Internal Revenue Code allows a C corporation paying dividends on ESOP shares to take a deduction for the dividends paid if they are used for certain purposes. Learn more in our video.
C corporation dividends can be deducted by the corporation if they are paid on ESOP shares and the ESOP uses those dividends to make payments on the loan that was used to buy the shares on which the dividend was paid. The dividend can also be claimed if the dividend is passed through to ESOP participants or if the dividend is passed through to participants and they’re given the right to elect to reinvest that dividend in company stock. The loan payment dividend is the most common form of dividend deduction and second most popular is the dividend where employees take the pass through dividends and make a supplemental deferral in to their 401(k) plans allowing to diversify some of their dividends on their ESOP shares.