In 2019, LuxAir Inc. (LA) has book income of $160,000. Included in this figure is income generated from ownership in Jet Repair Corporation (JRC), of which LA owns 30 percent. JRC has $270,000 in earnings for the year and pays $32,000 in dividends to LA. Assuming accounting for the investment in JRC (income from JRC and the DRD) are its only book-tax differences, what is LA's tax liability for 2019?
What will be an ideal response?
$18,942, computed as follows:
| Description | Amounts | Explanation | |||
| (1) | Book income | $ | 160,000 | ||
| (2) | Ownership in Jet Repair Corp. | 30 | % | ||
| (3) | JRC's earnings | 270,000 | |||
| (4) | LuxAir's book income from JRC investment | 81,000 | (2) × (3). | ||
| (5) | Dividends received (included in taxable income) | 32,000 | |||
| (6) | Favorable book-tax difference due to dividends | (49,000 | ) | (5) - (4). | |
| (7) | Dividends received deduction percentage based on ownership | 65 | % | §243(c) | |
| (8) | DRD modified taxable income | 111,000 | (1) + (6). | ||
| (9) | Dividends received deduction before limitation | 20,800 | (5) × (7). | ||
| (10) | Dividends received deduction limitation | 72,150 | (7) × (8). | ||
| (11) | Dividends received deduction | 20,800 | Lesser of (9) or (10). | ||
| Taxable income | 90,200 | (8) - (11). | |||
| Tax liability | $ | 18,942 | $90,200 × 21% | ||
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