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In: Accounting

Brace, Inc., a regular corporation, owns 90% of West common stock. This year, Brace generated $60,000...

Brace, Inc., a regular corporation, owns 90% of West common stock. This year, Brace generated $60,000 taxable income before the dividend received deduction, including $10,000 dividend income from West. Brace's taxable income after special deductions is:

options:

A)

 $53,000

B)

 $58,000

C)

 $52,000

D)

 $50,000

Solutions

Expert Solution

Option D) $50,000

The Dividend received deduction is a federal tax deduction in the U.S. that is given to certain corporations that get dividends from related entities. The amount of the dividend that a company can deduct from its income tax is tied to how much ownership the company has in the dividend-paying company. However, there are criteria that must be met in order to qualify for a Dividend received deduction.

The amount of Dividend received deduction that a company may claim according to its percentage of ownership in the company paying the dividend. There are three tiers of possible deductions.

First Tier- the general rule states that the Dividend received deduction is equal to 70% of the dividend received.

Second Tier- if the company receiving the dividend owns more than 20% but less than 80% of the company paying the dividend, the Dividend received deduction amounts to 80% of the dividend received.

Third Tier- if the company receiving the dividend owns more than 80% of the company paying the dividend, the DRD equates to 100% of the dividend.

Brace Inc. has owned 90% of West Common Stock, Therefore Dividend received deduction of Brace Inc. will be eligible on the Third Tier(holds more than 80% of ownership)

Hence,

Taxable Income Before Dividend received Deduction = $60,000

Less: Dividend @ rate of 100%(Third Tier) = $10,000

Income after Deductions = $50,000   

ekkarill92 answered 2 years ago
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