Question

This year, GHJ Inc. received the following dividends. BP Inc. (a taxable California corporation in which GHJ holds a 6% stock interest) $ 21,300 MN Inc. (a taxable Florida corporation in which GHJ holds a 55% stock interest) 82,800 AB Inc. (a taxable French corporation in which GHJ holds a 32% stock interest) 21,300 Compute GHJ’s dividends-received deduction.

Answer 1

The dividends received deduction (DRD) 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 DRD.

The dividends received deduction allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax accordingly. However, several technical rules apply that must be followed for corporate shareholders to be entitled to the DRD. The amount of DRD that a company may claim depends on its percentage of ownership in the company paying the dividend.

There are three tiers of possible deductions. First, the general rule states that the DRD is equal to 70% of the dividend received. Second, if the company receiving the dividend owns more than 20% but less than 80% of the company paying the dividend, the DRD amounts to 80% of the dividend received. Finally, if the company receiving the dividend owns more than 80% of the company paying the dividend, the DRD equates to 100% of the dividend.

So in the given case GHJ Inc . holds 6% stock interest in BP Inc. and it receives dividend amounting to $21300. So the DRD would be 70% of dividend received i.e $21300*70% = $14910.

Similarly GHJ Inc. receives $82800 from MN Inc. and $21300 from AB Inc. In both the companies GHJ Inc. hold more than 20% but less than 80% stock interest. So it will Qualify for 80% DRD. So amount of DRD in this cases will be ($82800+$21300)*80% = $83820

So overall Dividend received deduction for GHI Inc will be $14910 + $ 83820 = $98190