Erin Inc’s gross income from operations was $500,000 and its operating were $550,000. All its activites...

Erin Inc’s gross income from operations was $500,000 and its operating were $550,000. All its activites qualify as domestic production activites. its also received a $200,000 dividend from a 30% owned corporation. What is Erin Inc's dividend received deduction?

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Expert Solution

Gross income from operations = $500,000

Operating expenses = $550,000.

Net operating income (loss) = Gross income from operations - Operating expenses

= 500,000 - 550,000

= $(50,000)

$200,000 dividend received from a 30% owned corporation

Taxable income = Net operating income (loss) + Dividend received

= (50,000) + 200,000

= $150,000

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.

According to taxable income limitation rule, Dividend received deduction equals 80% of the taxable income of the dividend receiving company if the taxable income of the corporation receiving the dividend is less than what the dividend received deduction would otherwise be.

Fundamentally, in light of its 30% ownership, Erin, Inc. should have been entitled to a dividend received deduction equal to $200,000 X 80%, or $160,000.

However, the Dividend received deduction is limited to 80% of Erin Inc's taxable income, or $120,000 (150,000 x 80%)

ekkarill92 answered 2 weeks ago

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