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Velvet Corporation has revenues of $340,000 and deductible expenses of $350,000. It also received a $40,000 dividend from a corporation in which it owns 10 percent.

Velvet Corporation has revenues of $340,000 and deductible expenses of $350,000. It also received a $40,000 dividend from a corporation in which it owns 10 percent. What is the corporation’s taxable income?

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Expert Solution

This is the question of dividend received deduction (DRD).

Taxable income before DRD = Revenues + Dividends – Deductible expenses

                                                = 340,000 + 40,000 – 350,000

                                                = $30,000

DRD adjustment:

Since there is less than 20% holding (as owning is 10%), either 70% of taxable income before DRD or 70% of dividend whichever is lower is subtracted.

70% of taxable income before DRD = $30,000 × 70% = $21,000 (lower)

70% of dividend = $40,000 × 70% = $28,000

Therefore, the taxable income = Taxable income before DRD – Lower amount

                                                = 30,000 – 21,000

                                                = $9,000 (Answer)     

ekkarill92 answered 2 years ago
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