Question

 

1) Robots, Inc. reports the following financial data for the year:

Gross income from sales and services 200k

Wages, cost recovery and other expenses 180k

Dividend income from at least 20% owned Corp. 40k

Net Operating Loss Carryover 20k

Capital Losses 10k

Charitable Contribution Carryover 7k

Current charitable contributions11k

a) What is Robot's charitable contribution deduction?

b) How much of the charitable contribution carryover is used up

c) What is taxable income?

d) What is the dividend received deduction?

Answer 1

a) Charitable contribution deduction would be least of the following :-

1. The amount of contribution = 11000 (Current Year) + 7000 (carried over) = 18000

2. 50% of the adjusted total Income = 18500

Here, adjusted gross Income of "Robert Inc will be as follows:-

Total income less adjustments (expenses)

=) Gross Income from Sales and services = 200000

Add:- Dividend Income = 40000

Less:- Wages, cost recovery and Other expenses = 180000

Less:- Net Operating Loss = 20000

Less:- Capital loss = 3000 (Maximum allowed amount is 3000 only)

=) adjusted Gross Income = 37000

=) 50% of AGI = 18500

Therefore Charitable contribution deduction would be 18000 (all)

b) all 7000 carryover will be allowed for deduction in the current year.

c) Taxable Income

Gross Income =

Sales Income = 200000

Less :- Wages expenses = 180000

Add :- Dividend income = 8000

Less :- Charitable Contribution = 18000

Gross Income = 10000

Less :- Carryover capital Loss = 3000

Less :- Carryover operating Loss = 20000

Taxable Income = NIL

Net operating loss will be carried forward by 13000 to next year

capital loss will be carried forward by 7000 to next year

d) The DRD guidelines are laid out in Section 243 of the Internal Revenue Code. The general rule is that if a company receives dividends from another corporation, then it is allowed to deduct 70% of those dividends under the DRD. That effectively cuts the tax rate on dividends from a top corporate rate of 35% down to 10.5%.

But, a separate rule offers a different DRD amount. If the corporation receiving the dividend owns at least a 20% stake in the company paying the dividends, then the DRD amount rises to 80%. That cuts the tax rate all the way to 7% on dividend income received

therefore the DRD will be 80% of the 40000 = 32000 and taxable dividend will be 8000 only