UM19MB588-International Taxation - II

UM19MB588-International
Taxation – II
(Corporate Taxation )
• For the tax year beginning after 2017, as per the Tax Cuts and Jobs
Act, there is a shift from worldwide system of taxation to a modified
territorial system. Residents and citizens of United States are taxed at
the local, state and federal levels.
• US citizens or residents who are engaged in doing business outside
the United States are also subject to tax in the local country.

• In simple words, taxes are collected by local authorities, state

governments, federal government and foreign governments
• Local authorities include cities, municipalities and counties. Local
taxes include property tax, Business and occupation tax and net
income tax.
• State taxes include net income tax, sales and use tax, excise tax and
unemployment tax Federal taxes include net income tax, employment
taxes (social security tax, Medicare tax, and self-employment tax),
unemployment tax, excise tax, gift and estate tax.
• Non US or foreign governments’ taxes include Employment tax,
Property tax, Net income tax, value added tax ,
Many factors affect choice of entity

Only in very few cases will the choice of entity be a simple decision. Rather, the
ultimate choice will be a compromise of a number of factors that, when
considered in the aggregate, provides the best alternative.

Each different form of entity offers advantages and disadvantages.

Considerations include the following:

1. Legal
2. Tax
3. Initial cost
4. Maintenance cost
5. Operational complexity
6. Exit alternatives
Business Entities
Business Entities

Unincorporated:
• Sole proprietorship [ Form1040]
• Partnership [Form 1065]
• General or limited partnership,
• limited liability partnership
• Limited liability company
Incorporated
• C –corporation[Form 1120]
• Single Entity
• Affiliated group
• S- corporation [Form 1120s]
Unincorporated Entities:

• Sole proprietorship:
• Sole proprietorship is the simplest form of business type. It is a
business owned and controlled by one person. This person is
responsible for the entire business and profit or loss. Sole
proprietorship is not a legal entity separate from its owners.

• The owner has unlimited liability i.e., the Firm's liabilities are treated
as personal liabilities of the owner. On death of the owner sole
proprietorship firm ceases to exist.
• Profits and losses of the business are of the owner's personal income
and the proprietorship firm is disregarded for tax purposes. Hence,
the income or loss is reported in the owner's form 1040.
Partnerships:

Partnership is an association of two or more persons to carry on a

business for profit. These partners are responsible for the business,
including all liability and profit or loss.
• According to Sec 761(a), the term partnership includes, “ a syndicate,
a group, pool, joint venture or other unincorporated organization
conducting any business, financial operation or venture” .
• Partnership is created by mutual agreement among the partners and
are governed by the state or federal laws
• The partners to enter into a partnership make an agreement to share
profits and losses.

• It is a flow through entity where the partnership firm is not taxed but
the income earned is taxed in the hands of the partners in their form
1040 or respective forms.
• Partnership is required to file an informational return to the
government to report what the profits and losses of the partnership
were and how these were allocated to the partners.
• Taxable income (loss) is allocated to the partners on Sch K-1.
• Corporate partners include allocations on Form 1120.
• Individual partners include allocations on Form 1040.
• Partnerships are considered as legal entity separate from its partners.
Partnerships can choose its accounting period, methods, etc.
• Partnership tax returns are due by the 15th day of the 3rd month
following the close of the tax year.
• It files Form 1065. Extension to file the Form 1065 can be requested
by filing Form 7004 and the extension period is 6 months.
Major kinds of partnerships :

• General Partnership: (Unlimited Liability)

• Limited Partnership (a Partnership with Limited Liability):
• Limited Liability Company (LLC's)
• General Partnership: (Unlimited Liability)
This is the most basic type. All management and liability is shared
between the partners, unless otherwise specified. The Partnership
does not pay tax; the income flows through and is taxed on each
owner's personal tax return.
• A Partnership that has got all the partners are general partners is a
General Partnership.

