Question

riverbend inc. received a $367500 dividend from stock it held in Hobble corporation. riverbends taxable income is $2450000 before deducting the dividends received deduction, a $60500 NOL carryover, and a $138,000 charitable contribution.
a. what is riverend's deductible drd assuming it owns 10 percent? answer 183750
b. assuming the facts in part a what is riverbends marginal tax rate on the dividend?

Answer 1

a.

As you have already mentioned the answer as 183,750, which is the half of 367500 ( dividend from stock ) for question-a, So, im assuming that the DRD percentage is 50%.

Otherwise we need Dividends Received Deduction Percentage for stock options table to derive at the DRD percentage.

So the steps would be

367500 * 0.50 = 183,750 (already given)

Its full DRD is $183,750

Riverbend's modified taxable income for the taxable income limitation is $1,914,000 ($2450000 minus $138,000 charitable contribution).

So, the taxable income limit =$957,000 ($1,914,000× 50%).

As the full $183,750 DRD is less than the taxable income limit, Riverbend will deduct the entire $183,750 DRD.

This is how you would be getting the 183,750 amount as answer which you mentioned along with the question.

b. Answer: Marginal tax rate on the dividend = 10.5%

Calculation:

Corporate tax rate is 21%.

So, its effective tax rate on the dividend after taking the DRD into account is computed as follows:

($367,500 − $183,750 ) × 0.21] / $367,500 = 10.5%

Marginal tax rate on the dividend = 10.5%