[KellyCA75]

I’m trying to figure out a REG SIM question I got from cpareviewforfree and I keep getting a different answer from their answer key. Any help would be appreciated 🙂

Basically they want to know the taxable income if

Sales Revenue = 700,000

Dividends = 80,000

Ord and Necessary Expenses = 710,000

Charity = 16,000

They own 32% of the corp

So the answer i get would be:

700,000

+80,000

(710,000)

= 70,000

(7,000) for charity since 70,000 * 10% max

= 63,000

(64,000) for DRD since you take the lessor of 63,000 * 80% or 80,000 * 80% UNLESS it creates a NOL! So since it creates and NOL i took the 64,000

which would give me a final taxable income = (1,000)

Well they say the answer is 7,000 by calculating charity deduction after they take out DRD. Isnt that wrong though?

Any help would be greatly appreciated!!

BEC: Oct 2012
AUD: 86
REG: 86
FAR: 65 Rematch Jan 2013

[Anonymous]

I got the same answer you did. DRD is supposed to be computed after the charitable deduction, not before. I would assume the answer key is wrong.

[Shay]

No, answer is 7000

700 + 80 – 710==70,000 Taxable income

Lessor of 80% of T.I.(64K) OR 80% Div Received 56000

If you have loss after DRD deduction, then no charity. In this case, its positive

Then 10% T.I of Charity = 7000 is deductible

So, 70 – 56= 14 – 7 = 7K

Look over AICPA released questions Sims 2012

[Anonymous]

Shay, the charitable contribution deduction is supposed to be calculated before the DRD. At the same time, charitable contributions are not supposed to be used in calculating NOL. This results in potentially conflicting rules when a charitable deduction does not result in a NOL but reduces TI to the point that the subsequent DRD does create a NOL. However, Becker's example on R3-25 demonstrates that charitable contributions are deducted first even when the DRD then creates a NOL. Can anybody clarify this discrepancy? Is Becker wrong or the answer key wrong?

[Anonymous]

I can't find anything online directly addressing this, but I'm going to assume Becker is wrong for now, and the charitable contribution deduction is not factored into the taxable income used as the DRD limitation. Anyone else have ideas/input?

[Shay]

@CPA…In your post your mistake is after $63,000. You are suppose to minus 56,000 (which is lessor of 80% of Taxable Income before Charity, DRD OR 80% of Dividends Received 64,000).

[Anonymous]

You are generally supposed to take the lesser of the DRD or 80% of TI. However, this rule does NOT apply when the DRD yields a NOL. In this case, assuming the charitable deduction is applied first as per Becker, the $63,000 would be reduced by the full $64,000 DRD because the exception applies (it yields a NOL). The only way the $7,000 answer could be correct would be if the rule that the charitable deduction goes first does not apply when the final result is a NOL, which I have seen no support for from any source in regards to the DRD (and, in fact, contradicts the example on R3-25). However, Becker also says on page R3-19 that a charitable deduction is not used in computing a NOL, which could be the rationale for this exception, but I would much rather have solid proof rather than conjecture.

[Anonymous]

I think Becker is wrong.

Sales Revenue = 700,000

+Dividends = 80,000

– Ord and Necessary Expenses = 710,000

= taxable income $70,000

– charitable contibutions (7,000) [70,000 x .10]

=$63,000

Apply test of DRD. Full DRD of 80% would yield a DRD of $64,000 and a NOL of ($1,000). Therefore, the full 80% DRD of $64,000 can be deducted, resulting in a net loss of ($1,000). The 80% limitation of taxable income does not apply.

An example from publication 542:

Example 1.

A corporation loses $25,000 from operations. It receives $100,000 in dividends from a 20%-owned corporation. Its taxable income is $75,000 ($100,000 – $25,000) before the deduction for dividends received. If it claims the full dividends-received deduction of $80,000 ($100,000 × 80%) and combines it with an operations loss of $25,000, it will have an NOL of ($5,000). Therefore, the 80% of taxable income limit does not apply. The corporation can deduct the full $80,000.

[KellyCA75]

Thanks everyone for responding! I was basing my calculation off the example in Becker as well. @CPA I think you're right that the rationale would be that charitable deduction is not taken when calculating NOL. @Shay I'll make sure to look over AICPA recently released stuff.

Thanks again! And also if anyone does find a definite reason, please post 🙂

BEC: Oct 2012
AUD: 86
REG: 86
FAR: 65 Rematch Jan 2013

[Shay]

this is why I dont use free resources like cpareview….Stick with becker and Yes answer is (1000) N.O.L

[Author]

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