Form 1120 Schedule C: Dividends, Inclusions, and the Dividends-Received Deduction

A corporation receiving dividends from another corporation can often deduct part of them, which stops the same profits being taxed repeatedly as they move up a chain of companies.

How much can be deducted depends on how much of the paying company is owned, and the claim carries holding period conditions that have to be evidenced with dates rather than asserted.

This covers what the schedule reports, how the deduction is determined, the limitation that caps it, and how it interacts with the regimes that apply to foreign subsidiaries.

What Is Schedule C on Form 1120?

Schedule C of the C-corporation tax return (Form 1120) is where corporations report dividends and inclusions received from other corporations, and calculate the Dividends-Received Deduction (DRD). The DRD reduces or eliminates the double taxation that would otherwise arise when one corporation receives dividends from another corporation in which it has invested.

What Is the Dividends-Received Deduction (DRD)?

The DRD allows C-corporations to deduct a portion of dividends received from domestic corporations, reducing the effective tax rate on inter-corporate dividends. The deduction percentage depends on the receiving corporation's ownership stake in the distributing corporation:

Example: 50% DRD

Corporation A owns 10% of Corporation B. Corporation B pays a $100,000 dividend to Corporation A. Corporation A can deduct $50,000 (50% DRD), making only $50,000 taxable. At a 21% corporate tax rate, the effective tax on the $100,000 dividend is $10,500 instead of $21,000.

The Taxable Income Limitation

The DRD cannot exceed the corporation's taxable income for the year, EXCEPT when the DRD creates or increases a net operating loss (NOL). The NOL exception overrides the taxable income limitation, so the full DRD applies even if it pushes the corporation into a loss position.

• Calculate DRD without the limitation first.
• If the DRD would create a loss, the full DRD applies.
• If taxable income before DRD is positive but less than the DRD amount, the DRD is limited to taxable income (unless this would create an NOL, in which case the full DRD applies).

Lines Reported on Schedule C

GILTI: Global Intangible Low-Taxed Income

C-corporations that own controlled foreign corporations (CFCs) must include their share of GILTI in income. GILTI is a complex computation representing foreign intangible income taxed at low rates abroad. Corporations may be entitled to a 50% GILTI deduction under Section 250 (reducing the effective rate).

Subpart F Income

Subpart F income (passive income earned by CFCs) must also be included in the US parent corporation's income, regardless of whether it is distributed. Subpart F inclusions are reported on Schedule C and may qualify for the Section 245A participation exemption if certain conditions are met.

Section 245A: Participation Exemption

US corporations owning 10% or more of a foreign corporation may deduct 100% of the foreign-source portion of dividends received from those foreign corporations (the participation exemption). This is also reported on Schedule C.

Dividends on Debt-Financed Portfolio Stock

When a corporation borrows money to purchase stock (debt-financed stock), the DRD is reduced by a percentage representing the portion of the stock that is debt-financed. This prevents corporations from borrowing to buy dividend-paying stocks and then claiming a DRD while deducting the interest on the loan.

Frequently Asked Questions

Written by

Ankit Sarawagi, CPA, CA, MBA

Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn