[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for REG. 🙂

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[aatoural]

@JMG – Yeah the answer is C. But about your question. If X and Y are filling a consolidated statement, I don;t think the questions gives us that much detail. We don't know for sure that the taxable income of Y of $140 includes the $10K dividends. At least that is from reading the problem a few times.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[aatoural]

@dtatham10 – I think know which are f=refundable and which are not and the major issues with them should suffice.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[JMG]

@aatoural thanks for the follow up, it wasn't clicking initially because I never read anything in the Becker book on DRD imnpact on taxable loss. Still not clear on why the elimination of the dividend increases the loss.

[HoosierCPA]

Speaking of DRD, I haven't cycled back through that material. But there is some rule. I believe you cannot take a DRD if it causes you to go from a profit to a loss–am I making this up?

JMG, what's not clicking? I'm trying to figure out how I can explain it better. If you have a loss and received dividend income you would reduce that loss by the dividend. If that dividend is eliminated then you are back to the original loss amount.

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[RE2PECT]

@dtatham10- Not sure if this is what you're referring to, but I just had this question come up. In this situation you're allowed to take the full DRD as opposed to using the taxable income limitation. Sorry if the formatting is a little messed up.

During 2016, Sea Corporation reported gross income from operations of $100,000 and operating expenses of $150,000. Sea Corporation also received dividend income of $90,000 from a domestic corporation in which Sea is a 20% shareholder. What is the amount of Sea Corporation’s net operating loss?
A. $40,000
B. $23,000
C. $0
D. $32,000
Answer (D) is correct.

Sec. 172(c) defines a net operating loss as the excess of deductions over gross income, with certain modifications. One modification is that the dividends-received deduction is computed without regard to the 80% of taxable income limitation (i.e., $40,000 × 80% = $32,000 deduction limit) in Sec. 246(b); therefore, the deduction is the full amount of $72,000. Thus, Sea’s NOL is $32,000 as computed below.
Gross income from operations
$100,000
Dividend income
90,000
Less: Operating expenses
(150,000)
Gross income
$ 40,000
Less: Dividends-received deduction
(80% × $90,000)
(72,000)
Net operating loss
$ (32,000)

FAR: 75 Roger & Ninja (notes/flashcards/audio/MCQ)
AUD: 73, 81
BEC: 71, retake 8/29
REG:

[JMG]

@dtatham10 you're thinking of the exception to the taxable income limitation rule for DRD if it results in a NOL.

For that problem I think I'm just having a hard time with the wording, because it says the dividend was “included” in the loss. So just explain to me how we get from (120K) to (130K) with the dividend being eliminated.

[JMG]

Nevermind, I just answered my own question lol

[LIZZ]

@ JMG there are 3 companies in the question. Maybe thats where your lost?

1.Parent X – Owns 100% of Sub Y.
2.Sub Y owns 20% of some other company as a stock investment.

the question tells you that DRD is not calculated in NI for either company so DRD needs to be deducted.

1. Parent X elimated 100% of Sub Y Dividends. SO NI 120 less 10k DRD = 130K for Parent
2. Sub Y owns 20% of stock investment = 70% DRD. 30k divd x 70% = 21,000 elimination allowance. NI = 140 – 21k = 119 for Sub

Consolidated is
(130) Parent
119 Sub
——–
11k Consolidated NI

The Question AGAIN:
Parent company X and subsidiary company Y file a calendar-year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20%-owned stock investments. Neither company took into account any applicable dividends-received deduction. What is the group’s consolidated tax loss for the year?

Hope that Helps = )

FAR - 05/2015
AUD - 75,11/2014
REG - 07/2015
BEC - 09/2015

[LIZZ]

Ok now im lost on the DRD %. does anyone remember them from FAR?

Owns = Eliminated
less than 20% – 80%?
20% – 80% = 70% ?
Over 80% = 100%

I thought the max elimination was 70% but at @Re2pect question it says 80%.

FAR - 05/2015
AUD - 75,11/2014
REG - 07/2015
BEC - 09/2015

[JMG]

@financelady thanks for the help, my brain fart was telling me “eliminated” = zero, instead of eliminated = (10K) so that's where I was confused.

[aatoural]

@JMG – the problem is meant to trick your math it is a loss of 120 which includes the 10 dividend. If we take out the dividend it will look like this: -120 – 10 = -130 that netted against the 140 – 21 = 119 which ends up at 119 – 130 = -11

@financelady –

less than 20% -> 70% DRD
20-80% -> 80% DRD
80% and more -> 100% DRD meaning no dividend income from affiliated companies

Not to confuse with GAAP which only requires 50% for consolidation.

Hope this helps.

BEC - PASSED
AUD - 8/29/16
FAR - TBS
REG - TBS

[HoosierCPA]

@JMG ok can you or anyone elaborate on your comment. The example problem @re2pect posted makes me think you can take the full DRD even if it reduces your income to a loss.

“you’re thinking of the exception to the taxable income limitation rule for DRD if it results in a NOL.”

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[LIZZ]

THANKS @aatoural I knew there was something wrong.. Starts at 70% and goes up to 100% !

FAR - 05/2015
AUD - 75,11/2014
REG - 07/2015
BEC - 09/2015

[JMG]

@dtatham10 I'm just paraphrasing from the Becker book here, but:

DRD = lesser of:
– 70-80% dividends received
– 70-80% taxable income (w/out DRD, NOL deduction, cap loss carryback, or DPA deduction)

Exception:
Taxable income limitation does not apply if the result of the DRD is a NOL

There's a really good example of this in the book, wish I could post it up here.

[HoosierCPA]

ahhh Taxable income! I'll have to take a look when I get home. What page is it in Becker?

FAR - 78
REG - 72,74,71...please just go away REG nobody likes you!
BEC - 82
AUD - Aug 16

[Author]

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