Question

1. Special Deductions and Limitations (LO 11.3)

   Fisafolia Corporation has gross income from operations of $426,600 and operating expenses of $362,610 for 2018. The corporation also has $42,660 in dividends from publicly traded domestic corporations in which the ownership percentage was 45%.

   Below is the Dividends Received Deduction table to use for this problem.
   

   Percent Ownership 2018 Dividends Received Percentage Less than 20 percent 50% 20 percent or more, but less   than 80 percent 65% 80 percent or more 100%

   If require, round final answers to the nearest dollar.

   a. Calculate the corporation's dividends received deduction for 2018.
   $

   b. Assume that instead of $426,600, Fisafolia Corporation has gross income from operations of $319,950.

   Calculate the corporation's dividends received deduction for 2018.
   $

   c. Assume that instead of $426,600, Fisafolia Corporation has gross income from operations of $350,000. Calculate the corporation’s dividends received deduction for 2018.
   $

Answer 1

Answer :

(a). Calculate the Fisafolia corporation's dividends received deduction for 2018

Taxable income = (Gross income - operating expenses + Dividend received)

Taxable income = ($426,600 - $362,610 + $42,660)

Taxable income = $106,650

Since ownership in all corporation was 45%

Corporation's dividends received deduction = lower of (65% of dividend received, 65% of taxable income)

Corporation's dividends received deduction = lower of (65%*$42,660,65% $106,650)

Corporation's dividend received deduction = 65% * $42,660 = $27,729

(b). Assume that instead of $426,600, Fisafolia corporation has gross income from operation of $319,950

Taxable income = (Gross income - operating expenses + dividend received)

Taxable income = ($319,950 - $362,610 + $42,660)

Taxable income = 0

If the dividend received deduction increases or creates a net operating loss, the limitation does not apply since taxable income is zero, than limitation of taxable income is not applicable

Since ownership in all corporation was 45%

Corporation's dividends received deduction = 65% of dividend received

Corporation's dividends received deduction = 65% * $42,660

Corporation's dividends received deduction = 427,729

(c). Assume that instead of $426,600, Fisafolia corporation has gross income from operations of $350,000

Taxable income = (Gross income - operating expenses + Dividend received)

Taxable income = ($350,000 - $362,610 + $42,660)

Taxable income = $30,050

As the dividends received deduction does not creates a net operating loss after deduction ($30,050 - 65% of dividend), the limitation shall apply, hence

Since ownership in all corporations was 45%

Corporation's dividends received deduction = lower of (65% of dividend received, 65% of taxable income)

Corporation's dividends received deduction = lower of (65% of 42,660, 65% of $30,050)

Corporation's dividends received deduction = 65% of $30,050 = $19,532.5

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