Question

A-----If ABC, Inc. purchases Citibank, Inc stock and receives a $200,000 dividend in 2020, what will be ABC, INC tax burden on this dividend:

B---Suppose ABC, INc. purchases 65% of X Co. and X Co. pays a $100,000 dividend, what will be ABC, INc tax burden on this dividend:

Answer 1

A - If ABC, Inc. purchases Citibank, Inc stock and receives a $200,000 dividend in 2020, it will be taxed @21% as corporate tax rate for 2020 is 21%.

Dividends are taxed in the hand of shareholders.

Tax burden on the dividend = $200,000 * 21% = $ 42,000

B - The Dividends Received Deduction, or DRD, is a tax deduction that corporations receive on the dividends distributed by other companies whose stock they own. As a corporation's equity holding in a dividend-paying company increases, so does the amount of the DRD.

Dividend received = $100,000

ABC owns 65% of X Co, i.e between 20% and 80% ownership, and hence DRD will be 80%

Taxable income after DRD = Taxable Income befor DRD - DRD = $100,000 - (80% of $100,000) = $20,000

Tax burden on this dividend = $20,000 * 21% = $4,200