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Investing for Corporations and Businesses

| October 25, 2014

Investing for Corporations and Businesses

Recently we had someone come to us with a proposal to manage their corporate investments.  Amazingly, they were not aware they could deduct dividends received from ownership of other corporations through common stock: the Dividends-Received Deduction. Many factors go into the decision making process around what investments a business should be invested in, including risk tolerance of the corporation or its owners, and their time horizon and liquidity needs.  This deduction is also something that needs to be considered when applicable. 

Many are not aware that ownership of common stock through mutual funds can also make a corporation eligible for the deduction.  There are many different types of mutual fund families available and many individual mutual funds and not all qualify for all or part of this deduction. A thorough analysis can be required to make this determination.

When looking into a business investment strategy, first we ask the simple question: when and how much cash?  When do you need the cash and how much cash do you need?  Once we work through that we can begin the process of asset allocation to determine if common stock or any other investment strategy is a right fit.

We then build a financial plan for the business around when their assets are needed and what the goal is for that money, much like we would for an individual.  We call this plan the Investment Plan for Organizations (IPO) and together with the Investment Policy Statement determine the best course of action and provide a framework for monitoring the investment strategy.

We build the asset allocation based upon these key factors, including the Dividends Received Deduction, and continually monitor them for changes in the economy and changes within the management of the individual investments.  Below is a quick calculation to determine the amount of deduction possible. 

Dividends Received Deduction Calculation

  • If Percent of Ownership is <20%, there is a 70% Dividends Received Deduction
  • If Percent of Ownership is between 20% and 80%, there is an 80% Dividends Received Deduction
  • If Percent of Ownership is >80%, there is a 100% Dividends Received Deduction

C Corporations are only eligible for this deduction.  S Corporations, Partnerships, Individuals and Trusts are not allowed to take this deduction.