ABC Company owns 40 percent of JMT Company and 95 percent of DEM Company. JMT pays a $80,000 dividend to ABC and DEM pays a $40,000 dividend to ABC in the current year. Assuming that ABC has $1,000,000 of taxable income, calculate ABC's dividends received deduction for the current year.

Question

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ABC Company can take a dividends received deduction for the dividends received from JMT Company and DEM Company. The deduction is 50 percent of the dividend received for JMT Company since ABC owns between 20 percent and 80 percent, and it is 100 percent of the dividend received for DEM Company since ABC owns more than 80 percent.

Deduction for JMT Company = 0.5 x $80,000 = $40,000 
Deduction for DEM Company = $40,000

Total dividends received deduction = $40,000 + $40,000 = $80,000

Therefore, the taxable income after deduction is $1,000,000 - $80,000 = $920,000.

ABC Company can also exclude 70 percent of the dividends received from both JMT and DEM Companies as they are corporate shareholders holding the stock for more than 45 days.

Exclusion for JMT Company = 0.7 x $80,000 = $56,000 
Exclusion for DEM Company = 0.7 x $40,000 = $28,000

Total exclusion = $56,000 + $28,000 = $84,000

The dividends received deduction and exclusion together cannot exceed the amount of taxable income.

Therefore, ABC Company can deduct $80,000 and exclude $84,000, for a total of $164,000. However, since the taxable income is only $1,000,000, the maximum deduction is $1,000,000.

Therefore, the dividends received deduction for the current year is $104,000 ($80,000 + $24,000, which is the amount above the taxable income that cannot be applied this year).

The answer is B.

ABC Company Owns 40 Percent of JMT Company and 95