REG 4 - Corporate Taxable Income

Question 1

What is the purpose of dividends-received deduction?

Answer 1

The purpose of the dividends-received deduction is to avoid triple taxation.

E.g. Big Corp gives dividend to Little Corp, and Little Corp gives dividend to individual. The income would be taxed three times if not for the dividends-received deduction.

Question 2

What are the percentage amount for the dividends-received deduction?

Answer 2

Percentage ownership = 0% - 19%
- Dividends received deduction = 70%

Percentage ownership = 20% - 79%
- Dividends received deduction = 80%

Percentage ownership = 80% or more
- Dividends received deduction = 100%

Question 3

What is another way to say a percentage ownership is 0% - 19%. What is another way to say a percentage ownership is 80% or more.

Answer 3

Percentage ownership = 0% - 19%
- Unrelated

Percentage ownership = 80% or more

• Consolidated tax return
• Affiliated corporation
• Small business investment corporations (SBICs)

Question 4

Explain the general rule for the dividends-received deduction?

Answer 4

If the dividends-received deduction percentage x dividends received and the dividends-received deduction percentage x taxable income before DRD does not cause:

• Taxable income before DRD to be less than dividends received

AND

• A negative taxable income after deduction (NOL)

THEN:

Use the amount of deduction that will cause the greater amount of taxable income after DRD.

E.g. Duffy Corp owns 30% of Fox Corp. (The dividends received deduction is 80%).

Operations income - 250
Dividend income - 100
Total - 350
Less: Deductions - (200)
Taxable income before DRD = 150

1) the dividends-received deduction percentage x dividends received = (80% x 100) = 80
2) the dividends-received deduction percentage x taxable income before dividends received deduction = (80% x 150) = 120
- Use the amount of 80 as a deduction because it will cause a greater taxable income
- Taxable income after DRD is 70 (150 - 80).

Question 5

Explain the limitation for the dividends-received deduction?

If taxable income before the dividends-received deduction is less than the dividends received.

Answer 5

If taxable income before the dividends-received deduction is less than the dividends received THEN:

Take the LESSER of:

1) the dividends-received deduction percentage x dividends received

OR

2) the dividends-received deduction percentage x taxable income before dividends received deduction

E.g. Duffy Corp owns 30% of Fox Corp. (The dividends received deduction is 80%).

Operations income - 250
Dividend income - 100
Total - 350
Less: Deductions - (260)
Taxable income before DRD = 90

1) the dividends-received deduction percentage x dividends received = (80% x 100) = 80
2) the dividends-received deduction percentage x taxable income before dividends received deduction = (80% x 90) = 72
- Because the taxable income is less than the dividends received ( 90 vs. 100) the limitation applies
- The deduction is the lesser of (90 x 80% = 72) vs. (100 x 80% = 80)
- Subtract $72 deduction from $90 taxable income before DRD = 18 (taxable income)

Question 6

Explain the losers exception for the dividends-received deduction?

If:

1) the dividends-received deduction percentage x dividends received

OR

2) the dividends-received deduction percentage x taxable income before dividends received deduction

cause a negative taxable income (NOL)

Answer 6

If:

1) the dividends-received deduction percentage x dividends received

OR

2) the dividends-received deduction percentage x taxable income before dividends received deduction

causes a negative taxable income (NOL) THEN:

• take the GREATER amount of deduction

E.g. Duffy Corp owns 30% of Fox Corp. (The dividends received deduction is 80%).

Operations income - 250
Dividend income - 100
Total - 350
Less: Deductions - (280)
Taxable income before DRD = 70

1) the dividends-received deduction percentage x dividends received = (80% x 100) = 80
2) the dividends-received deduction percentage x taxable income before dividends received deduction = (80% x 70) = 56
- take the GREATER amount of $80 to get a NOL of -10 (70 - 80).

Question 7

For which entities does the dividends-received deduction not apply?

Don’t take it personally

Answer 7

Entities for which the dividends-received deduction does not apply:

• Personal service corporations
• Personal holding companies
• (Personally taxed) S corporations