ExpertHard1 markMultiple Choice
CPA · Question 26 · Area V: Entity Taxation
A C Corporation owns 30% of the voting stock of a domestic corporation. The C Corporation received $10,000 in dividends from this investment. The C Corporation's taxable income before the dividends received deduction (DRD) was $8,000. What is the allowable DRD?
A C Corporation owns 30% of the voting stock of a domestic corporation. The C Corporation received $10,000 in dividends from this investment. The C Corporation's taxable income before the dividends received deduction (DRD) was $8,000. What is the allowable DRD?
Answer options:
A.
$6,500
B.
$5,000
C.
$5,200
D.
$8,000
How to approach this question
1) Determine rate: 30% ownership = 65% DRD. 2) Calculate Tentative DRD: $10k * 65% = $6,500. 3) Calculate Income Limit: $8k * 65% = $5,200. 4) Take lesser (unless NOL created).
Full Answer
C.$5,200✓ Correct
Ownership is 20%-80%, so the DRD rate is 65%. Tentative DRD = $10,000 * 65% = $6,500. Limitation: DRD cannot exceed 65% of Taxable Income (before DRD). Limit = $8,000 * 65% = $5,200. Since taking the full $6,500 would not create a Net Operating Loss ($8,000 - $6,500 > 0), the limitation applies. Allowable DRD is $5,200.
Common mistakes
Ignoring the taxable income limitation or using the wrong rate (50% vs 65%).
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