• General partner (GP) will have an unlimited exposure to partnership

liabilities.
• This is partnership where the owners can be held liable for the
partnership’s debts if partnership does not have enough assets to
cover its liabilities of the business.
 Limited Partnership
(a Partnership with Limited Liability):

• Under limited partnerships owners are divided into general partners

and limited partners.

• Limited Partnership must have at least one general partner and one
limited partner.
• Only limited partners have the limited liability. They contribute capital
and share in profits or losses but who do not run the business and are
not liable for the partnership obligations beyond contribution.
• General partners manage the business and are liable for partnership
debts.
• This type of partnership is basically formed by professional service
organizations
Limited Liability Company (LLC's)

• An LLC is a non -corporate hybrid business structure that combines the limited
liability of a corporation with the tax advantage of a partnership.

• LLCs are the only business entities that allow

• Complete pass-through tax advantages and the operational
flexibility of a partnership
• Corporation-style , limited liability under state law
• No restrictions on the number or types of members, and
• Management participation by a member is called Managing
member of LLC. Members are the owners of the LLC.
Corporation:
(C-Corporation )

• Corporations are governed by the state or federal. Their

characteristics includes,
• Continuity of life, centralized management, limited liability and
free transferability of ownership interests.
• These could be either publicly traded or closely or privately
traded.
• There is double taxation which means the corporation is taxed
for their income and when the distributions are made to the
shareholders they get taxed again.
• Form 1120 is prepared to derive the taxable income and filed with
the IRS.
 Corporation:
S- corporations

• S- corporations are small business corporations where the total

number of shareholders cannot exceed 100,
• only individuals can be shareholders and should have only one class
of stock.
• S- corporations are entities where the income flows through to its
shareholders from Sch K-1 similar to Partnership.
• 1120 S is the form prepared to derive the taxable income and filed
with the IRS.
 S Corporations are pass-through entities to
shareholders

The tax attributes of the entity generally pass through to

the shareholders. Tax treatment of these attributes is
generally determined at the shareholder level.

Certain tax attributes (e.g., investment credit recapture or

last-in, first-out (LIFO) recapture), built-in gains, and
excess passive income, however, are taxed at the entity
level, and the effect of that taxation passes through for
consideration again at the shareholder level.
 Limited Liability Company (LLC)

• Newer type of business entity , that is popular with small business

owners. But some state are having some restrictions.
• Similar to corporation but with lot of flexibility with fewer requirements.
• LLC , - own legal entity that separates from you personal assets.
Affiliated group

Consolidated filing by an affiliated group

1.File one Form 1120 with supporting schedules and attachments
2.Only taxable & domestic corporation entities are included

Who can be part of an affiliate group

1.Parent entity holds 80% of the stock of any subsidiary
2.Atleast 80% of the stock of all other subsidiaries is owned within the
group
Affiliated group
Parent entity holds 80% of the stock of any subsidiary
Atleast 80% of the stock of all other subsidiaries is owned within the group
Summary of Business Entities
Business Entity Owner's Taxation
Liability
Sole proprietorship Unlimited At sole owner level

Corporations ( c- Corporation) Limited At corporate level

(Impacted with Double
taxation)
Corporations (S –Corporations) Limited Flow through taxation on
a per-day and per share
basis to its shareholders.
Partnership General Flow through to partners.
Partners-
unlimited
Limited Partners-
Limited
Limited Liability Default is flow through to
Company(LLC) Limited member. However, may
elect to be treated as a
different type of entity.
• Non- Business entities
• These include the Estates and Trusts. Taxable income is measured and
characterized on Form 1041.

