Question

Kaspar and Ludger, two unrelated calendar year corporations, have the following transactions for 2019: Kaspar Corporation Ludger Corporation Gross income from operations $180,000 $300,000 Expenses from operations $255,000 $310,000 Dividends received from domestic corporations (15% ownership) $100,000 $230,000 Taxable income before the dividends received deduction $25,000 $220,000

Determine the dividends received deduction for both companies.

Answer 1

The dividends received deduction for Kaspar Corporation is $50,000 and for Ludger Corporation is $115,000, which is 50% of the dividends they received from domestic corporations where their ownership is below 20%.

Step-by-step explanation:

Calculating the Dividends Received Deduction

In order to calculate the dividends received deduction for both Kaspar Corporation and Ludger Corporation, we must apply the federal tax code regulations regarding such deductions. Corporations that receive dividends from other domestic corporations are entitled to a deduction depending on the ownership level of the company from which they're receiving dividends. Since both Kaspar and Ludger own less than 20% of the corporations providing them dividends, they can deduct 50% of the received dividends from their taxable income.

1. Kaspar Corporation: Received $100,000 in dividends, so the dividends received deduction is 50% of this amount, which equals $50,000.
2. Ludger Corporation: Received $230,000 in dividends, so the dividends received deduction is 50% of this amount, which equals $115,000.

Note that the dividends received deduction cannot exceed the corporation’s taxable income calculated without the deduction. However, in this scenario, both Kaspar and Ludger have sufficient taxable income to take the deduction in full.