Question

Part 1

Information for Year 1, Year 2, and Year 3 for the Andean branch of Powell Corporation is presented in the following table. The corporate tax rate in the Andean Republic changes drastically year-to-year. The U.S. corporate tax rate each year is 21%.

	Year 1	Year 2	Year 3
Foreign source income	$75,000	$100,000	$100,000
Foreign (Andean) tax rate	15%	20%	22%
Foreign taxes paid
U.S. tax before FTC

1. For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States (fill in the table with your answer)? Show your work.
   1. $15,70, $21,000, and $21,000
   2. $11,250, $20,000, and $22,000
   3. $75,000, $100,000, and $100,000
   4. $11,250, $20,000, and $21,000
   5. $15,70, $21,000, and $22,000
      
2. For Year 2, what is the net U.S. tax liability? Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

3. For Year 3, what is the net U.S. tax liability?   Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

4. In Year 3, how much excess foreign tax credit can Powell carry back?
   Show your work.
   1. $22,000
   2. $0
   3. $1,000
   4. $2,000
   5. $21,000

Answer 1

Solution :-

1)

Particulars	Year 1	Year 2	Year 3
Foreign Source Income (A)	$75000	$100000	$100000
Foreign (Andean) Tax Rate (B)	15%	20%	22%
Foreign Taxes Paid C = (A*B)	$11250	$20000	$22000
U.S. Tax Before FTC D = (A*21%)	$15750	$21000	$21000
Foreign Tax Credit Allowed (C and D whichever is Less)	$11250	$20000	$21000

2) For Year 2, What is the net U.S. Tax Liability ?

Particulars	Amount($)
Foreign Tax Paid	20000
U.S. Tax Liability	21000
Net U.S. Tax Liability ($20000-$21000)	(1000)

In Year 2, Foreign Tax Paid $1000 Less than U.S. Tax Liability,

Therefore In Year 2 U.S. Tax Liability is $1000

3) For Year 3, What is the net U.S. Tax Liability ?

Particulars	Amount($)
Foreign Tax Paid	22000
U.S. Tax Liability	21000
Net U.S. Tax Liability ($22000-$21000)	1000

In Year 3, Foreign Tax Paid $1000 more than U.S. Tax Liability,

Therefore In Year 3 U.S. Tax Liability is $0

4) For Year 3, How much excess foreign tax credit can Powell Carry Back ?

Particulars	Amount($)
Foreign Tax Paid	22000
U.S. Tax Liability	21000
Excess Foreign Tax Credit Can Carry Back ($22000-$21000)	1000

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