HG You are the controller for XYZ Company, a publicly traded corporation. You ha
ID: 2582981 • Letter: H
Question
HG You are the controller for XYZ Company, a publicly traded corporation. You have just prepared the corporation's income tax return, and the The members of the board of directors, none of whom accounting Required: Prepare a one page memorandum explaining the significance of the following deductions return shows an overpayment of $373,280. have an accounting or tax background, have some specific questions about certain deductions that the corporation claimed on its retun 1) The Dividends Received Deduction (Form 1120, Line 29b) 2) The Domestic Production Activities Deduction (Form 11.20, Line 25) The Net Operating Loss Deduction(Form 1120, Line 29) Specifications: Assignment should be an APA paper, double spaced, 12font, 1 inch margin (top, bottom, left and right), and at least three (3) sources. MacBook Air 3 5 6 8 0Explanation / Answer
The Dividends Received Deduction, or DRD, is a tax deduction that C corporations receive on the dividends distributed to them by other companies whose stock they own.
The DRD is designed to soften the blow of triple taxation on corporate dividends. Triple taxation occurs because the company paying the dividend does so with after-tax money. The C corporation receiving the dividend is then taxed on the dividend. Finally, if the receiving C corporation pays out the dividend to its shareholders, the shareholders are taxed yet again.
There are a few limitations to the DRD:
The Domestic Production Activities Tax Deduction is intended to provide tax relief for businesses that produce goods in the United States rather than producing it overseas. The deduction went into effect in 2005 and applies to both small and large businesses.The tax deduction is often associated with oil-related businesses: the form itself has two columns, one of which is devoted to "oil-related activities." However, the deduction can apply to almost any business that manufactures, grows, extracts, produces, develops or improves goods primarily in the United States.
Tax deduction amounts and limitations
The maximum credit you can claim under the domestic production activities tax deduction is 9% of the income you earn from the business. Since the intent of the deduction is to increase production and employment in the United States, your business can only qualify if it has employees.Additionally, the deduction carries two significant limitations: you can only deduct up to half the amount you pay to your workers engaged in domestic production and your deduction cannot exceed your corporation's taxable income
If you operate a sole proprietorship, S corporation, partnership or LLC, the deduction is limited to your adjusted gross income.
Qualifying domestic production activities
The term "domestic production activity" cuts across a broad swath of businesses. The IRS has determined that businesses qualifying for the deduction must undertake work in one of the following categories:
Construction performed in the United States.
Electricity, potable water or natural gas produced in the United States.
Films and videos produced at least 50% in the United States.
Architectural or engineering services performed in the United States for domestic construction projects.
The disposition of tangible personal property, sound recordings or computer software created or developed, in whole or in part, in the United States.
Certain exceptions apply. For example, rental income doesn't qualify under the construction category, and sexually explicit films don't qualify under the film production deduction. However, "tangible personal property" is an extremely broad category, and many businesses, from magazines and newspapers to home-based craft stores may qualify for the deduction.
A net operating loss (NOL) is a loss taken in a period where a company's allowable tax deductions are greater than its taxable income. When more expenses than revenues are incurred during the period, the net operating loss for the company can generally be used to recover past tax payments. The reasoning behind this is that corporations deserve some form of tax relief when they lose money, so they may apply the net operating loss to future income tax payments, reducing the need to make payments in future periods.
An NOL may be considered a valuable asset because it can lower a company’s amount of taxable income. For this reason, the Internal Revenue Service (IRS) has a restriction on using an acquired company simply for its NOL’s tax benefits. Section 382 of the Internal Revenue Code states that if a company with a NOL has at least a 50% ownership change, the acquiring company may use only that part of the NOL in each concurrent year that is based on the long-term tax-exempt bond rate multiplied by the stock of the acquired company. However, purchasing a business with a substantial NOL may mean an increased amount of money going to the acquired company’s shareholders than if the business possessed a smaller NOL.
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