A:

Corporations may not legally deduct the dividend payments before taxes but there is another approach - a corporate structure called an income trust. Income trusts allow a firm to deduct dividends, or trust payments, before taxes are calculated. The essence of an income trust is to pay all of the earnings after all business expenses to the unit holders, which are the owners of the income trust.

An income trust is essentially a corporation with a different classification under tax law. Income trusts are not permissible in most countries, but there are a few (Canada, for example) that still allow income trusts, or a variation thereof. Because trust payments are paid out to unit holders in a cash-distributions-per-unit format before taxes are calculated, the corporation will have no income against which to calculate income taxes, virtually eliminating its tax liability.

If you want to learn more about dividends, please read How and Why Do Companies Pay Dividends?



RELATED FAQS

  1. What is private wealth management?

    Understand what private wealth management is from the perspective of both the private client as well as the private wealth ...
  2. What dividend yield is typical for companies in the industrial sector?

    Find out more about dividend yields, what the dividend yield measures and what level of dividend yield is typical for companies ...
  3. What are the advantages of investing in ETFs with high trading volume?

    Learn about the advantages of exchange-traded funds with higher volume and liquidity, and understand how covered call options ...
  4. Which REITs pay the highest dividends?

    Find out more about real estate investment trusts and which ones have dividend yields greater than 15% for the year 2015.
RELATED TERMS
  1. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  2. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
  3. Business Judgment Rule

    A legal principle which grants directors, officers, and agents ...
  4. Dividend

    A distribution of a portion of a company's earnings, decided ...
  5. Sharpe Ratio

    A ratio developed by Nobel laureate William F. Sharpe to measure ...
  6. Target Payout Ratio

    A target payout ratio is a measure of what size a company's dividends ...

You May Also Like

Related Articles
  1. Active Trading Fundamentals

    Which oil and gas stocks pay the highest ...

  2. Mutual Funds & ETFs

    What are some popular ETFs that track ...

  3. Stock Analysis

    Google Stock: A Tale of Two Share Classes

  4. Professionals

    5 Signs That You Have a Lousy 401(k) ...

  5. Investing Basics

    Which insurance companies pay the highest ...

Trading Center