• Tax Exempt Organizations:

• Sec 501 (a) exempts certain organizations from federal income tax. If
any organization that is formed exclusively for religious, charitable,
scientific, educational or literary purposes they are exempt
organizations. Form 990 is prepared and filed with the IRS.
• Employer Identification Number
• An employer identification number (EIN) is the business/entity’s
equivalent of a taxpayer identification number (TIN)
• Accounting Methods
An accounting is a set of rules used to determine the tax year in
which an item is deductible in computing taxable income. The cash
method and accrual method are the most common.
Change in accounting method requires consent of the IRS. The
taxpayer should file Form 3115 to request for such changes.
Types of accounting methods accepted to compute
taxable income?

• Tax payer must consistently use the accounting

method every year to compute taxable income and It
must correctly reflect taxable income.
• Taxpayer should follow the process prescribed by
Internal revenue code to change the accounting
method.
• 1) Cash Method: Cash method tax payer recognizes income when
cash or cash equivalent is received. Expenses are recognized when
the actual payment happens.
• 2) Accrual method: Accrual method tax payer recognizes incomes and
expenses when they are accrued i.e when the incomes or expenses
are earned or incurred irrespective of the fact when actual cash is
received or paid.
• 3) Any other methods permitted by IRC.
Exceptions:
• C Corporations are prohibited from using cash method of accounting
except in below cases
a) Gross receipts are less than or equal to $5M
b) Qualified personal service corporations
c) Corporations doing farming business

Note: For tax years beginning after Dec. 31,2017 under the gross
receipt test, taxpayers with annual average gross receipts that do not
exceed $ 25 million for the three prior tax years are allowed to use
the cash method
Accounting Periods Tax Year

The tax year may be either a calendar or fiscal year or the period for
which a return is prepared, if the return is prepared for period of less
than 12 months (a short - period tax year)

• A calendar year is a period of 12 months ending on

December 31.
• A fiscal year is a period of 12 months ending on the last day
of any month other than December,
• 52 or 53-week tax year
Computation of Taxable Income

• Gross income- Allowable deductions= taxable income.

• As a general rule we assume book = tax.
• Large corporations use the overall accrual method of accounting for
both book and tax purposes.
• Most transactions are accounted for in the same way on the income
statement and on tax return.
Review of the formula for computing corporate taxable income

Corporate taxable income is based on this formula

Gross income (Sec 61)

(Allowable deductions) (Sec 161 & 162)
Taxable income *
* Form 1120, page 1, line 30

Note - Recognition of items of gross income and deductions depends on corporation’s method of accounting
for tax purposes.

Only two entities pay federal tax on net income derived from business activities: individuals and C
corporations. The focus is on C corporations and the preparation of Form 1120, the corporate income tax
return.
 Differences in book income for financial statement purposes and
taxable income reported on a tax return

Book Income is Pre-tax financial Income. Income is computed based on the US

GAAP (Generally Accepted Accounting Principles) for financial statement purpose.

Taxable Income is computed based on the federal tax law on a tax return on Form
1120 and is reported to the Internal Revenue Services (IRS).

Note - Flow of information to Form 1120 to compute taxable income is derived

primarily from the corporation’s financial books and records.

Continue……
Large corporations use the overall accrual method of accounting for
both book and tax purposes.

As a result ,
o Transactions that generate revenue for financial statement purposes usually
generate an identical amount of gross income for tax purposes.

o Transactions that generate an expense for financial statement purposes

usually generate an identical deduction for tax purposes.

For certain transactions, federal tax law requires a method of accounting that
differs from the GAAP method used for financial statement purposes.

o Book revenue doesn’t equal the gross income recognized on the tax return.
o Book expense doesn’t equal the deduction recognized on the tax return.
Book-tax differences are classified in two ways
1. Unfavorable or favorable
2. Permanent or temporary

The reconciliation of book income to taxable income are reported on Schedules M-1 or M-3 of the corporate income tax return.

