Delta corporation owns 2 of the stock in a US corporation Az

Delta corporation owns 2% of the stock in a U.S. corporation Azul. It receives a dividend from that corporation of $100,000. Delta has $3 million of taxable income not including the dividend from Azul.

a) Suppose that before the dividends Delta had a taxable loss from all other activities of ($40,000). How much gross income from the dividend does Delta report?

b)What if Delta’s taxable loss before dividends was ($55,000) would your answer change and if so how?

Solution

a) As per IRS rule, if a corporation receives dividend from a corporation having a stake of less than 20%, it will get 70% dividend received deduction. So, taxable dividend income is:-

= 100,000 - 100,000(70%)

= 30,000

Since, delta corporation falls in the bracket of 35%, his dividend income will be taxed at 20% (Because it is qualified dividend)

According to the Internal Revenue Service, an investor \"must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date\" to be considered a qualified dividend.

So, gross income = Taxable income + Dividend income - Taxable loss

= 3000000+30,000-40,000

=2990000 which will be taxed as,

30000 @ 20% and 2960000 @ 35%.

b) If delta\'s taxable loss is $ 55,000:-

Gross income = 3000000+30000-55000

= 2975000 which will be taxed as,

30000 @ 20% and 2945000 @ 35%.