Preferred stock has both a tax advantage and a tax disadvantage. Those two are:
A) in default there are no taxes and dividends are taxed in corporate hands at 70%.
B) corporate dividend receipts are taxed on 30% of the total dividends and a liability is created for arrears.
C) dividends are not a tax-deductible expense but are 70% exempt from corporate taxation.
D) dividends are fully tax deductible but are not equity capital.

Question

Quizplus · Accepted Answer

Preferred stock dividends are not tax-deductible for the issuing corporation, which is a disadvantage. However, when these dividends are received by another corporation, they are eligible for a dividends-received deduction, which effectively taxes only 30% of the dividends (making 70% of the dividends received tax-exempt), providing a tax advantage.

Preferred Stock Has Both a Tax Advantage and a Tax