Rules:
A net operating loss (NOL) for corporations is the excess of deductions over
gross income; however, the dividends received deduction is allowed to be
deducted before calculating the NOL.
The dividends received deduction (DRD) for entities that are controlled 0% to
<20% (which is how a Fortune 500 corporation would be controlled) is the
LESSER of 70% of dividends received or 70% of taxable income computed without
regard to the DRD, and NOL deduction, or any capital loss carryback (but this
does not apply in the case when deducting the full DRD results in an
NOL).
Choice "c" is correct. Applying the rules above, Brown's net operating loss
is calculated as follows:
Gross income before dividends | $ 900,000 |
|
Add: Dividends received | 100,000 |
|
Less: Deductions (excluding DRD) | (1,100,000) |
|
Less: DRD | (70,000) | [$100,000 × 70%] |
NOL | $ 170,000 |
|
Choice "a" is incorrect. The dividends received deduction ($70,000 in this
case) is allowed to be deducted before calculating the NOL [$900,000 + $100,000
− $1,100,000 = ($100,000)].
Choice "b" is incorrect. The DRD is 70% of the dividends received ($70,000),
not 30% (or, $30,000) [$900,000 + $100,000 − $1,100,000 − $30,000 =
($130,000)].
Choice "d" is incorrect. The DRD for ownership of a Fortune 500 company is
70% of the dividends received, not 100% [$900,000 + $100,000 − $1,100,000 −
$100,000 = ($200,000)].
