A C Corporation owns 80% of a foreign subsidiary. The subsidiary pays a dividend of $100,000 to the US parent. The subsidiary paid $20,000 in foreign taxes on the income. The US parent elects to take the 100% Dividends Received Deduction (DRD) under §245A. What is the US tax impact?

Answer options:

Income: $0; Foreign Tax Credit: $0

Income: $100,000; Foreign Tax Credit: $20,000

Income: $50,000; Foreign Tax Credit: $10,000

Income: $0; Foreign Tax Credit: $20,000

How to approach this question

Under TCJA, dividends from >10% owned foreign corps are 100% deductible (tax-free). Consequently, no Foreign Tax Credit is allowed for taxes paid on that income.

Full Answer

A.Income: $0; Foreign Tax Credit: $0✓ Correct

IRC §245A and §243. The US moves towards a territorial system. The dividend is fully offset by the DRD. No foreign tax credit or deduction is allowed for taxes associated with the deductible dividend.

Common mistakes

Claiming the FTC while taking the DRD (double dipping).

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