A regulated investment company (RIC) can be any one of several investment entities. For example, it may take the form of a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT), or a unit investment trust (UIT). Whichever form the RIC assumes, the structure must be deemed eligible by the Internal Revenue Service (IRS) to pass through taxes for capital gains, dividends, or interest earned to the individual investors.
A regulated investment company is qualified to pass-through income under Regulation M of the IRS, with the specific regulations for qualifying as an RIC delineated in U.S. code, title 26, sections 851 through 855, 860, and 4982.
Regulated Investment Company (RIC) Basics
The purpose of utilizing pass-through or flow-through income is to avoid a double-taxation scenario as would be the case if both the investment company and its investors paid tax on company generated income and profits. The concept of pass-through income is also referred to as the conduit theory, as the investment company is functioning as a conduit for passing on capital gains, dividends and interest to individual shareholders.
Regulated investment companies do not pay taxes on their earnings.
Without the regulated investment company allowance, both the investment company and its investors would have to pay taxes on the company's capital gains or earnings. With pass-through income, the company is not required to pay corporate income taxes on profits passed through to the shareholders. The only income tax imposed is on individual shareholders.
Requirements to Qualify as an RIC
To qualify as a regulated investment company the business has to meet specific perimeters.
Exist as a corporation, or other entity, which would ordinarily have taxes assessed as a corporation.
Be registered as an investment company with the Securities and Exchange Commission (SEC).
Elect to be deemed as an RIC by the Investment Company Act of 1940 as long as its income source and diversification of assets meets specified requirements.
Additionally, an RIC must derive a minimum of 90% of its income from capital gains, interest or dividends earned on investments. Further, an RIC must distribute a minimum of 90% of its net investment income in the form of interest, dividends or capital gains to its shareholders.
Should the RIC not distribute this share of income, it may be subject to an excise tax by the IRS. The RIC would also have to issue an IRS Form 2439 to shareholders stating that the capital gains are being retained.
Finally, to qualify as a regulated investment company, at least 50% of a company's total assets must be in the form of cash, cash equivalents or securities. No more than 25% of the company’s total assets may be invested in securities of a single issuer unless the investments are government securities or the securities of other RICs.
Key Takeaways
A regulated investment company can be any type of investment entity including mutual funds, ETFs, and REITS.
An RIC must derive a minimum of 90% of its income from capital gains, interest, or dividends earned on investments.
To qualify, at least 50% of a company's total assets must be in the form of cash, cash equivalents, or securities.
President Obama signed the Regulated Investment Company Modernization Act of 2010 into law Dec. 22, 2010.
Real World Example
President Obama signed the Regulated Investment Company Modernization Act of 2010 into law Dec. 22, 2010. It made changes to the rules governing the tax treatment of regulated investment companies (RICs), including open-end mutual funds, closed-end funds, and most exchange-traded funds. The last update to the rules governing RICs was the Tax Reform Act of 1986.
The primary reason for the 2010 RIC Modernization Act was due to vast changes in the mutual fund industry in the 25 years between 1986 and 2010. Further, many of the tax rules applicable to RICs became obsolete, created administrative burdens or caused uncertainty.
A regulated investment company (RIC) is a domestic corporation that acts as an investment agent for its shareholders, typically investing in corporate and government securities and distributing income earned from the investments as dividends (for example, a mutual fund or exchange-traded fund).
(RICs), commonly known as mutual funds, are corporations that act as investment agents for their shareholders, typically investing in government and corporate securities and distributing dividend and interest income earned from the investments as dividends to their shareholders.
A regulated investment company (RIC) can be any one of several investment entities. For example, it may take the form of a mutual fund or exchange-traded fund (ETF), a real estate investment trust (REIT), or a unit investment trust (UIT).
An RIC is often referred to as a mutual fund and can provide substantial tax incentives, which is a primary benefit for firms. This classification can help financial entities avoid corporate income taxes on profits that are distributed to shareholders, as long as they adhere to specific distribution guidelines.
Use Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a regulated investment company (RIC) as defined in section 851.
Regulated investment companies (RIC) file this form to report their. income, gains, losses, deductions, credits, and. to figure their income tax liability.
Unlike a C-corporation, a RIC can deduct dividends distributed to its shareholders. A RIC is therefore generally not subject to an entity level tax on net investment income and net capital gain if it distributes these amounts to its shareholders within certain time limits.
Regulated investment companies (RICs), commonly known as mutual funds, are corporations that act as investment agents for their shareholders, typically investing in government and corporate securities and distributing dividend and interest income earned from the investments as dividends to their shareholders.
If you are a shareholder of a mutual fund, or other regulated investment company (RIC), you may be able to claim the credit based on your share of foreign income taxes paid by the fund if it chooses to pass the credit on to its shareholders.
Robinhood is also regulated by the U.S. Securities and Exchange Commission (SEC) because it's a registered broker-dealer. Finally, Robinhood offers added financial protection per customer account of up to $1.9 million for cash and $50 million for securities.
Related Content. A US investment company that meets certain tax requirements regarding its assets, income and distributions, and has made an election to be taxed as a RIC. Mutual funds and closed-end investment companies typically are taxed as RICs.
If all of your foreign taxes are on 1099-DIV, you can select RIC for the country name. That indicates the dividends came through a Regulated Investment Company.
The RIC is made up primarily of the security's ticker symbol, optionally followed by a period and exchange code based on the name of the stock exchange using that ticker. For instance, IBM.N is a valid RIC, referring to IBM being traded on the New York Stock Exchange.
Fund sponsors in the United States offer four main types of registered investment companies: mutual funds, closed‑end funds, exchange‑traded funds (ETFs), and unit investment trusts (UITs). The majority of investment companies are mutual funds, both in terms of number of funds and assets under management.
A regulated investment company (RIC) ( ¶2301) is subject to tax at the regular corporate income tax rate (21 percent) on its investment company taxable income ( Code Sec. 852(b); Reg. §1.852-3).
Schwab also is a broker-dealer registered with the SEC and is a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Our brokerage and investment advisory services and fees differ, and we believe it is important for you to understand those differences.
Merrill Lynch is a member of industry self-regulatory organizations, including the Financial Industry Regulatory Authority (FINRA), the New York Stock Exchange and other exchanges. It is also regulated by the U.S. Securities and Exchange Commission (SEC) and by each state's securities regulator.
A regulated investment company (RIC) can be any one of several types of companies, including mutual funds, exchange-traded funds (ETFs), unit investment trusts, or real estate investment trusts (REITs).
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