CPA Exam — REG (Regulation)Federal Taxation of EntitiesEasy
A client, ABC Corp, a C corporation, reported taxable income of $250,000 for the current tax year. The corporation also received $10,000 in dividends from a 15%-owned domestic corporation. What is ABC Corp's dividends received deduction (DRD)?
- A$6,500
- B$5,000
- C$7,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $5,000
For dividends received from a 15%-owned domestic corporation, the dividends received deduction is 50% of the dividends received. Therefore, $10,000 * 50% = $5,000.
Why the other options are wrong
- A. This would be the DRD if the ownership was less than 20% and the taxable income limitation applied, but it does not apply here.
- C. This would be the DRD if the ownership was 20% but less than 80%, which is not the case here.
- D. This is incorrect; a deduction is available for dividends received from domestic corporations.
Dividends Received Deduction (DRD)
A corporate tax deduction for dividends received from other domestic corporations, designed to prevent triple taxation of corporate earnings.
- Ownership < 20%: 50% DRD
- Ownership 20% to < 80%: 65% DRD
- Ownership >= 80%: 100% DRD
Memory trick: Don't Double-Dip, Deduct Dividends!