Question

The Dawg corporation owns 17% of Company A and 24% of Company B. Dividends received from Company A were $142,000 and from Company B were $239,000. If Dawg's "adjusted" taxable income is $2,000,000, calculate Dawg's taxable income after including the dividend information. А В C D 1 2 Taxable Income = 3 4 6 7 9 10 ш

Answer 1

Dividends received deduction is tax break applied to corporations who receives dividend from the companies in which it holds stake. The deduction eliminates triple taxation consequences on dividend receipt.

There are three tiers of possible deductions:

	Allowed deduction of dividend
If company holds less than 20% of another company	50%
If company holds more than 20% - 80%of another company	65%
If company holds more than 80%	100%

Dawg corporation holds 17% of company A. Hence, allowed deduction would be 50% of dividend i.e. 50% of 142,000 = $ 71,000

Dawg holds 24% of Company B which is more than 20% Hence, allowed dividend received deduction would be 65% of dividend = 65% of 239,000 = $ 155,350.

Computation of taxable income is as:

	Amount ($)	Amount ($)
Dawg’s taxable income before dividend		2,000,000
Add:
Dividend income from A	142,000
Dividend income from B	239,000	381,000
		2,381,000
Less: Dividend received deductions (DRD) as:
DRD from A	71,000
DRD from B	155,350	226,350
Dawg’s taxable income after including dividend		$ 2,154,650

Note that this is solved as per IRS code 2019

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