Sonic Corporation has a 21% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:

Question

Quizplus · Accepted Answer

Sonic Corporation's effective tax rate on the Roller dividend is 10.5% because, under the U.S. tax code, corporations that receive dividends from other U.S. corporations are entitled to a dividends-received deduction. Since Sonic owns less than 20% of Roller, Inc., it can deduct 50% of the dividends received, effectively taxing the remaining 50% at its marginal tax rate of 21%. Thus, 50% of the dividends are taxed at 21%, leading to an effective tax rate of 10.5% on the total dividends received.

Sonic Corporation Has a 21% Marginal Tax Rate and Received