Question

Fatigue, a domestic corporation, sells energy bars and has $6,000,000 of domestic sales and $2,000,000 of foreign sales and taxable income of $600,000 from the domestic sales and $200,000 from the foreign sales. Fatigue's adjusted basis in its depreciable business assets is $500,000. Fatigue pays foreign taxes of $21,000 on its foreign sales. Title to the foreign inventory passes outside the US. What are the tax consequences to Fatigue?

Answer 1

Being a domestic company Fatigue is liable to pay income tax on the amount of income earned by the company from both its domestic as well as foreign sales. As per the US Federal Corporate income tax rates the companies operating in the country now requires to pay tax at the rate of 21% from earlier higher tax rate of 35%. For domestic companies the income on domestic sales as well as foreign sales are liable to be taxed in the country.

Accordingly, Fatigue, the domestic company, is under an obligation to pay tax on its domestic income of $600,000 as well as foreign income of $200,000. However, in case of double taxation agreement between the US and the foreign country in which the company has earned its foreign income of $200,000 from sale of $2,000,000 then the company will be allowed to set off the foreign tax of $21,000 that it has paid for its foreign income in the foreign country.

Thus, taking into consideration the above it is clear that Fatigue Corporation is under an obligation to pay taxes on both its domestic and foreign income.