In: Accounting
Dark, Inc., a U.S. corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S. tax return along with $400,000 of taxable income from its U.S. operations. Dark paid $30,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S. tax rate of 21%, what is Dark's U.S. tax liability after any allowable foreign tax credits?
a.$75,000
b.$21,000
c.$84,000
d.$105,000
Correct answer is option c i.e. $84,000.
Explanation: Dunkel's income is $100,000 and the U.S. operations income is $400,000. Accordingly, the total U.S. taxable income is $500,000. The U.S. tax on this amount is $105,000 ($500,000×21%). The German branch income is all general basket income. The FTC( foreign tax credit) limit in this basket is $21,000. Because the actual foreign income taxes are $30,000, Dark's FTC is limited to $21,000.
Accordingly, Dark's net U.S. tax liability is $84,000($105,000-$21,000).