in which the ceiling was also exceeded, and this corporation is nowhere near the ceiling. A programme that produced a deduction every year for a decade now produces none, and the corporation would have to give more than $80,000 to deduct anything at all.

Traps

Sixty-five percent begins at exactly twenty. IRC § 243(c)(2) says "20 percent or more", by vote and value.
Eighty percent ownership is not enough for the top rate. IRC § 243(a)(3) needs a qualifying dividend: affiliated group membership plus the IRC § 243(b)(2) election.
The taxable income limitation is applied in two passes. Sixty-five percent first on 20-percent-owned dividends, then fifty percent on the rest with income reduced accordingly.
A net operating loss removes the limitation entirely. IRC § 246(b)(2), which is why the deduction can create the loss that saves it.
The holding period applies here too. IRC § 246(c) denies the deduction on shares held too briefly.
The charitable deduction now has a floor. Contributions below one percent of taxable income produce no deduction at all for years beginning after 2025.
The floor carryover is conditional. Amounts disallowed by the floor carry forward only from a year in which the ceiling was also exceeded.

How this has changed

The corporate charitable deduction is the live change and it is the most consequential rewriting of a routine corporate deduction in years. Pub. L. 119-21 § 70426 rewrote IRC § 170(b)(2)(A) for taxable years beginning after 31 December 2025 to allow the deduction only to the extent contributions exceed one percent of taxable income and do not exceed ten percent. Before that there was a ceiling and no floor. The practical consequence is that modest corporate giving — the ordinary pattern for most companies — has become non-deductible, while nothing changes for a corporation already giving near the ceiling. IRC § 170(d)(2)(C) governs the carryover of amounts disallowed by the floor and permits it only from a year in which the ceiling was also exceeded, so the disallowance is generally permanent rather than deferred.

Any material describing the corporate charitable deduction as “up to ten percent of taxable income” and stopping there is describing the position through 2025 and is wrong for the year now running. This is the same shape as the information-reporting changes elsewhere in Part 2: a provision rewritten in July 2025 whose first operative year is 2026.

The dividends received deduction rates have been stable since they were reduced in 2017 from seventy and eighty percent to fifty and sixty-five. Material giving the older rates is pre-2018, and the error is material — it overstates the deduction by two-fifths at the lower tier.

Exam focus

The dividends received deduction is a reliable computation and the marks are in three places: the ownership percentage and which side of the boundaries it falls on; whether the taxable income limitation applies; and whether a net operating loss removes it.

Where a question gives ownership above eighty percent and offers a hundred percent deduction, read for whether an affiliated group and an election are mentioned. If the facts say nothing about either, the question is probably testing the shorthand — though a question that simply states “80 percent or more” and offers 100 percent as the answer is testing the rate table rather than the conditions, so read the options before deciding which.

For the charitable deduction, questions set in a year beginning after 2025 need both the floor and the ceiling. A corporation giving a small amount relative to its income now deducts nothing, and that is the answer the question is looking for.

Check yourself

1. A corporation owns 15 percent of another domestic corporation and receives a $80,000 dividend. Assuming no limitation applies, what is the deduction?

Answer: $40,000. The default rate under IRC § 243(a)(1) is 50 percent, and 15 percent ownership is below the 20 percent threshold for the higher rate. The holding period condition in IRC § 246(c) must also be satisfied, and the IRC § 246(b) taxable income limitation may reduce the amount.

2. A corporation owns exactly 20 percent of another corporation’s stock by both vote and value. At what rate is the dividends received deduction computed?

Answer: 65 percent. IRC § 243(c)(2) defines a 20-percent owned corporation as one of which 20 percent or more of the stock by vote and value is owned by the taxpayer, so the higher rate applies at exactly 20 percent. Both the vote and the value test must be met.

3. Corporation A owns 90 percent of Corporation B and receives a dividend. What must be true for A to deduct 100 percent of it?

Answer: the dividend must be a qualifying dividend. Under IRC § 243(b)(1) A must be a member of the same affiliated group as B at the close of the day the dividend is received, and the dividend must be paid out of earnings and profits of a year of B on each day of which both were members of that group. An election under IRC § 243(b)(2) is required, it binds all members of the group, and it may be revoked only with the consent of the Secretary. Ownership alone is not sufficient.

4. A corporation’s taxable income before the dividends received deduction is $30,000, and the full deduction would be $90,000. Does the taxable income limitation apply?

Answer: no. IRC § 246(b)(2) disapplies the limitation for any taxable year for which there is a net operating loss as determined under IRC § 172, and allowing the full $90,000 produces a $60,000 loss. The corporation takes the whole deduction and carries the loss forward.

5. A corporation with taxable income of $5,000,000 makes charitable contributions of $40,000 in a taxable year beginning in 2026. What is deductible?

Answer: nothing. For taxable years beginning after 2025, IRC § 170(b)(2)(A) allows the deduction only to the extent contributions exceed 1 percent of taxable income — $50,000 here — and only up to 10 percent. The $40,000 does not clear the floor. IRC § 170(d)(2)(C) permits amounts disallowed by the floor to be carried forward only from a year in which the ceiling was also exceeded, which this is not.

Change log

2026-08-21Initial draft. Sets out the IRC § 243(a) and (c) dividends received deduction rates, the § 243(c)(2) definition of a 20-percent owned corporation which begins at exactly 20 percent by vote and value, the § 243(b) conditions for a qualifying dividend on which the 100 percent rate depends — affiliated group membership and an election binding on every member — the § 246(b) taxable income limitation applied separately at 65 and 50 percent with the § 246(b)(2) net operating loss exception, the § 246(c) holding period, and the corporate charitable deduction as rewritten by Pub. L. 119-21 § 70426 to add a 1 percent floor beneath the 10 percent ceiling for taxable years beginning after 2025.