[SoCalCPA]

I am not able to recognize that the Company in the question is only allowed 70% dividend received deduction (DRD). Thanks for your help in advance!

Q) For the CY, K Corp. had net income per books of $300K before provision for Federal income taxes. Included in the net income were following items:

– dividend income from an unaffiliated domestic taxable corp $50K

– bad debt expense 80K

Assuming no bad debt was written off, what was K’s taxable income for hte year?

A) $345,000

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I understand that bad debt expense should be added back (unsure of the exact reason), but I don’t see why only 70% of 50K is subtracted. I thought the key word was “unrelated company” to subtract 50K. Thanks again!

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[Minimorty]

@SoCalCPA – “unaffiliated domestic taxable corp” means that we only own a small interest in this corporation. If a company owns less than 20% of another company, it is able to deduct 70% of the dividends it receives. If the company owns more than 20% but less than 80% of the company paying the dividend, it is able to deduct 80% of the dividend received. If it owns more than 80% of the dividend-paying company, it is allowed to deduct 100% of the dividends it receives. The key word in this problem is “unaffiliated” which implies that we own less than 20%.

[SoCalCPA]

Haha, I should have known, thanks so much!

So 20% or under –> “unaffiliated, unrelated”

How about keywords for 20~80%, and 80% +?

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[Minimorty]

>80% would be “related” “affiliated” “wholly-owned subsidiary”, etc.

Not too sure about that 20-80% area. I would think they would actually give you the ownership percentage (ie. you own 35% of ABC Company).

[SoCalCPA]

Thanks Mini, I greatly appreciate your help!

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[NJCPA4ME]

I just wanted to add that this is done to avoid triple taxation on the money. Everything said above is correct.

FAR 93
REG 87
AUD 92
BEC 91

[Author]

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