Gianelli Company (a Domestic Company) has the following taxable income for 2018: U.S. source $1,400,000 Foreign...

Gianelli Company (a Domestic Company) has the following taxable income for 2018:

U.S. source $1,400,000

Foreign source 1,600,000

Gianelli pays U.S. tax at a 21% rate.

Of the foreign source income, $1,400,000 is from active business income (making and selling tires in France and Germany) and $200,000 is from dividends paid by Dutch, German, and French companies. Gianelli paid the following foreign taxes:

German and French income taxes : $600,000

Dutch, German, and French withholding taxes on the dividends : $10,000

Calculate the following:

The foreign tax credit Gianelli may use in 2018

The amount of U.S. tax Gianelli will pay after using the foreign tax credit.

Solutions

Expert Solution

USA Taxable Income = $1,400,000

Foreign source income = $1,600,000

Foreign taxes paid = $610,000 (600,000 + 10,000)

US tax rate = 21%

Worldwide taxable income = $3,000,000 (1,400,000 + 1,600,000)

Pre-credit US tax = $630,000 (3,000,000 * 21%)

Foreign source taxable income = $1,600,000

Limitation = Pre-credit US tax * Foreign source taxable income/Worldwide taxable income

= 630,000 * 1,600,000/3,000,000

= $336,000

Credit = lesser of creditable taxes ($610,000) or the limitation ($336,000)

= $336,000

Foreign tax credit = $336,000

Amount of US tax after credit = $294,000 (630,000 - 336,000)

ekkarill92 answered 2 years ago

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