Question

The following information is from Robin Hood Inc. Advertising Expenses $ (400,000) Capital Gains $ 150,000 Capital Losses (this year) $ (200,000) Capital Losses (prior year) $ - Cost of Goods Sold $ (4,000,000) Dividend "A" income $ 200,000 Dividend "B" income $ 100,000 Dividend "C" income $ 50,000 General and Admin Expenses $ (1,300,000) Interest Expense $ (500,000) Sales $9,000,000 1. In addition, Robin purchased equipment at the beginning of the year for $750,000. The equipment has a useful life and a salvage value of 14 years and $50,000 respectively. 2. Robin Hood Inc. has varying ownership interest in the 3 companies listed below and receives dividend income from each company. Robin owns 15% of Company “A” Robin owns 45% of Company “B” Robin owns 90% of Company “C” 3. How much of Robin’s capital gains are taxable? 4. Calculate Robin’s interest expense deduction assuming the following: Adjusted taxable income $ 35,000,000 Business interest income $ 1,000,000 Business interest expense $ 15,000,000 5. How much of the dividend income is taxable? 6. Assuming taxable income is $3,500,000, calculate Robin’s tax liability.

Answer 1

Required 3.

Capital gain = $150,000

Capital Loss =$ (200,000)

Net Capital loss = $50,000

This loss shall be carried over by the corporation to 3 years backward and 5 years forward to be deducted against capital gains during those years.

Thus there is no taxable capital gain during the year.

Required 4

Business interest expense deduction is limited to the sum of :

• Business interest income
• 30% of the adjusted taxable income of the taxpayer
• Floor plan financing interest of the taxpayer for the taxable year.

In the given question,

Maximum Business interest deduction allowed = Business interest income + 30% of the adjusted taxable income of the taxpayer

= $1,000,000 + 30% of 35,000,000

= $11,500,000

Actual Business interest expense = $15,000,000

Therefore, business interest deduction allowed for the current year = $11,500,000

However, this rule does not apply to small business with average annual gross receipts of $26 MM or less during the preceding 3 years.

Required 5

Company Name	Percentage of holding	Dividend received	Dividend received reduction (%)	Dividend received reduction ($)	Taxable dividend
Dividend "A" income	15%	200,000	50%	100,000	100,000
Dividend "B" income	45%	100,000	65%	65,000	35,000
Dividend "C" income	90%	50,000	100%	50,000	0
Total	135,000

Taxable dividend = $135,000

It is assumed that Robin Hood Inc. prepares a consolidated tax return with Company C and thus 100% of the dividend is eliminated. If Consolidated tax return is not prepared, the deduction would be limited to 65%.

Required 6

Taxable Income = $3,500,000

Corporate tax rate = 21%

Tax Liability = $3,500,000 * 21% = $735,000