•However, the Dividend Received Deduction is also limited to 80% of ATI. •ATI: ($800,000 + 100,000) – (300,000+520,000) = $80,000•Therefore, the Dividend Received Deduction is limited to $64,000 (80% of $80,000 ATI).$80,000 ATI).•We can now calculate Taxable Income:$800,000Operating Revenue$100,000Dividend Received($300,000) COGS($520,000)Operating Expenses($64,000) Dividend Received Deduction$16,000Taxable Income
Deductions Requiring Special TreatmentInterest ExpenseInterest Expense.Interest expense on a corporation’s own debt is fully deductible, even if in connection with the repurchase of its own stock. Recall that individuals’ investment interest deductions are limited to net investment income. Not so with corporations. An Original Issue Discount on bonds is corporations. An Original Issue Discount on bonds is deductible as interest expense.Chapter 16, Exhibit 14a
Deductions Requiring Special TreatmentInterest ExpenseFacts:square43/1/2011: A corporation hired an investment banking firm to underwrite and sell 5-year, $10,000 bonds.square46/15/2011: The bonds were printed when the market yielded 10% on five-year bonds of comparable risk. Accordingly, the investment banking firm set the coupon rate at 10%.square46/15/2011 - 6/30/x1: The market yield on comparable five-year bonds rose to 12%.square46/30/2011: Five-year, $10,000, 10% bonds were issued to the public. Since the market then square46/30/2011: Five-year, $10,000, 10% bonds were issued to the public. Since the market then yielded 12%, the bonds had to be discounted to $9,250 to be saleable.Question: How much OID is deductible on one $10,000 bond over the 5-year bond maturity?Solution: $750 ($10,000 face value – $9,250 issue price)Chapter 16, Exhibit 14c
Deductions Requiring Special Treatment—Bond Redemptions at a PremiumRepurchasing Bonds at a Premium.A corporation that repurchases its bonds may deduct as interest expense the excess of the repurchase price over the issue price.Chapter 16, Exhibit 15a
Deductions Requiring Special Treatment—Bond Redemptions at a PremiumFACTS: square4ABC Corporation buys back one $10,000 bond on 1/1/2011 at a repurchase price of $9,800. square4The issue price on the bond is $9,425 as of 1/1/2011.Example on Repurchasing Original Issue Bonds at a PremiumSOLUTION: QUESTION:How much of the payment premium is deductible in the year 20x1 as interest expense?Chapter 16, Exhibit 15b$375 (i.e., $9,800 payment, less $9,425 issue price)
Deductions Requiring Special Treatment—CompensationCompensation.Three independent rules:(1) Unreasonable compensation to a shareholder is generally treated as a dividend, to the extent of earnings and profits.(2) Executive Compensation Limitations.Deductible compensation for the top five executives of publicly traded companies is limited to $1,000,000 for each executive unless performance based. unless performance based. (3) Restricted Stock.Compensation to an employee in the form of stock is deductible when the employee reports the amount as ordinary income. Employees must include the market value of stock received for services in GI when (i) it is not subject to a substantial risk of forfeiture, and (ii) its value is ascertainable.Chapter 16, Exhibit 16a
FACTS:square42001: Employee purchases restricted stock (FMV = $1,000) from employer-corporation for $500.