Question

Marathon Inc. (a C corporation) reported $1,750,000 of taxable income in the current year. During the year, it distributed $175,000 as dividends to its shareholders as follows: (Leave no answer blank. Enter zero if applicable.)

$8,750 to Guy, a 5 percent individual shareholder.
$26,250 to Little Rock Corp., a 15 percent shareholder (C corporation).
$140,000 to other shareholders.
How much of the dividend payment did Marathon deduct in determining its taxable income?
Assuming Guy’s marginal ordinary tax rate is 37 percent, how much tax will he pay on the $8,750 dividend he received from Marathon Inc. (including the net investment income tax)?
What amount of tax will Little Rock Corp. pay on the $26,250 dividend it received from Marathon Inc. (50 percent dividends received deduction)?
(Round your final answers to the nearest whole dollar amounts.)

a. amount deductible=__________

b. tax paid=____________

c. Tax paid=_________

Answer 1

(a)

Ans - 0$
A corporation cannot deduct dividend it distributes to it's shareholders because Dividend is not an expense of the company. It is part of profit that it has earned from the business it has conducted and has chosen that part to distribute to shareholders. So dividend being a profit part cannot be deducted. Thus Marathon did not deduct any part of dividend to determine it's taxable Income.

(b)

Ans - $2082.5
Since Guy's marginal ordinary tax rate is 37%, so his dividends will be taxed at 20% and Net investment tax rate is 3.8%. Thus Guy's Dividend will be taxed at (20% + 3.8% ) 23.8% tax rate.
=> Tax Payable = Dividend received by Guy X Dividend tax rate
=> Tax Payable = $8750 X 23.8%
=> Tax payable = $2082.5

(c)

Ans - $2756.25
Little rock corp being a C Corp will be taxed at the rate of 21% corporate rate on Taxable part of Dividend Income.
But 50% of dividend received is deductible
So, taxable dividend = (Total Dividend X 50%) = ($26250 X 50%) = $13125
=> Tax Payable = Taxable Dividend X Tax rate
=> Tax payable = $13125 X 21%
=> Tax payable = $2756.250