Question

1. In 2020, VQQ Inc. received $350,000 in dividends from Cohen Labratories Inc. VQQ's taxable income before the dividends received deduction (but including the dividend income) AND before a $30,000 charitable contribution deduction is $300,000. What is VQQ's DRD assuming it owns 15% of the Cohen Labratories Inc. stock, as well as its taxable income for 2020? (20 points)

2. Is the DRD a temporary or permanent difference? Favorable or unfavorable? Will it create a deferred tax asset or liability? Briefly explain your answers. (5 points)

3. Assume the corporation made $50,000 in charitable contributions but was allowed only the $30,000 deduction. Assuming VQQ expects to be profitable and have taxable income in future years, and that it does not plan to make any future charitable contributions, is this a temporary or permanent difference? Favorable or unfavorable? Will it create a deferred tax asset or liability? Briefly explain your answers. (5 points)

Answer 1

a)VQQ Inc owns 15% stock in Cehen laboratories inc, VQQ Inc would be allowed a DRD of 50% of the lower of Dividend Income or taxable Income befor DRD.

Dividend Income = $350,000

Taxable income before DRD = $300,000 - 30,000 = $270,000

Therefore DRD = 50% of Lower of $350,000 or $270,000

= 50% of $270,000

= $135,000

b)DRD is permanent difference, it shall not be evaluated while calculating deffered tax asset or liability. Therefore, DRD does not create a deffered tax asset or liability.

c)Charitable contributions in excess of the permisible limits is allowed to be carried forward and for 5 years.These carried forward charitable contribution can be adjusted against the future income.

Therefore, Charitable contribution carried forward is a temporary difference.

This will result in reduction of the future taxable income and the future tax liability, this difference is favorable difference.

Also this favorable temporary difference would create a deffered tax asset for the corporation.