What makes taxable preferred securities different from regular preferred securities?
Unlike the tax treatment of typical preferred securities, taxable preferred securities do not qualify for the dividends-received deduction for corporations. They are often issued by trusts established by operating companies, and are not a direct obligation of the operating company. The trust is generally treated as transparent for federal income tax purposes such that the holders of the taxable preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments of these securities are treated as interest rather than as dividends for federal income tax purposes, and are not eligible for the dividends received deduction. Because taxable preferred securities do not quality for the tax-favorable dividends-received reduction, they generally offer higher yields than regular preferred securities.
Unlike the tax treatment of typical preferred securities, taxable preferred securities do not qualify for the dividends-received deduction for corporations. They are often issued by trusts established by operating companies, and are not a direct obligation of the operating company. The trust is generally treated as transparent for federal income tax purposes such that the holders of the taxable preferred securities are treated as owning beneficial interests in the underlying debt of the operating company. Accordingly, payments of these securities are treated as interest rather than dividends for federal income tax purposes, and are not eligible for the dividends received deduction. Because taxable preferred securities do not quality for the tax-favorable dividends-received reduction, they generally offer higher yields than regular preferred securities.
