Pursco is a domestic corporation that distributes scientific equipment worldwide

Question

Pursco is a domestic corporation that distributes scientific equipment worldwide. During the current year, Pursco had $100 million of sales, a gross profit of $40 million, and incurred $30 million of selling, general and administrative expenses (SG&A), for taxable income of $10 million. Purscos sales include $20 million of sales to foreign customers. The gross profit on these foreign sales was $10 million. Pursco transferred title abroad on all foreign sales, and therefore the entire $10 million is classified as foreign-source income. A time management survey was recently completed, and indicates that employees devote 90% of their time to the companys domestic operations and 10% to foreign operations. Compensation expenses account for $20 million of the $30 million of total SG&A expenses. Assume Purscos $10 million of taxable income is subject to U.S. tax at a 35% rate.

Compute Purscos foreign tax credit limitation under the following independent assumptions.

Pursco determines the amount of SG&A expenses allocable to foreign-source income using gross sales as an apportionment base.

Pursco determines the amount of SG&A expenses allocable to foreign-source income using gross profi t as an apportionment base.

Pursco determines the amount of SG&A expenses allocable to foreign-source income using time as an apportionment base for the compensation component of SG&A, and gross sales as an apportionment base for the all other SG&A expenses.

Explanation / Answer

1 Domestic Foreign in millions in millions apportionment of SG&A expenses 30*80/100 30*20/100 = 24 6 gross pft 40 10 less:SG&A 24 6 Taxable income 16 4 Tax credit 4*35% 1.4 2 Domestic Foreign in millions in millions apportionment of SG&A expenses 30*40/50 30*10/50 = 24 6 gross pft 40 10 less:SG&A 24 6 Taxable income 16 4 Tax credit 4*35% 1.4 3 Domestic Foreign in millions in millions apportionment of compensation = 20*90% 20*10% 18 2 apportionment of other SG&A expenses 10*40/50 10*10/50 = 8 2 gross pft 40 10 less:SG&A 26 4 Taxable income 14 6 Tax credit    6*35% 2.1

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