Hi everyone,
I was a little confused by the below Becker question related to the Dividends Received Deduction and I'm hoping someone can help me figure out where my misunderstanding is. Based on the fact pattern in the below question I would have thought the DRD would have been $4,900 and not $7,000 since the it is supposed to be the lesser of 70% of the actual dividend or 70% of the taxable income without regard to DRD, NOL deduction, capital loss carryback, or domestic activities production. Yet based on the answer key, the DRD is $7,000. Why? What am I missing here??
Question details:
Kisco Corp.'s taxable income before taking the dividends received deduction was $70,000. This includes $10,000 in dividends from an unrelated taxable domestic corporation. Given the following tax rates, what would Kisco's income tax be before any credits?
Partial rate table
Tax rate
Up to $50,000
15%
Over $50,000 but not over $75,000
25%
a. $10,750
b. $12,500
c. $15,750
d. $10,000
Explanation
Choice “a” is correct. The $10,000 dividend is from an unrelated corporation. This means less than 20% of the company is owned. A 70% dividends received deduction is available.
Taxable income
$ 70,000
Less: Dividends received deduction (70% × 10,000)
(7,000)
Taxable income
$ 63,000
Income tax
15% × $50,000
$ 7,500
+ [25% × ($63,000 − $50,000)]
3,250
Total
$ 10,750
Choices “d”, “b”, and “c” are incorrect. The $10,000 dividend is from an unrelated corporation. [This means less than 20% of the company is owned. A 70% dividends received deduction is available.]
BEC - 88
AUD - 74, 87
REG - 77
FAR - 63, 82
CIA certified in 2013
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