Description
Solved Question:
DF Inc., received the following dividend payments this year:
ABC Corp. (California corporation in which DF has a 5% interest) : $20,000
LMN Corp. (New York corp in which DF has a 27% interest): $35,000
XYZ Corp. (French corp in which DF has a 50% interest): $100,000
DF’s taxable income before charitable contribution deduction, §199 deduction and dividends received deduction is $1,064,870. The company’s §199 deduction is $60,500. DF also made $125,000 of cash charitable contributions during the year.
Required:
a. Calculate DF’s allowable dividends-received deduction
.b. Determine DF’s allowable charitable contribution deduction
c. Determine DF’s taxable income
Answer:
DRD deductions are There are three tiers of possible deductions. First, the general rule is that the DRD is equal to 70% of the dividend received. Second, if the company receiving the dividend owns more than 20% but less than 80% of the company paying the dividend, the DRD is 80% of the dividend received. Finally, if the company receiving the dividend owns more than 80% of the company paying the dividend, the DRD is 100% of the dividend.
For ABC, DRD is 70% since DF has <20% interest
For ABC, DRD= 70% of 20000 = $ 14,000
For LMN and XYZ DRD = 80% since interest in those firms is >20% but <80%
for LMN , DRD= 0.8*35000 = 28,000
For XYZ, DRD = 0.8*100000 = 80,000
Total DRD = 14000+28000+80000 = $122,000
B) Adjusted Gross Income = 1064870 – 60500 = 1,004, 370
charitable contribution deduction limit = 50% of AGI = 50%*1004370 = 0.5*1004370 = 502,185
Allowable charitable contribution deduction = 125,000
C) Taxable income= AGI – DRD deductions – charitable contribution deduction
= 1,004,370- 122,000- 125,000 = $ 757,370
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