Question

Riverbend Inc. received a $252,500 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,550,000 before deducting the dividends received deduction (DRD), a $41,500 NOL carryover, and a $104,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.) a. What is Riverbend’s deductible DRD assuming it owns 10 percent of Hobble Corporation under new USA new taxation law.

Answer 1

Dividends received deduction = 252,500 * 70% = 176,750.

It is not limited due to modified taxable income limit

Modified taxable income = 2,550,000 + 41,500 = 2,591,500

Maximum deductible as per modified taxable income limit = 2,591,500 * 70% = 1,814,050

Dividends received deduction: dividends received by corporations are taxable at ordinary income tax rates applicable to them. Dividends received deduction is available as a percentage of dividends received based on the ownership in the dividend paying corporation by the dividend receiving corporation.

Percentage of dividend received deduction is 70% when the ownership is less than 20 percent. When ownership is at least twenty percent but less than eighty percent then the percentage deduction is eighty percent. When the ownership is more than eighty percent then the percentage of deduction is 100%.

Limit on dividends received deduction: if the corporation reports a NOL after deducting full deduction, no limit on deduction applies. Otherwise the amount of deduction is limited to the dividends received deduction percentage multiplied with modified taxable income. Modified taxable income for this deduction purpose is taxable income of the corporation before deducting this deduction, any NOL deduction, capital loss carryback, and DPAD.