XYZ inc. distributes scientific equipment worldwide. During 2016, XYZ had $100 m
ID: 2419172 • Letter: X
Question
XYZ inc. distributes scientific equipment worldwide. During 2016, XYZ 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. XYZ's sales include $20 million of sales to foreign customers. The gross profit on these foreign sales was $10 million. XYZ transferred title abroad on all foreign sales. 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 company's domestic operations and 10% to foreign operations. Compensation expenses account for $20 million of the $30 million of total SG&A expenses. Assume XYZ's $10 million of taxable income is subject to US tax at a 35% rate. Compute XYZ's foreign tax credit limitation under the following independent assumptions.
a. XYZ determines the amount of SG&A expenses allocable to foreign-source income using gross sales as an apportionment base.
b. XYZ determines the amount of SG&A expenses allocable to foreign-source income using gross profit as an apportionment base.
c. XYZ 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 all other SG&A expenses.
Explanation / Answer
Domestic Foreign Total Amount (milion $) Sales 80 20 100 Gross Profit 30 10 40 SGA 30 Taxable Income 10 10 Time 90% 10% Foreign Tax Credit limitation (a) Gross sales as apportionment base Tax = Taxable Income * Tax Rate = 10 * 35% = 3.5 Million Domestic = 2.8 Million Foreign = 0.7 Million (b) Gross Profit as apportionment base Tax = Taxable Income * Tax Rate = 10 * 35% = 3.5 Million Domestic = 2.625 Million Foreign = 0.875 Million (c) Time as apportionment base Tax = Taxable Income * Tax Rate = 10 * 35% = 3.5 Million Domestic = 3.15 Million Foreign = 0.35 Million
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