If the corporation makes the contribution in 2014, it can deduct $25,000 as a charitable
contribution, which will save $9,750 (39% tax rate × $25,000 deduction) in Federal income tax.
However, if the corporation makes the contribution in 2015, the percentage limitations applicable
to corporations will limit the 2015 deduction to $10,000 ($100,000 projected profit × 10% limit).
The corporation will save $3,400 (34% tax rate × $10,000 deduction) in taxes as a result of this
deduction. The corporation may carry the remaining $15,000 forward for five years or until
exhausted. If the corporation continues at the 2015 profit level, it will save an additional $5,100,
for a total tax savings of $8,500.
This analysis makes it clear that the corporation will save $1,250 more ($9,750 – $8,500) if it
makes the contribution in 2014. In addition, all of the savings will occur in 2014. If the
corporation makes the contribution in 2015, its tax savings will be split among several years. My
advice is that the corporation should make the contribution immediately so ownership of the stock
can be transferred by December 31.
Sincerely,
Alicia Gomez, CPA
52.
a.
White’s domestic production activities deduction is equal to 9% of the lesser of:
taxable income (before DPAD) of $900,000, or
qualified production activities income of $1.2 million.
The tentative deduction is $81,000 ($900,000 × 9%). Because W-2 wages attributable to
QPAI were $200,000, the wage limitation ($200,000 × 50% = $100,000) does not apply.
Therefore, White’s DPAD is $81,000.
b.
The wage limitation now applies and White’s DPAD is $75,000 ($150,000 × 50%).
53.
a.
The key to this question is the relationship between the dividends received deduction and
the net operating loss deduction. The dividends received deduction is limited to a
percentage of taxable income of the corporation
unless
taking the full dividends received
deduction would cause or increase an NOL. In this case the dividends received deduction
is limited to 70% of taxable income.
Gross income:
From operations
$660,000
Dividends
240,000
$900,000
Less: Expenses from operations
(720,000)
Income before the dividends received deduction
$180,000
Dividends received deduction (70% × $180,000)
(126,000)
Taxable income
$
54,000
The dividends received deduction is limited to 70% of taxable income (before the
dividends received deduction) because taking 70% of $240,000 ($168,000) would not
create a net operating loss.
b.
If Swallow Corporation owns 26% of Brown Corporation’s stock, the percentage for
calculating the dividends received deduction would be 80%. Under these circumstances,
taking the full dividends received deduction would create an NOL.
Gross income:
From operations
$660,000
Dividends
240,000
$900,000
Less: Expenses from operations
(720,000)
Income before the dividends received deduction
$180,000
Dividends received deduction (80% × $240,000)
(192,000)
Net operating loss
($
12,000)
The dividends received deduction is not limited to 80% of taxable income (before the
dividends received deduction) because taking 80% of $240,000 ($192,000) creates a net
operating loss.
54.
Following the procedure used in Example 25 in the text, proceed as follows:
Almond
Blond
Cherry
Corporation
Corporation
Corporation
Step 1
70% × $100,000 (dividend received)
$70,000
70% × $100,000 (dividend received)
$70,000
70% × $100,000 (dividend received)
$70,000
Step 2
70% × $200,000 (taxable income before DRD)
$140,000
70% × $50,000 (taxable income before DRD)
$35,000
70% × $90,000 (taxable income before DRD)
$63,000
Step 3
Lesser of Step 1 or Step 2
$70,000
$63,000
Generates a net operating loss (use Step 1)
$70,000
Consequently, the dividends received deduction for Almond Corporation is $70,000 under the
general rule. Blond Corporation also claims a dividends received deduction of $70,000 because a
