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If the corporation makes the contribution in 2014, it can deduct $25,000 as a charitablecontribution, 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 applicableto 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 thisdeduction. The corporation may carry the remaining $15,000 forward for five years or untilexhausted. 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 itmakes the contribution in 2014. In addition, all of the savings will occur in 2014. If thecorporation makes the contribution in 2015, its tax savings will be split among several years. Myadvice is that the corporation should make the contribution immediately so ownership of the stockcan be transferred by December 31.Sincerely,Alicia Gomez, CPA52.a.White’s domestic production activities deduction is equal to 9% of the lesser of:taxable income (before DPAD) of $900,000, orqualified production activities income of $1.2 million.The tentative deduction is $81,000 ($900,000 × 9%). Because W-2 wages attributable toQPAI 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 andthe net operating loss deduction. The dividends received deduction is limited to apercentage of taxable income of the corporation unlesstaking the full dividends receiveddeduction would cause or increase an NOL. In this case the dividends received deductionis limited to 70% of taxable income.
Gross income: From operations$660,000Dividends240,000$900,000Less: Expenses from operations(720,000)Income before the dividends received deduction$180,000 Dividends received deduction (70% × $180,000)(126,000)Taxable income$ 54,000The dividends received deduction is limited to 70% of taxable income (before thedividends received deduction) because taking 70% of $240,000 ($168,000) would notcreate a net operating loss. b.If Swallow Corporation owns 26% of Brown Corporation’s stock, the percentage forcalculating the dividends received deduction would be 80%. Under these circumstances,taking the full dividends received deduction would create an NOL.Gross income: From operations$660,000Dividends240,000$900,000Less: 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 thedividends received deduction) because taking 80% of $240,000 ($192,000) creates a netoperating loss. 54.Following the procedure used in Example 25 in the text, proceed as follows:AlmondBlondCherryCorporationCorporationCorporationStep 170% × $100,000 (dividend received)$70,00070% × $100,000 (dividend received)$70,00070% × $100,000 (dividend received)$70,000Step 270% × $200,000 (taxable income before DRD)$140,00070% × $50,000 (taxable income before DRD)$35,00070% × $90,000 (taxable income before DRD)$63,000Step 3Lesser of Step 1 or Step 2$70,000$63,000Generates a net operating loss (use Step 1)$70,000Consequently, the dividends received deduction for Almond Corporation is $70,000 under thegeneral rule. Blond Corporation also claims a dividends received deduction of $70,000 because a