FRAMEWORK B2T - 'BOOK INCOME TO TAXABLE INCOME'

Sch M-1\M-3
G Book
Fav\Unfav Perm\Temp
Tax
I
A
R
A Revenue ≠ Gross Receipts

P Expenses ≠
Allowable
Expenses
C
Book Income Taxable Income

Identify TRANSACTONS that are tax sensitive

 Unfavorable or favorable differences

Unfavorable differences increase taxable income over book income

Favorable differences decrease taxable income from book income

Book income + Unfavorable differences- (Favorable differences) =Taxable income

• Favorable adjustment decreases(-) the taxable income
• ( book value of expenses<IRC value of expenses-favourable)

• Unfavorable adjustment increases(+) the taxable income.

• ( book value of expenses>IRC value of expenses-unfavourable)
 Permanent differences & Temporary differences

Permanent differences result from:

Events recognized for financial reporting purposes with no tax consequences
Events with tax consequences not recognized for financial reporting purposes
Permanent differences affect only one taxable year
Examples: Revenues excluded from gross income, Nondeductible expenses,
Deductions not based on corporate expense or loss.
 Temporary differences result from:

Revenue and expense items recognized in different years for book and tax
purposes
Difference between book basis and tax basis of assets
Difference in cost recovery method for book and tax

Temporary differences are timing differences that affect more than one
taxable year. Difference originates in one year and reverses in future years.
Types of Book – tax differences

1) Permanent differences
2) Temporary differences

Permanent differences are the book-tax difference that never reverse.

Below are a few
examples of permanent differences.
a) Meals and entertainment ( 50% only allowed )
b) Fines and penalties – never allowed
c) Municipal bond interest income – exempted income
Temporary differences or Timing differences

Temporary differences or timing differences arise because income or

expenses are recognized by GAAP and IRC during different periods.

Below example explains how a depreciation adjustment is just a timing

difference between books under GAAP and taxable income computed
under IRC
Examples:
• Net Gain / loss from Sales of business property
• Depreciation
• Bad Debt expense - Accrual Write-off –accepted by the tax
authorities
Depreciation

• Asset purchased for $1000

Depreciation
• Book - 5 Years Book Value of expenses > IRC - UF
• Tax - 3 years Book Value of expenses > IRC - F
Year1 Year2 Year3 Year4 Year5
Book 200 200 200 200 200 1000
Tax 333 333 334 1000
UF/(F) -133 (f) -133(f) -134 ( f) 200 ( uf) 200 ( uf) 0
 Permanent differences
Permanent differences result from events recognized for financial
reporting purposes with no tax consequence or events with tax
consequence not recognized for financial reporting purposes. Permanent
difference affect only one tax year and they do not get reversed over a
period of time.
 Temporary differences result
• On the contrary, temporary differences result from revenue and expense
that are recognized in different years for book and tax purposes. These
differences get reversed over a period of time. As such they affect more
than one taxable year.
 Types of accounting methods accepted to
compute taxable income?

• Tax payer must consistently use the accounting

method every year to compute taxable income and It
must correctly reflect taxable income.
• Taxpayer should follow the process prescribed by
Internal revenue code to change the accounting
method.
• 1) Cash Method: Cash method tax payer recognizes income when
cash or cash equivalent is received. Expenses are recognized when
the actual payment happens.
• 2) Accrual method: Accrual method tax payer recognizes incomes and
expenses when they are accrued i.e when the incomes or expenses
are earned or incurred irrespective of the fact when actual cash is
received or paid.
• 3) Any other methods permitted by IRC.
Exceptions:
• C Corporations are prohibited from using cash method of accounting
except in below cases
a) Gross receipts are less than or equal to $5M
b) Qualified personal service corporations
c) Corporations doing farming business

Note: For tax years beginning after Dec. 31,2017 under the gross
receipt test, taxpayers with annual average gross receipts that do not
exceed $ 25 million for the three prior tax years are allowed to use
the cash method
ANALYSING TRANSACTIONS THAT CAUSE BOOK TO TAX DIFFERENCES
Difference in book and taxable income

$1,546,610
Schedule M-1 and M-3 reconciliation (Refer to Blank Form 1120 and Schedule M-3)

Corporations must reconcile net income per books to taxable income on either
Schedule M-1 or Schedule M-3, Form 1120.
Note –
Corporations with total assets of less than $10 million may use the much simpler Schedule
M-1.
Corporations with total assets of $10 million or more must use the much more detailed Schedule M-3. However, corporations
with total assets of $10 million or more but less than $50 million have the option of filing only Part I of Schedule M-3 and filing
Schedule M-1, rather than completing Parts II and III of Schedule M-3.

