Question

Corporation A owns a small percentage of the stock of corporation B. Corporation B pays corporation A​ $100,000 in dividends. Corporation A pays tax at a​ 21% rate and is allowed to exclude from taxable income​ 50% of dividends received from other firms. The incremental taxes that Corporation A must pay on the dividends received are​ ________.

A. ​$0

B. ​$21,000

C. ​$10,500

D. ​$1,050

Answer 1

Dividend Received by Corporation A from Corporation B = $ 100,000.

The tax rate applicable to Corporation A is 21%.

The taxable income of Corporation A with regards to Dividend Income from other firms excludes 50% of the Dividend Received, which means that only 50% of the Dividend received from other firms will be included in taxable income calculation of Corporation A.

Taxable income calculation of Corporation A

Dividend Received from Corporation B = $ 100,000 * 50%

                                                              = $ 50,000.

Tax Payable on Taxable Income of Corporation A

Tax Payable on dividend received from Corporation B = $ 50,000 * 21%

                                                                                     = $ 10,500.

Therefore the incremental taxes that Corporation A must pay on the dividends received are C. $10,500.