ExpertMedium1 markMultiple Choice
CPA · Question 56 · Area 3: Entity Tax Compliance
A US Corporation pays $20,000 in foreign income taxes on $80,000 of foreign source income. The US corporate tax rate is 21%. The corporation's total taxable income is $200,000. What is the Foreign Tax Credit (FTC) limitation?
A US Corporation pays $20,000 in foreign income taxes on $80,000 of foreign source income. The US corporate tax rate is 21%. The corporation's total taxable income is $200,000. What is the Foreign Tax Credit (FTC) limitation?
Answer options:
A.
$20,000
B.
$16,800
C.
$42,000
D.
$0
How to approach this question
1. Calculate US Tax before credit: $200,000 * 21% = $42,000.<br/>2. Calculate Limitation Fraction: Foreign Source Income / Total Worldwide Income = $80,000 / $200,000 = 0.40.<br/>3. Calculate Limit: Total US Tax * Fraction = $42,000 * 0.40 = $16,800.<br/>4. Compare to Tax Paid ($20,000). Allowable credit is lesser ($16,800).
Full Answer
B.$16,800✓ Correct
B
FTC Limit = (Foreign Source Taxable Income / Worldwide Taxable Income) × U.S. Tax Liability.<br/>($80,000 / $200,000) × ($200,000 × 21%) = 0.4 × $42,000 = $16,800.
Common mistakes
Taking the full foreign tax paid as credit without checking the limit.
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