Question

2.During 20X5, X co. had the following income and expenses:

Gross income from operations$3,000,000

Business expenses<1,400,000>

Dividends received from Y co. (32% owned by X co.)400,000

Capital gains 150,000

Capital loss carry forward<183,000>

Net operating loss carry forward                                          <25,000>

a.Determine X co.’s dividends received deduction in 20X5?

b.Determine X co.’s dividends received deduction in 20X5 assuming that there was no NOL carry forward and X co.’s business expenses were:

(i) $3,050,000 or (ii) $3,200,000.

Answer 1

Answer:

a.

X co.’s dividends received deduction in 20X5

320,000

b.

i.	X co.’s dividends received deduction in 20X5	280,000
ii.	X co.’s dividends received deduction in 20X5	320,000

Calculation:

a.Determine X co.’s dividends received deduction in 20X5?

First we need to find the full dividends received deduction in 20X5. For that we need to ultiply the Dividend received with the dividends received deduction rate.

Here DRD rate is .8 because X company owns 32% of Y company

Dividend received	400,000
x Dividends received deduction Rate	0.8
Full dividends received deduction	320,000

Then we need to find the Alternative Taxable Income by deducting business expenses from the gross income from operations and then adding the Dividends received and also Capital gains. The capital loss carryforward is $150,000 as the capital gains are $150,000.

Gross income from operations	3,000,000
Business expenses	(1,400,000)
Dividends received from Y co	400,000
Capital gains	150,000
Capital loss carryforward	(150,000)
Net operating loss carryforward	X
Alternative Taxable Income	2,000,000

Then we need to multiply the Alternative Taxable Income with the Dividends received deduction Rate.

Alternative Taxable Income	2,000,000
x Dividends received deduction Rate	0.8
Limited Dividends received deduction	1,600,000

Since the $320,000 full DRD is less than the $1,600,000 limited Dividends received deduction, the X Co's Dividends received deduction in 20X5 is $320,000.

b.Determine X co.’s dividends received deduction in 20X5 assuming that there was no NOL carry forward and X co.’s business expenses were:

(i) $3,050,000

First we need to find the full dividends received deduction in 20X5. For that we need to ultiply the Dividend received with the dividends received deduction rate.

Here DRD rate is .8 because X company owns 32% of Y company

Dividend received	400,000
x Dividends received deduction Rate	0.8
Full dividends received deduction	320,000

Then we need to find the Alternative Taxable Income by deducting business expenses from the gross income from operations and then adding the Dividends received and also Capital gains. The capital loss carryforward is $150,000 as the capital gains are $150,000.

Gross income from operations	3,000,000
Business expenses	(3,050,000)
Dividends received from Y co	400,000
Capital gains	150,000
Capital loss carryforward	(150,000)
Alternative Taxable Income	350,000

Then we need to multiply the Alternative Taxable Income with the Dividends received deduction Rate.

Alternative Taxable Income	350,000
x Dividends received deduction Rate	0.8
Limited Dividends received deduction	280,000

Here the $320,000 full Dividends received deduction is higher than the $280,000 limited Dividends received deduction. However, since the full DRD does not create any net operating loss, it wont eliminate the $280,000 limited Dividends received deduction

taxable income without DRD	350,000
Full DRD	320,000
taxable income	30,000

So X Co's Dividends received deduction in 20X5 is $280,000.

(ii) $3,200,000.

First we need to find the full dividends received deduction in 20X5. For that we need to ultiply the Dividend received with the dividends received deduction rate.

Here DRD rate is .8 because X company owns 32% of Y company

Dividend received	400,000
x Dividends received deduction Rate	0.8
Full dividends received deduction	320,000

Then we need to find the Alternative Taxable Income by deducting business expenses from the gross income from operations and then adding the Dividends received and also Capital gains. The capital loss carryforward is $150,000 as the capital gains are $150,000.

Gross income from operations	3,000,000
Business expenses	(3,200,000)
Dividends received from Y co	400,000
Capital gains	150,000
Capital loss carryforward	(150,000)
Alternative Taxable Income	200,000

Then we need to multiply the Alternative Taxable Income with the Dividends received deduction Rate.

Alternative Taxable Income	200,000
x Dividends received deduction Rate	0.8
Limited Dividends received deduction	160,000

Here the $320,000 full Dividends received deduction is higher than the $280,000 limited Dividends received deduction. Also the full DRD create net operating loss, then we need to eliminate the $160,000 limited Dividends received deduction

taxable income without DRD	200,000
Full DRD	320,000
taxable income	(120,000)

So X Co's Dividends received deduction in 20X5 is $320,000.