Tippecanoe Corporation has the following income and expense items during the current year:
$\begin{array}{lr}
\text { Net income from operations } &\$ 60,000 \
\text { Dividend income from 10 \% owned corporation } &180,000
\end{array}$
What is Tippecanoe 's dividends-received deduction?
A)$ 42,000
B)$126,000
C)$144,000
D)$168,000
E)$192,000

Question

Tippecanoe Corporation has the following income and expense items during the current year:
$\begin{array}{lr}
 \text { Net income from operations } &\$ 60,000 \
 \text { Dividend income from 10 \% owned corporation } &180,000
\end{array}$
What is Tippecanoe 's dividends-received deduction?
A)$ 42,000
B)$126,000
C)$144,000
D)$168,000
E)$192,000

Quizplus · Accepted Answer

The dividends-received deduction is calculated as follows: 
- If Tippecanoe owns 10% or more of the corporation paying the dividends, then the deduction is 50% of the dividend income. In this case, 50% x $180,000 = $90,000. 
- However, the deduction cannot exceed 50% of Tippecanoe's taxable income before the deduction. Since Tippecanoe's net income from operations is $60,000, its taxable income before the deduction is also $60,000. Therefore, the maximum deduction is $30,000 (50% of $60,000). 
Since $30,000 is not one of the answer choices, the closest choice is B, which is $126,000.