Corporate Dividends Received Deduction (DRD) Suitability
A C-corporation has $500,000 in excess cash that it wants to invest in income-producing securities. To maximize after-tax yield, which security takes advantage of the corporate Dividends Received Deduction (DRD)?
Under the corporate Dividends Received Deduction (DRD), U.S. corporations that own stock in other domestic companies can exclude 50% (or 65% depending on ownership) of dividend income from federal corporate income tax.
Complete Analysis & Legal Rationale
The DRD applies strictly to corporate dividends (common and preferred stock), NOT debt interest. Treasury, debenture, and commercial paper interest is 100% taxable to a corporation.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Preferred stock dividends qualify for the 50% corporate Dividends Received Deduction.
Bond interest is fully taxable to corporations; no DRD exclusion applies.
Treasury interest is fully taxable at the federal corporate rate.
Commercial paper generates interest income, not dividend income.
Official Standard: Permits corporate deduction for dividends received from domestic corporations.