In Year 1, Best 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. Best recorded the following information for Year 1:
Loss from Best's operations $ (10,000)
Dividends received 100,000
Taxable income (before dividends-received deduction) 90,000
Best's dividends-received deduction on its Year 1 tax return was:
a. $100,000
b. $80,000
c. $70,000
d. $63,000
Answer:D
Choice "d" is correct. The dividends-received deduction ("DRD") is generally calculated as 70% of dividends received which would be $70,000 (70% × $100,000). However, the deduction is limited to 70% × dividends received deduction (DRD) modified taxable income. DRD modified taxable income is calculated as taxable income before the dividends received deduction, any NOL carryover or carryback deduction, capital loss carryback deduction, and the domestic production activities deduction. Because the loss of $10,000 is a current year loss and not a carryover or carryback, it is not an adjustment to taxable income when calculating modified taxable income. DRD modified taxable income is $90,000. Best’s DRD deduction on its Year 1 tax return is limited to $63,000 (70% × $90,000).
Choice "a" is incorrect. The 100% DRD is available only when 80?100% of the stock is owned (making these entities related).
Choice "b" is incorrect. The 80% DRD is used when at least 20% but less than 80% of the stock is owned.
Choice "c" is incorrect. The deduction is limited to 70% of the lesser of dividends received deduction modified taxable income or the dividends received