Question

1. Before the provision for Federal income tax, Karas Corporation had book income of $400,000 for the current year. The book income included $100,000 of dividends received from a 15% owned domestic corporation. What was Karas Corporation's taxable income for the current year?

a.$300,000

b.$335,000

c.$350,000

d.$400,000

2. Hirsch, Incorporated, is a calendar year corporation that has had revenues of less than $500,000 since inception. In 2017, Hirsch had a net operating loss that was able to be used in full via a carryback to 2016. For 2018, Hirsch expects to have taxable income of $100,000. How will Hirsch avoid a penalty for underpayment of estimated Federal taxes in the current year?

a.Hirsch must pay 100% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

b.Hirsch must pay the amount of taxes owed on its 2017 return via estimated taxes to avoid an underpayment penalty.

c.Hirsch must pay 90% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

d.Hirsch may pay the lower of the amount of taxes owed in 2017 or 100% of the tax shown on the return for 2018 via estimated taxes to avoid an underpayment penalty.

3.

The dividends received deduction (DRD) is a tax deduction that may be taken by which of the following?

a.An individual

b.An S corporation

c.A partnership

d.A C corporation

4. In the current year, Acorn, Inc., had the following items of income and expense:

Sales $500,000 Cost of sales 250,000 Dividends received 25,000

The dividends were received from a corporation of which Acorn owns 30%. In Acorn's current-year corporate income tax return, what amount should be reported as income before special deductions?

a.$525,000

b.$505,000

c.$275,000

d.$250,000

5. Parent Corp. owns 40% of Sub Corp. In the current year, Parent has gross income of $43,000 and allowable deductions of $30,000 before considering any dividends received deduction (DRD). Included in the $43,000 gross income is $8,000 of dividends from Sub. What is the maximum DRD available to Parent?

a.$4,000

b.$5,200

c.$8,000

d.$8,450

Answer 1

1) d 400,000

As per IRS, the company receiving the dividend from any other comapany will get dividend received reduction (DRD) based on its % of holding. For a company holding less than 20% holding can get 70% deduction from the dividend received.

Income before DRD 400,000

Less DRD (70,000) (100000*70%)

Income after DRD 330,000

However, this DRD is special deduction given after the taxable income. so, taxable income will be $400,000

2. c.Hirsch must pay 90% of the tax shown on its 2018 return via estimated taxes to avoid an underpayment penalty.

As per IRS, taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

3. d. A C Corporation

As per IRS, The Dividends Received Deduction, or DRD, is a tax deduction that C corporations receive on the dividends distributed to them by other companies whose stock they own.

4. c. $275,000

Income before any special deductions will include sales, plus the dividends received, minus the cost of sales, or $275,000 ($500,000 + $25,000 - $250,000). Since Acorn owns 30% of the corporation from which the dividends were received, Acorn will be able to take a dividends received deduction equal to 80% of the dividends, or $20,000 ($25,000 x 80%). However, the dividends received deduction is a special deduction and can only be claimed after the total amount of the dividends has been included in income.

5. e. None of the above

As per IRS, DRD is lesser of 80% of dividend income, or $6,400 (8000*0.8)
80% of taxable income without dividend deduction $10,400 (13000*0.8)