Continue….
 Schedule M-1 reconciliation
Schedule M-1 begins on line 1 with book income for the corporation (or
corporations) included in the Form 1120 (or consolidated Form 1120).
Book/tax differences are aggregated into a few broad categories.

Unfavorable adjustments (additions) are aggregated on the left, while

favorable adjustments (subtractions) are aggregated on the right.

The final line 10 in the reconciliation equals taxable income before any NOL
deduction or dividends-received deduction (line 28, page 1, Form 1120).
 Schedule M-1 reconciliation

Schedule M-1 reconciliation

Schedule M-1 begins on line 1 with book income for the corporation (or
corporations) included in the Form 1120 (or consolidated Form 1120).

Book/tax differences are aggregated into a few broad categories.

Unfavorable adjustments (additions) are aggregated on the left, while

favorable adjustments (subtractions) are aggregated on the right.

The final line 10 in the reconciliation equals taxable income before any
NOL deduction or dividends-received deduction (line 28, page 1, Form
1120).
Schedule M-3 reconciliation.

Schedule M-3 begins by reconciling worldwide consolidated financial statement net

income (line 4a) to the book income of corporations included in the Form 1120 (line
11). A consolidated group for federal tax purposes doesn’t include non-US
subsidiaries or less-than-80% controlled domestic subsidiaries.

The starting point is line 4 of Schedule M-3 , page 1 is the worldwide consolidated
income for financial statement purposes as reported on the Form 10-K or other
audited financial statements (if no Form 10-K is filed).
 Schedule M-3 reconciliation.

The main purpose of lines 5-10 of Schedule M-3, page 1 is to

provide a reconciliation between income as reflected in the
worldwide financial statements and book income of entities
included in the consolidated tax return (e.g. by eliminating book
income (loss) of most. foreign entities or domestic subsidiaries
owned >50% but < 80%).
 Key Points of Schedule M-3

 Schedule M-3 requires book income to be disaggregated into approximately 60

categories of income, loss, expense, and deduction items in column (a) of Parts II
and III. The book amount for each category must be reported even if there is no
book-tax difference for the category.

 Schedule M-3 does require distinguishing between those book/tax differences

which are temporary and those which are permanent. Any book-tax difference
for a category is reported on column (b) Temporary Difference or column (c)
Permanent Difference.
 Key Points of Schedule M-3

 The amount of each category reported on the tax return is

reported in column (d)

 Part II, line 30 Reconciliation totals reconciles book income in

column (a) with taxable income in column (d).

 The reconciliation between book and tax Income items are

reported on page 2 of Schedule M-3 and reconciliation between
book and tax expense items are reflected on page 3 of the M-3.

 Book deduction which is blanked out for tax are current and
deferred federal income tax or state deferred income taxes since
• Book Tax
• Revenues Gross Income
• (Expenses) (Deductions)
• --------------- -----------------
• Book Income Taxable income
Analyse income
Gross income defined
• IRC Section 61(a): “Gross income means all income from whatever
source derived”
• Treas. Reg. §1.61-1(a): “Gross income means all income from
whatever source derived unless excluded by law. Gross income
includes income realized in any form, whether in money, property, or
services”
• Rule of thumb: All income is taxable unless a specific statutory
authority permits exclusion
Business Income:

Gross Income from a business that sells products or commodities.

