Question

Riverbend Inc. received a $305,000 dividend from stock it held in Hobble Corporation. Riverbend's taxable income is $2,380,000 before deducting the dividends received deduction (DRD), a $78,000 NOL carryover, and a $132,000 charitable contribution. Use Exhibit 16-6. (Round your tax rates to 1 decimal place. Leave no answer blank. Enter zero if applicable.) b. Assuming the facts in part (a), what is Riverbend’s effective tax rate on the dividend?

Answer 1

Answer:-

The dividends-received deduction^[is a tax deduction received by a corporation on the dividends it receives by other corporations in which it has an ownership stake.

if a corporation receives dividends from another corporation, it is entitled to a deduction of 50 percent of the dividend it receives.

If the corporation receiving the dividend owns 20 percent or more, then the amount of the deduction increases to 65 percent.

If, on the other hand, the corporation receiving the dividend owns more than 80 percent of the distributing corporation, it is allowed to deduct 100 percent of the dividend it receives.

So deduction for dividend is 305000*50% = 152,500

Based on its level of taxable income, Riverbend’s marginal tax rate is 34%. So, its marginal tax rate on the dividend after taking the DRD into account is computed as follows:

((305000-152500)*34%)/305000 = 17%