Question

When a corporation's DRD will create a net operating loss, the DRD is (limited/not limited) by its taxable income before the DRD.

a. Limited
b. Not limited

Answer 1

The DRD is indeed limited by the corporation's taxable income before the application of the DRD to prevent the creation or increase of a Net Operating Loss. Therefore, option a. Limited is the correct answer.

Step-by-step explanation:

When considering Dividend Received Deduction (DRD), which is a tax deduction that corporations get for the dividends received from other corporations in which they have an ownership stake, it's essential to know its impact on corporate taxes and, specifically, the Net Operating Loss (NOL).

In the scenario described, if applying the DRD creates a net operating loss for the corporation, then according to U.S. tax law, the dividend received deduction is limited by taxable income before the application of the DRD. This is to prevent corporations from using the DRD to produce or increase a NOL. The Internal Revenue Service (IRS) regulations stipulate that the DRD cannot exceed the taxable income of the corporation, which prevents the corporation from using these deductions to create or enhance an NOL.

Thus, the correct option for the question is: a. Limited.