Question

Charlotte Inc., a domestic corporation, has $2.5 million of qualified foreign taxes paid during the year on $5 million of foreign income. Assume the U.S. tax rate is 21 percent. The foreign tax credit limitation is $1.75 million. The U.S. tax liability on worldwide income before the foreign tax credit is $4.2 million. After applying the appropriate foreign tax credit, Charlotte's tax liability is what?

Answer 1

Foreign tax credit will be computed as foreign taxes paid or U.S. tax liability on the foreign income, whichever is lower subject to the foreign tax credit limitation.

Foreign taxes paid = $2.5 million

U.S. Tax liability on the foreign Income = $5 million * 21% i.e. $1.05 million

Foreign Tax credit limitation = $1.75 million

Foreign tax credit available to Charlotte Inc. will be $1.05 million subject to maximum of $1.75 million.

Therefore, Foreign Tax credit available to Charlotte Inc. will be $1.05 million.

U.S. tax liability = Tax liability on world wide income - Foreign tax credit

= $4.2 million - $1.05 million

= $3.15 million