Question

3. Eagle Corporation owns 2% of the stock in Hawk Corp, a U.S. corporation. Eagle has gross income from operations for the current year of $1,000 and deductible operating expenses of $300. In addition to the gross income from operations Eagle has $200 of dividends received from Hawk Corporation, during the year. Hawk is a U.S. corporation. a. How much of the dividends from Hawk must Eagle include in income for the year? b. What is the amount of Eagle's dividends received deduction for the year? c. Assume instead that Eagle's deductible operating expenses are $1,050 and all other information is the same. What is Eagle's dividends received deduction? d. Assume as a separate third alternative that the facts as originally stated except that Eagle's operating expenses are $1,050. What is the dividends received deduction?

Answer 1

A. Hawk must include all dividend in Income for the year, of which 70% of Dividend income will be tax deduction or Dividend received reduction.

Thus Income = $1000+200 = $1200

B. DRD is a federal tax deduction that is given to corporations receiving dividends from related entities. As a general rule, the amount of dividend a company can deduct = 70% of dividend received. However it is limited to 70 % of taxable income and cannot create a situation of operating loss.

Dividend received = $200

Deduction available = 70% of 200 = $140

C. If operating expenses are $1050

Taxable income= $1200-$1040= $160

As DRD is limited to 70* of taxable income. DRD available = 70% of 160 = $112

D. The question appears to be same as C. (same operating expenses assumption)

taxable income limitation also applies to DRD stipulations. This rule affects dividends received from companies in which the payee has less than 80% ownership. The rule applies if the taxable income figure of the dividend-receiving company is less than what the DRD would be otherwise. In other words, the DRD cannot create an operating loss for the company.