Waco Leather Inc., a U.S. corporation, reported total taxable income of $5.1 mil
ID: 2437691 • Letter: W
Question
Waco Leather Inc., a U.S. corporation, reported total taxable income of $5.1 million. Taxable income included $2 million of foreign source taxable income from the company’s branch operations in Mexico. All of the branch income is general category income. Waco paid Mexican income taxes of $500,000 on its branch income.
Compute Waco’s allowable foreign tax credit. Assume a U.S. corporate tax rate of 34 percent. (Do not round intermediate computations. Enter your answers in dollars and not in millions of dollars.)
Explanation / Answer
Step 1: Computation of Creditable Foriegn Income tax paid = $500,000 [readly available]
Step 2: Compute the foreign income tax credit limitation
a. World wide tax income = $5,100,000
b. Pre-credit US tax [tax on world wide income using US rate rates]= $5,100,000 x 34% = $1,734,000
c. Taxable income from foriegn source = $2,000,000
d. Tax payable on the foriegn souce taxable income @US tax rate
= $2,000,000 x 34% or ($2,000,000 ÷ 5,100,000) x $1,734,000 = $680,000
Step 3: Foriegn tax credit equals the lower of the limitation amount computed under Step 2 or the amount of foreign tax paid computed under step 1.
Amount under step 1 = $500,000
Amount under step 2 = $680,000
Therefore, foreign tax credit = $500,000
.
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