[Anonymous]

I have a quick question on the DRD. Let’s say you have the two following examples:

Example 1

Taxable income before DRD, NOL, etc.: $900

Dividend Income from 75% owned company: $1,000

Example 2

Taxable income before DRD, NOL, etc.: $500

Dividend Income from 75% owned company: $1,000

How I understand the deduction is that you get the lesser of the DRD % or the Taxable Income limitation unless there is a current year NOL or you create a loss. In Example 1, the DRD deduction would be 80% of $1,000, or $800. The TI limitation would be $80% of $900, or $720. $720 is the lesser of the two so that would be your deduction.

In Example 2, the DRD would be $800 and the TI limitation would be $400. However, instead of taking the lesser of the two, we apply the $800 to the $500 of the net income, see that it creates the loss, and thus ignore the TI limitation and use the full $800.

I’m just confused at the whole process. In Example 1, we do one thing, and in Example 2, we do another. Should our entire approach to DRD just be this:

Step 1: Calculate the DRD

Step 2: Compare it to TI

Step 3: If the DRD creates a loss, use the full amount. If it doesn’t, go to Step 4

Step 4: Calculate the TI limitation amount

Step 5: Use the lesser of the DRD or TI limitation as your deduction

It just seems a little convoluted. If you forget to apply the full DRD to the TI before you compare it to the TI limitation, and the full DRD creates a loss, your answer will be wrong.

[futureCPA12]

@beardown That is pretty much the jyst of it. I never really understood why the rules were like that, but then again REG is all about memorization anyway…

[Anonymous]

I think the whole idea behind this rule is to maximize the NOL recognized or create the highest taxable income base. If there is an operating income for tax purposes it would make sense that you get to take the smallest deduction meaning you pay more tax.

[Author]

Replies