TAX LAW CHANGES: Corporate Changes in Reduction of Dividends Received May Benefit Your Canna Business
Tax season is well underway: are you ready?
We’re starting a series to help cannabis companies understand how the recent tax reforms passed by Congress will impact your tax obligations. Like many small businesses, the intricacies of the new tax plan have big implications for California cannabis companies. From what you can deduct on your tax return to what you need to be responsible for moving forward, we’re here to help you catch up. If you have specific questions, please reach out to an expert at California Cannabis CPAs.
What is a DRD?
DRD stands for Dividends Received Deduction. This is a federal tax deduction that certain corporations – ones that receive dividends – can take. The goal of the DRD is to prevent the same income from being taxed three times. The DRD makes it so that if Company A receives a dividend payout from Company B, Company A can claim that dividend as income and accordingly receive an income tax reduction.
How much can you claim on your DRD?
DRD is a little more complex than it may seem at first glance. The deduction amount that a company may claim depends on its percentage of ownership in the company paying the dividend. For example, if Company A owns a 20% stake in Company B, and Company C owns a 60% stake in Company B, Companies A and C will be able to claim different amounts of DRD. The amounts are based on their ownership stake.
As of 2018 and the changes in the tax law, the percentage DRD a company can claim changed:
Effective for years beginning after 12/31/17, the 70% DRD will be reduced to 50% and the 80% DRD will change to 65%.
The Fine Print
There are a few key limitations to know, including the taxable income limitation and the timeline for owning shares limitation.
What this means for Cannabis Companies
It’s not uncommon for our experts to see a cannabis holding company (the company which a main investor will agree to fund) operate with a subsidiary (e.g., a real estate company, operating company, or management company). Creating a structure that allows you to maximize your DRD will decrease your overall effective tax rate and increase your cash flows to re-invest in your companies. Be aware of the latest changes in the tax code if you want your company to survive in the new highly taxed marketplace.
Specific questions? Get in touch with our experts today to make sure you’re claiming your full deductions on this year’s tax return and mitigate the possibility of overpaying your taxes.