Feb 20, 2018
Are Dividends Part of a Corporation’s Operating Expenses?
The short answer is no. Dividends paid to investors and shareholders are not tax deductible for the company paying them out, and therefore they are not considered part of its operating expenses.
At first glance, this may seem a bit odd, but it actually makes sense. Dividends are not considered part of a company’s operating expenses, which are tax-deductible, because they are paid out after all of the other essential expenses have already been met, including taxes. A dividend represents a portion of the pure profit a company has made at the end of a quarter or fiscal year. In other words, dividends are part of the net profit a company is left with, after it has deducted all of the expenses that went into generating that profit.
For example, imagine you are the owner and sole investor in a successful restaurant. Let’s take a look at the financials: The restaurant generates revenue from the food and drinks you serve. However, in order to generate this revenue, you incur a lot of expenses. These include the salaries of the head chef, kitchen staff and servers; the rent for the building itself; the ingredients and other supplies needed to make the food. All of those expenses are tax deductible, because they are necessary for generating the revenue of the restaurant.
After you subtract your operating expenses from the revenue, you are left with income before taxes. After you deduct taxes, whatever is left is the net income—also known as the net profit. Think of this as the money the business gets to keep.
Like our hypothetical restaurant, public companies operate in a similar way. After they calculate their net income, or profit, they can do two things with it: (1) Give the money back to the investors in the form of dividends, or (2) use it to reinvest in the business (with the goal of growing or otherwise improving the company). In practice, most businesses usually only pay out a portion of their profit as a dividends, while the rest is left as reserve cash for future investments. This is usually referred to as retained earnings.
Typically, shareholders elect a board of directors, who decide how the company’s profit should be used. It is up to this board to determine the dividend per share—and whether dividends will be paid out to shareholders at all.
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