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% |
Applicable deduction would be 50% as Cardinal holds only 10% interest.
Requirement 1
Computation of taxable |
||
Income excluding dividends |
500,000 |
|
Dividend received |
250,000 |
|
Less: Dividend received deduction of 50% |
(125,000) |
125000 |
Taxable income |
$ 625,000 |
Cardinal Corporation taxable income shall be $ 625,000
Requirement 2
E & P beginning balance |
150,000 |
Add: |
|
Taxable income |
625,000 |
Dividend received deduction |
125,000 |
Interest income |
35000 |
Less: |
|
Interest paid |
(20,000) |
Federal taxes paid |
(131,250) |
E & P balance |
$ 783,750 |
Cardinal corporation accumulated E & P balance at the start of next year is $ 783,750
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