Dividend Received Deduction

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  • #2744346 Reply
    TNTTN
    Participant

    Can someone please explain to me why the answer is $45,000?

    In Year 1, Best Corp., an accrual basis calendar year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt financed and was held for over a year. Best recorded the following information for Year 1:
    Loss from Best's operations $ (10,000)
    Dividends received $ 100,000
    Taxable income (before dividends-received deduction) $ 90,000
    Best's dividends-received deduction on its Year 1 tax return was: $45,000

    I thought the DRD is the lesser of 50% of dividend income which is 50,000 or 50% of taxable income including dividend income which is $95,000 (50% x (100,000+90,000). In other Becker questions, they would include the dividend income calculate the deduction except for this one. Why is that?

    Thank you so much very much.

    AUD - NINJA in Training
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    #2745189 Reply
    whatsmada
    Participant

    The DRD deduction is limited to TI times the % used to calculate the DRD. The limitation is not required if the full DRD would create or enhance a net operating loss. DRD is a 3 step process.

    1: Full DRD $100,000 * 50% = $50,000

    2: Taxable Income Limitation $ 90,000 * 50% = $45,000

    3: Income/Loss with Full DRD $ 90,000 – $ 50,000 = $40,000 – step 3 verifies that you should indeed take the lesser of 1 or 2 – which is 45,000.

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