Question

XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received?

Answer 1

Answer:

$25,500

Explanation:

Given:

Stocks owned by the XYZ corp = 18%

Dividends received = $250,000

Marginal tax rate = 34%

Now,

According to the rule of inter corporate dividend exclusion :

A corporation owning stock in another corporation, the 70% of their dividends received are not included in the taxation

thus,

Only 30% of the dividend income is subjected to tax

therefore,

30% of $250,000

or

Dividends subjected to tax = $75,000

hence,

tax liability on dividend income = 0.34 × $75,000

or

tax liability on dividend income = $25,500