• Gross Sales ( receipts)
(-) cost of goods sold
• (+)Other gross income
• Gross Income from the Business
Business Income:

• Compensation for services, including fees, commissions, fringe

benefits, and similar items;
• Gross income derived from business;
• Gains derived from dealings in property;
• Interest;
• Rents;
• Royalties;
• Dividends;
• Alimony and separate maintenance payments
• Annuities
• Income from life insurance and endowment contracts;
• Pensions
• Income from discharge of indebtedness;
• Distributive share of partnership gross income
• Income in respect of a decedent; and
• Income from an interest in an estate or trust
Common exclusions from gross income
• Qualified income excluded from regular taxable income
• Interest income on state and local obligations
• Death benefits from company-owned life insurance
• Increase in cash surrender value of company-owned life insurance
• Book treatment
• GAAP does not differentiate between taxable and tax-exempt income
• Schedule M
• Favorable Schedule M adjustment = 100% of book income
Timing of income recognition
• GAAP rule – Income is realized when the earnings process is
complete, regardless of when payment is received
• Prepaid income is recorded as a liability
• Tax rule – Income is recognized when all events have occurred that fix
the taxpayer’s right to receive the income
• Right to receive income is fixed when the earnings process is complete or
when payment is received, whichever occurs first
General rule: Prepaid income ( received in advance) is recognized in the year
received
Schedule M
• Unfavorable Schedule M = prepayments received recorded as
unearned revenue not recognized for book purposes but recognized
as income for tax purposes
• Favorable Schedule M = unearned revenue reported as book income
but not recognized for tax purposes
• Changes between BOY and EOY balances in unearned revenue
accounts may indicate Schedule M differences in book-tax income
 Unearned revenue general rule example
Marvin Inc. received a $25,200 prepayment of rent from a tenant for the
six-month period beginning on 1 November 20Y1. For 20Y1 book
purposes, Marvin recorded $8,400 rent income and $16,800 unearned
revenue (liability account).

How much rental income does Marvin include for tax purposes in 20Y1
and 20Y2 and what are the Schedule M differences in both years?
Unearned revenue general rule example (cont.)

• For 20Y1 tax purposes, Marvin must recognize $25,200 rent

income
• $16,800 unfavorable Schedule M in year of receipt
• For 20Y2 book purposes, Marvin recorded $16,800 rent
income for the remaining 4 months of the 20Y1 prepayment
• For 20Y2 tax purposes, Marvin recognized no additional rent
income from the prepayment
• $16,800 favorable Schedule M in year of following receipt
Unearned revenue: Exceptions
Advance payments for inventory can be deferred until year in
which payment is reported as income for financial statement
purposes
• No book-tax difference
Unearned revenue: Exceptions
Advance payment for inventory example
In December, 20Y1, Link Company received a $15,000 advance
payment for inventory. The goods were shipped to the customer in
January, 20Y2
• In which tax year will Link record income from this advance payment
for book purposes?
• In which tax year will Link recognize income from this advance
payment for tax purposes?
• What are the amounts of any 20Y1 and 20Y2 book-tax differences
related to this transaction?
Unearned revenue one-year deferral example
PC, a personal services firm, received a $24,000 advance payment in
November 20Y1 for services to be performed over a two-year period
beginning in December 20Y1
• In which tax year(s) will PC record income from this advance
payment for book purposes?
• In which tax year(s) will PC recognize income from this advance
payment for tax purposes?
• What are the amounts of any 20Y1, 20Y2, and 20Y3 book-tax
differences related to this transaction?
Domestic Production Activities Deduction:
• This deduction is applicable only for manufacturing industries.
Domestic production activities deduction is an exclusion from tax
liability of a portion of the earnings from qualified activities.
• Sec 199 provides a
Step1 : special deduction equal to 9% of the lesser of ,
i) qualified production activities income
or
ii) taxable income before DPAD.
Continued…..
 Step 2:but this deduction cannot exceed 50% of the total
compensation paid to the US workforce.
• Example:
• Best Corporation produces bolts and nuts in the US. Qualified
production activities income = $2,450. Taxable income before DPAD=
$3,910. Compensation paid to the US workers = $1,800. Calculate
Best Corporation’s DPAD
• Step 1 = 2450X9%= $221
• Less: Step 2 = 1800X50%=$900
• DPAD= $ 221
• Note: DPAD has been repealed by the Tax Cuts and Jobs Act of 2017
(TCJA), so that no deduction is allowed for tax years beginning after
2017. ... The domestic production activities deduction (DPAD), for
various trade or business activities conducted in the U.S., has been
repealed for tax years beginning in 2018 or later
Bad Debts Recovery:

