Question

Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent.

	Year 1		Year 2		Year 3
Foreign source income	$	75,000	$	100,000	$	100,000
Foreign taxes paid		8,250		15,000		22,000
U.S. tax before FTC		15,750		21,000		21,000

For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States?

Answer 1

Year 1

Foreign source income =$75,000

Foreign taxes paid =$8250

U.S. tax before FTC=$15,750

U.S. corporate tax rate in each year is 21 percent.

US Taxable income =$15750/21%=$75,000

Foreign tax credit limit= Pre-credit U.S. tax *(Foreign source income/US Taxable income)

                                      =$15,750 *($75,000/$75,000)=$15,750

Credit = lesser of creditable taxes ($8,250) or the limitation ($15,750)

     Credit allowed in year 1 = $8,250

Year 2

Foreign source income =$100,000

Foreign taxes paid =$15,000

U.S. tax before FTC=$21,000

U.S. corporate tax rate in each year is 21 percent.

US Taxable income =$21,000/21%=$100,000

Foreign tax credit limit= Pre-credit U.S. tax *(Foreign source income/US Taxable income)

                                      =$21,000 *($100,000/$100,000)=$21,000

Credit = lesser of creditable taxes ($15,000) or the limitation ($21,000)

     Credit allowed in year 2 = $15,000

Year 3

Foreign source income =$100,000

Foreign taxes paid =$22,000

U.S. tax before FTC=$21,000

U.S. corporate tax rate in each year is 21 percent.

US Taxable income =$21,000/21%=$100,000

Foreign tax credit limit= Pre-credit U.S. tax *(Foreign source income/US Taxable income)

                                      =$21,000 *($100,000/$100,000)=$21,000

Credit = lesser of creditable taxes ($22,000) or the limitation ($21,000)

     Credit allowed in year 3 = $21,000

US Co. can carry its excess credit ($22,000-$21000)=$1000 back one year or forward 10 years.