Foreign Tax Credit Limitation. During the current year, Jackson, a U.S. corporat

Question

Foreign Tax Credit Limitation. During the current year, Jackson, a U.S. corporation and accrual method taxpayer, engages in both U.S. and foreign business activities. All its over-seas activities are conducted by a branch in Country S. The results of Jackson’s current year operations are as follows:

U.S. source taxable income $2,000,000

Foreign source taxable income 1,500,000

Accrued Country S income taxes 600,000

a. What is the amount of Jackson’s foreign tax credit (assuming the corporate tax rate is 34% and income from all foreign activities fall into a single basket)?

b. Are any foreign tax credit carrybacks or carryovers available? If so, in what years can they be used?

Explanation / Answer

a) Amount taxable in US = Income from US + income from outside country

= 2000000+ 1500000 , =3500000

Total US tax Liability = 3500000 x Tax Rate ( 34%)

= 3500000 x 34 %, =1190000

Now Tax credit paid in outside country can be calculated as

US tax liability x ( Income from outside country / Total Income taxable in US)

= 1190000 x ( 1500000 / 3500000) , = 510000

So, amount of tax credit allowed will be limited to $ 510000

b) Yes amount paid in excess of 510000 as foreign tax is available as carry back and carryover

i.e 600000 - 510000 , =90000 is available and it can be carry overed for upto 10 tax years

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