CPA Regulation (REG) : Dividends Received Deductions
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Example Questions
Example Question #1 : Corporate Income Tax Deductions
The corporate dividends-received deduction:
May be claimed by S corporations.
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.
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period.
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?
$3,000
$0
$1,950
$1,500
$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 #2 : Corporate Income Tax 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:
$100,000
$45,000
$50,000
$65,000
$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 : Dividends Received Deductions
The corporate dividends received deduction:
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 an S corporation
Is affected by a requirement that the investor corporation must own the investee’s stock for a specified minimum holding period
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 #5 : 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?
$1,900
$1,500
$3,000
$0
$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 #2 : Dividends Received Deductions
The Dividends Received Deduction applies to:
A C Corporation in the United States
A company in France
Individuals in the United States
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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