I have a quick question on the DRD. Let's say you have the two following examples:
Example 1
Taxable income before DRD, NOL, etc.: $900
Dividend Income from 75% owned company: $1,000
Example 2
Taxable income before DRD, NOL, etc.: $500
Dividend Income from 75% owned company: $1,000
How I understand the deduction is that you get the lesser of the DRD % or the Taxable Income limitation unless there is a current year NOL or you create a loss. In Example 1, the DRD deduction would be 80% of $1,000, or $800. The TI limitation would be $80% of $900, or $720. $720 is the lesser of the two so that would be your deduction.
In Example 2, the DRD would be $800 and the TI limitation would be $400. However, instead of taking the lesser of the two, we apply the $800 to the $500 of the net income, see that it creates the loss, and thus ignore the TI limitation and use the full $800.
I'm just confused at the whole process. In Example 1, we do one thing, and in Example 2, we do another. Should our entire approach to DRD just be this:
Step 1: Calculate the DRD
Step 2: Compare it to TI
Step 3: If the DRD creates a loss, use the full amount. If it doesn't, go to Step 4
Step 4: Calculate the TI limitation amount
Step 5: Use the lesser of the DRD or TI limitation as your deduction
It just seems a little convoluted. If you forget to apply the full DRD to the TI before you compare it to the TI limitation, and the full DRD creates a loss, your answer will be wrong.