• The Recovery of the amount previously deducted as a bad debts is

included in gross income to the extent that the prior deduction
reduced taxes

• Eg Bad debts - 2007- $2000- Accepts – IRS

• Recovery of bad debts 2010-$1000- to be taxed
• If IRS rejects the claim in 2007 ?
• Recovery of bad debts 2010-$1000- not to be taxed
Prepaid Income:

• Generally, amounts that are received in advance for future services

are required to be included in the year of receipt .
However , accrual basis taxpayers can elect to defer recognition until
the time of performance , up to the year after the payment date.
Net operating Loss (NOL)

An NOL is any excess of deductions over gross income. A corporations

NOL is carried back 2 years and forward 20 years.

• New Law: For NOL’s arising in tax years ending after Dec. 31, 2017,
the two-year carry back is repealed.

• For losses arising in tax years beginning after Dec. 31, 2017, the NOL
deduction is limited to 80% of taxable income. NOL’s can be carried
forward indefinitely
CARES Act
• The CARES Act provides that NOLs incurred in 2018, 2019, and 2020
may be carried back to offset taxable income earned during the five-
year period prior to the year in which the NOL was incurred.
Net operating Loss (NOL)
• Sum:Corporation A incurred a net operating loss of $96,000 in 2016
and carried it back to 2014. In 2014 corporation A had gross income
of $470,000 and business expenses of $390,000,including charitable
contribution of $1,000. A net operating loss of $70,000 from 2015
had also been carried back to 2014.How much of Corporation A's
2016 net operating loss can be deducted against 2014 income?
Capital Losses corporation’s capital losses

SUM: For the calendar year, White Corporation had operating income
of $80,000, exclusive of the following capital gains and losses:
Long term capital gain $14,000
Short term capital gain $6,000
Long-term capital loss$(2,000)
Short term capital loss$ (8,000)
Calculate the taxable income
Dividends Received Deduction (DRD)
Dividends Received Deduction (DRD) from domestic taxable
corporations is allowed. However all dividends constitute gross
Income.
• Less than 20% ownership is 70% of dividends is deductible
• 20% or more than 20% but less than 80% ownership is 80% of dividends is
deductible
• 80% or More than 80% ownership & affiliated is 100% of dividends is
deductible
• To be eligible for the DRD, a corporation must hold the stock at least
for 45 days during the 90 day period that begins 45 days before the
dividends are paid.
• New Law: For tax years beginning after Dec. 31, 2017, the 70% DRD is
reduced to 50% and 80% DRD is reduced to 65%.
Disqualified Dividends
• A deduction is not allowed for dividends received from the following:
-
• Mutual savings banks (like Interest),
• Real estate investment trusts(REiT)
• Domestic international sales corporations Public utilities on preferred
stock and
• A corporation exempt for tax during the distribution year.
Sum: Brown corporation reported gross income from operations of $
100,000 and
operating expenses of $150,000. Brown also received dividend
income of $90,000 from a domestic corporation in which brown is a
20% shareholder. What is the amount of Brown Corporation's net
operating loss?
THANK YOU

Dr C Sivashanmugam
Department of Management Studies (PG)
sivashanmugam@pes.edu
+91 80 2672 1983 Extn :317