Wein's charitable contribution is not deductible for tax purposes since a net loss was incurred. A dividends-received deduction (DRD) is allowed.
A dividends-received deduction reduces taxable income. In addition, there is no limit in deducting 70% of dividends received if a net operating loss is either created or increased.
According to the instructions for Form 1120, U.S. Corporation Income Tax Return, “in a year in which an NOL occurs, this 70% limitation does not apply even if the loss is created by the dividends-received deduction.” (IRC Sections 172(d) and 246(b))
Loss from operations $(50,000)
Dividends 10,000
Total income (loss) $(40,000)
Add back charitable contributions 2,000 A charitable contribution
is not deductible for tax
purposes since a loss
occurs. According to the
scenario, the $2,000 was
already included in the
$50,000 net loss from
operations.
Loss before $(38,000)
Less: DRD deduction
(70% x $10,000) ( 7,000)
Net operating loss $(45,000)
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The dividends from a less-than-20%-owned domestic corporation are allowed a 70% special deduction. The $10,000 in dividend income Wein Corporation received from a 15%-owned domestic corporation would be reported on line 1 in Schedule C of Form 1120. The totals of line 1 through 8 in Schedule C are then subject to a taxable income limitation. A corporation's percentage dividends-received-deduction (DRD) for any tax year cannot exceed a certain applicable percentage of its taxable income. There is a worksheet for Schedule C, line 9, in the Form 1120 instructions that helps a taxpayer determine the amount of the taxable income limitation. A corporation's DRD is generally limited to 70% of its taxable income. This income limitation does not apply for any tax year for which the shareholder has an NOL.
This is not saying that the corporation gets a 100% DRD when there is an NOL in that tax year. Instead this taxable income limitation is determining what amount of the 70% DRD is going to be allowed based upon the corporation's income. Due to the NOL, Wein Corporation is allowed to deduct 100% of its 70% special dividend deduction, or $7,000.
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