Translation of foreign tax payments. Arnie, a U.S. citizen uses the calender yea

Question

Translation of foreign tax payments. Arnie, a U.S. citizen uses the calender year as his tax year and the cash method of accounting, operates a sole proprietorship in County Z. In year 1, he reports 500,000 doubles pretax profit. On june 1 of Year , he pays Country Z income taxes of 150,000 dubles for calender Year 1, Duble-U.S. dollar exchange rates various dates in Year 1 and Year 2 are as follows:

a. What is the U.S dollar amount of Arnie's foreign tax credit? In what year can Arnie claim the credit?

b. How would you answer to Part a change elected to accrue his foreign income taxes on December 31 of Year 1, and filed his Year 1 U.S. income tax return on April 15 of Year 2?

c, What adjustment to the credit calimed in Part b would Arnie have to make when he pays his Country Z taxes on June 1 of Year 2?

December 31, Year 1 14.00 dubles=$1 (U.S) Year 1 average 3.75 dubles= $1 (U.S) June 1, Year 2 4.25 dubles= $1 (U,S.)

Explanation / Answer

Answer:a 150,000 doubles/4.25 doubles per $1 U.S. = $35,294 foreign tax credit. The credit benefit is available in Year 2 if Arnie claims the foreign taxes as a credit in the year he pays the taxes.

Answer:b 150,000 doubles/3.75 doubles per $1 U.S. = $40,000 foreign tax credit that Arnie can claim in Year 1. This amount is reported on Arnie's Year 1 tax return.

Answer:c No adjustment is required because Arnie paid the taxes within two years after the close of the tax year to which the taxes relate.

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