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. How do dividend distributions affect additional paid in capital?

    Find out how the issuance of dividends can affect the additional paid-in capital subaccount of a company's balance sheet; ...
  2. When does the holding period on a stock dividend start?

    Understand the difference between qualified and unqualified stock dividends, and when the holding period for qualified dividends ...
  3. Is there a situation in which wash trading is legal?

    Learn about what wash trading is and how it can affect the value of a stock. Explore the difference between wash trading ...
  4. What is the difference between comprehensive income and gross income?

    Learn the specifics of both comprehensive income and gross income, how they are legally defined, and the primary difference ...
RELATED TERMS
  1. Ex Gratia Payment

    A payment made to an individual by an organization, government, ...
  2. Duty Free

    Goods that international travelers can purchase without paying ...
  3. Poison Put

    A takeover defense strategy in which the target company issues ...
  4. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  5. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  6. Back-End Plan

    An anti-acquisition strategy in which the target company provides ...

You May Also Like

Related Articles
  1. Brokers

    10 Most Famous Public Companies That ...

  2. Trading Strategies

    Dividend Versus Buyback: Which Is Better?

  3. Trading Strategies

    Microsoft's Game of Catch-Up With The ...

  4. Stock Analysis

    Is Bank of America Turning Around?

  5. Mutual Funds & ETFs

    Why Mutual Funds are Still Better than ...

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!