ExpertMedium1 markMultiple Choice
CPA · Question 42 · Area II: Entity Tax Compliance
A U.S. Corporation has a foreign branch. The branch earns $100,000 of income and pays $20,000 in foreign taxes. The U.S. tax rate is 21%. What is the net U.S. tax liability on this income after the Foreign Tax Credit (FTC)?
A U.S. Corporation has a foreign branch. The branch earns $100,000 of income and pays $20,000 in foreign taxes. The U.S. tax rate is 21%. What is the net U.S. tax liability on this income after the Foreign Tax Credit (FTC)?
Answer options:
A.
$21,000
B.
$0
C.
$1,000
D.
$20,000
How to approach this question
1. Calculate U.S. Tax on foreign income ($21k). 2. Identify Foreign Tax Paid ($20k). 3. FTC is lesser of the two. 4. Net Tax = U.S. Tax - FTC.
Full Answer
C.$1,000✓ Correct
IRC §901. The U.S. taxes worldwide income. $100,000 * 21% = $21,000. The Foreign Tax Credit is allowed for taxes paid ($20,000), limited to the U.S. tax on that foreign income ($21,000). Net liability = $1,000.
Common mistakes
Assuming the income is exempt or that the credit is unlimited.
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