Problem 24-55 (LO 24-4) [The following information applies to the questions disp

Question

Problem 24-55 (LO 24-4)

[The following information applies to the questions displayed below.]

Sombrero Corporation, a U.S. corporation, operates through a branch in Espania. Management projects that the company’s pretax income in the next taxable year will be $133,000, $108,000 from U.S. operations and $25,000 from the Espania branch. Espania taxes corporate income at a rate of 45 percent. The U.S. corporate tax rate is 35 percent. (Do not round intermediate calculations.)

a. If management’s projections are accurate, what will be Sombrero’s excess foreign tax credit in the next taxable year? Assume all of the income is general category income.

b. Management plans to establish a second branch in Italia. Italia taxes corporate income at a rate of 30 percent. What amount of income will the branch in Italia have to generate to eliminate the excess credit generated by the branch in Espania?

b. Management plans to establish a second branch in Italia. Italia taxes corporate income at a rate of 30 percent. What amount of income will the branch in Italia have to generate to eliminate the excess credit generated by the branch in Espania?

Explanation / Answer

(a) Excess Foreign tax credit Taxable income 108000 Tax rate' 35% Pre credit US tax 37800 Foreign tax ($25000*0.45) $11250 FTC Limitation $8750 (25000/108000 ) *37800 Excess FTC credit $2500 (b) Income Need to be generated in italia to eliminate the excess credit Excess credit $2500 Tax rate in Italia Branch 30% Tax rate in US 35% Difference 5% Income need to be earned in italia =$2500/5% =$50,000

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