A corp has domestic taxable income of $400,000 and foreign-source taxable income of $200,000. Their U.S. tax on worldwide income is $204,000. The corp paid foreign income taxes of $75,000. What is their foreign tax credit on their US income tax return?
To calculate the foreign tax credit on their US income tax return, you would need to follow these steps:
1. Determine the foreign tax credit limit: The foreign tax credit limit is calculated by multiplying the U.S. tax liability on the foreign-source income by the ratio of foreign-source taxable income to worldwide taxable income.
U.S. tax liability on foreign-source income = U.S. tax on worldwide income - U.S. tax on domestic taxable income
= $204,000 - U.S. tax on domestic taxable income
2. Calculate the U.S. tax on domestic taxable income: As given, the domestic taxable income is $400,000. However, to determine the U.S. tax on domestic taxable income, we need the tax rate that applies to this income. Let's assume a tax rate of 30%.
U.S. tax on domestic taxable income = Domestic taxable income * Tax rate
= $400,000 * 0.30
= $120,000
Therefore, the U.S. tax on domestic taxable income is $120,000.
3. Calculate the U.S. tax liability on the foreign-source income:
U.S. tax liability on foreign-source income = $204,000 - $120,000
= $84,000
4. Determine the foreign tax credit limit:
Foreign tax credit limit = U.S. tax liability on the foreign-source income * (Foreign-source taxable income / Worldwide taxable income)
= $84,000 * ($200,000 / ($400,000 + $200,000))
= $84,000 * (0.33333)
= $28,000
5. Calculate the allowable foreign tax credit:
Allowable foreign tax credit = Lesser of foreign taxes paid or foreign tax credit limit
= Min($75,000, $28,000)
= $28,000
Therefore, the foreign tax credit on their US income tax return would be $28,000.