Question

The Dawg corporation owns 4% of Company A and 25% of Company B. Dividends received from Company A were $130,000 and from Company B were $204,000. If Dawg's "adjusted" taxable income is $2,000,000, calculate Dawg's taxable income after including the dividend information.

Answer 1

The Dividends Received Deduction, or DRD, is a tax deduction that corporations receive on the dividends distributed to them by other companies whose stock they own. As a corporation's equity interest in a dividend-paying company increases, so does the amount of the DRD as shown below:

Percent Ownership		Dividends Received Deduction
< 20%		70%
20 - 80%		80%
> 80%		100%

There are a few limitations to the DRD:

• The DRD is only available to C corporations; not LLCs, S corporations, or individuals.
• There is a 45-day minimum holding period for common stock.
• The DRD does not apply to preferred stock.
• If a corporation is entitled to a 70% DRD, it can deduct dividends only up to 70% of its taxable income.
• If a corporation is entitled to a 80% DRD, it can deduct dividends only up to 80% of its taxable income.

If a corporation claims both a 70% DRD and an 80% DRD, we will first calculate the taxable income limit for the 80% DRD. Then, in order to calculate the taxable limit for the 70% DRD, we will reduce the taxable income by the total amount of the dividends subject to the 80% DRD.

Assuming that the Dawg's "adjusted" taxable income of $2,000,000 is inclusive of dividends.

The Dawg corporation owns 4% of Company A and 25% of Company B. Dividends received from Company A were $130,000 and from Company B were $204,000. Hence, for Company A, DRD is 70% while for Company B, DRD is 80%.

First, we will calculate the the 80% DRD. The allowable deduction is the smaller of the tentative DRD of $163,200(=80%×$204,000) or 80% of its taxable income or $1,600,000 (=80%×$2,000,000) taxable income.

Next, we will calculate the 70% DRD. The allowable deduction is the smaller of the tentative DRD of $91,000 (=70%×$130,000) or 70% of its taxable income after deducting dividends from Company B, or $1,257,200[=70%×($2,000,000−$204,000)].

Taxable Income Before DRD		$2,000,000
( – ) DRD [=$163,200+$91,000]		(254,200)
Taxable Income After DRD		$1,745,800

Dawg's taxable income after including the dividend information = $1,745,800