CPA Regulation (REG) : Dividends Received Deductions
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Example Questions
Example Question #1 : Corporate Income Tax Deductions
The corporate dividends-received deduction:
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.
Is unaffected by the percentage of the investee’s stock owned by the investor corporation.
Must exceed the applicable percentage of the recipient shareholder’s taxable income.
May be claimed by S corporations.
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.
The dividends-received deduction (DRD) depends on the percentage of the investor’s share of the investee. To take advantage of the DRD, investors must hold the investee’s stock for a specific period prior to the ex-dividend date. The DRD is only available to domestic C corporations, and is limited to the investor’s taxable income for the period.
Example Question #2 : Corporate Income Tax Deductions
Rohr, a C corporation, owns 18% of Alda Corporation. Alda paid a $3,000 cash dividend to Rohr. What is the amount of Rorh’s dividends-received deduction?
$1,950
$1,500
$0
$3,000
$1,500
For the dividends-received deduction (DRD), less than 20% ownership results in a 50% deduction, so Rohr gets a DRD of $1,500 (50% of the $3,000 dividend received).
Example Question #1 : Dividends Received Deductions
In Year 2, Buy Corp., an accrual basis calendar year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt financed and was held for over a year. Buy recorded the following information for Year 2:
- Loss from Buy’s operations: (10,000)
- Dividends received: 100,000
- Taxable income (before dividends-received deduction): 90,000
Buy’s dividends-received deduction on its Year 2 tax return was:
$45,000
$65,000
$50,000
$100,000
$45,000
Generally, the minimum dividends-received deduction (DRD) is 50%, which would mean in this case a $100,000 would result in a $50,000 DRD. However, the DRD is limited to the lesser of the DRD % applied to dividends received or the DRD % applied to taxable income without consideration of the DRD. Since we are told the taxable income is $90,000, the maximum DRD at 50% would be $45,000. (Had the company been eligible for a 65% DRD, the DRD could only have been $58,500, which was not an option.)
Example Question #1 : Corporate Income Tax Deductions
The corporate dividends received deduction:
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period
Must exceed the applicable percentage of the recipient shareholder’s taxable income
Is unaffected by the percentage of the investee’s stock owned by the investor corporation
May be claimed by an S corporation
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period
The corporate DRD is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period of more than 45 days.
Example Question #2 : Corporate Income Tax Deductions
Canada Co, a C Corp, owns 15% of Apple Corp. Apple paid a $3,000 cash dividend to Canada. What is Canada’s DRD?
$3,000
$0
$1,900
$1,500
$1,500
Per the DRD rates, with a 15% ownership in Apple, the percentage used for the deduction is 50%. 50% * $3,000 = $1,500.
Example Question #3 : Corporate Income Tax Deductions
The Dividends Received Deduction applies to:
A C Corporation in the United States
Individuals in the United States
A company in France
All of the above
A C Corporation in the United States
Of the following choices, only a C Corporation in the United States would be applicable for the DRD under current US tax law.
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