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Are dividends on preferred stock tax deductible to the issuing corporation?

April 26, 2017beginners deductible dividends Finance issuing Markets preferred stock stock stocks tax

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Are dividends on preferred stock tax deductible to the issuing corporation?

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Dividends paid on preferred shares are not tax-deductible expenses for issuing corporations. All preferred dividends are paid out of after-tax net income. After preferred dividends are paid out, common shareholders may claim the remaining net income.

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There some preferred shares out there called ‘Trust Preferred’ stock. These shares are issued by trusts that a corporation forms simply to issue preferred stock—the proceeds are then used to buy debentures issued by the forming corporation. The result being that the forming corporation then pays interest to the trust which then pays them to the investor–and interest is tax deductible. A corporation would do this simply to ‘cut out’ one level of taxation (the end result to them is they pay the same amount of cash out-but the debenture interest is deductible leaving them with less net income, but the same amount of cash).