🎯Dividend Received Deductions and Charitable Contributions: 17 MCQs

Responses

1. 

   Betty Barnes 11 June 2024

   Explanation for Q#1 does not match answer.

   1. 

      Maroun, CPA 14 June 2024

      Hello Betty,

      There was a typo. I adjusted the explanation.
      Thank you for pointing this out!

2. 

   Denise Feng 3 September 2024

   For question #6, why is the dividend received the deduction if the deduction would cause the taxable income to become negative?

   1. 

      Maroun, CPA 6 September 2024

      Hello Denise,

      Under IRC Section 246(b), the taxable income limitation applies to the DRD, meaning that the deduction is limited to a percentage of the taxable income before applying the DRD. However, the code provides an exception to this limitation:
      If applying the full DRD would create or increase a net operating loss (NOL), then the full DRD is still allowed. This means that the DRD is not capped by taxable income if doing so would result in negative taxable income or increase an existing loss.

      I hope this helps!

3. 

   Denise Feng 3 September 2024

   The questions asks to determine taxable income while the explanation is determining the DRD.

   1. 

      Maroun, CPA 6 September 2024

      Hello Denise,

      Please read the full explanation. In order to compute taxable income, you have to deduct DRD.

4. 

   Olanrewaju Shodeyi 15 November 2024

   is this correct? it should be 36000

   1. 

      Maroun, CPA 18 November 2024

      Hello Olanrewaju,

      Based on the rules for determining the maximum allowable charitable contribution deduction, the calculation starts with taxable income before any charitable contribution deduction, Dividends Received Deduction (DRD), or capital loss carryback.

      In the explanation, the taxable income was adjusted by adding back the DRD ($25,000) to arrive at $410,000. From there, the 10% limitation was applied to calculate the maximum allowable deduction of $41,000.

      Could you clarify why you believe the deduction should be $36,000 instead? If there’s an error in the explanation or calculation that you’ve spotted, I’d like to understand your reasoning to address it thoroughly.

      Looking forward to hearing from you!

5. 

   James 31 December 2024

   in question 4, step 1 = 200000*.65 =130000 with no NOL created.
   step 2 = 185000*.65 or 120250
   deduction is limited to the lessor of 130000 or 120250. I do not understand how it could be 130000

   1. 

      Maroun, CPA 4 January 2025

      Hi James,

      The key to understanding this question lies in the instructions provided. The question specifically states: “Given that Apex’s dividends-received deduction is not limited by its taxable income.” This means you should calculate the dividends-received deduction (DRD) directly as 65% of the dividend received, without applying the taxable income limitation.

      The confusion arises from your use of the $185,000 net operating income to compute the limitation. The net operating income is NOT the correct base for the limitation. The limitation is calculated based on taxable income before the DRD, capital loss carryback, and net operating loss (NOL) deductions. The dividend income received from the investee is not generated from Apex’s operations. Thus, it should be added to net operating income in order to compute taxable income before DRD as follows:
      Adjusted taxable income = Net operating income + dividend income
      Adjusted taxable income = $185,000 + $200,000 = $385,000.

      Because the limitation is based on this adjusted taxable income, the DRD is not restricted.
      Thus, Apex can claim the full 65% of the dividend received:
      $200,000 x 65% = $130,000.

      Make sure to always pay attention to the question’s instructions and solve it accordingly.
      I hope this helps!

6. 

   NICOLETA Soroiu 26 July 2026

   In the explanation of the topic —- If TI before DRD were $120,000, full DRD would create an NOL ($120k – $135k = –$15k); in that case, the full $135,000 would be deductible. —-But if is NOL the DRD is not allowed. Please explain.

   1. 

      Maroun, CPA 27 July 2026

      Hello Nicoleta,

      The NOL deduction and the NOL exception to the DRD limitation are two different concepts.

      When calculating the taxable-income limitation for the DRD, a corporation does not subtract an NOL carryforward deduction from another year. However, this does not mean that the current-year DRD is disallowed.

      Instead, the corporation first tests the full DRD:
      Taxable income before DRD: $120,000
      Full DRD: $270,000 × 50% = $135,000
      $120,000 − $135,000 = $(15,000) NOL

      Because the full DRD creates a current-year NOL, the 50% taxable-income limitation does not apply. Therefore, the corporation may deduct the full $135,000.

      In the original question, taxable income was $240,000:
      $240,000 − $135,000 = $105,000

      Because no NOL results, the DRD is limited to:
      $240,000 × 50% = $120,000

      Hope this helps!