Question

Foreign Tax Credit Limitation. Tucson, a U.S. corporation organized in Year 1, reports
the following items for a three-year period.
Year 1 Year 2 Year 3
Foreign tax accrual $ 70,000 $ 120,000 $ 180,000
Foreign source taxable income 400,000 300,000 500,000
Worldwide taxable income 1,000,000 1,000,000 1,000,000
The foreign source and worldwide taxable income items are determined under
U.S. law.
a. What is Tucson’s foreign tax credit limitation for each of the three years (assume a
21% U.S. corporate tax rate and that income from all foreign activities fall into a single
basket)?
b. How are Tucson’s excess foreign tax credits (if any) treated? Do any carryovers remain
after Year 3?
c. How would your answers to Parts a and b change if the IRS determines that $100,000
of expenses allocated to U.S.-source income should have been allocated to foreignsource
income?
d. What measures should Tucson consider if it expects a potential current excess foreign
tax credit position to persist in the long-run?

Answer 1

Refer the below images for the above asked questions in a detailed way of explanation.
Solution:- The foreign tax credit a) is $ 70,000 in year ! $ 63000 $105000 in in year 2 year 3. Compotation of foragn tap Credit timitations as fdlows : World wide Taxable inome $ 1000 000 Times: 0.s Tax yate Gress us tax liaktty for each of years 1 thyough 3 $210000 year : Fore:gn tax cyedit is $70,000, which is lesser of the $400000 = $ 84000 CFIC limitation) X f 210 000 $ 1 000 000 Cor) Foxeign tax accrual =$ 70000 Foreign tax credet is year 2 $63 000, which is the lesser of $ 300 000 $63000 (FTC timitatfon) X $21000 $1000000 (OY) Foreign tax accyval =$120000 Foreign tax credit is $105000 which is the year 3 : lesser of X $ 210000 = $. 105000 1000 000 (Fic timitation) (or) Foreign tar accrual = 180 000 Note point 0 #ere FTC dimitation means Foreign Tar Credit" timitation. income :

b) The exess forergn tay [ie $120000 -463000] credit from year 2 of $57000 back Carvies to year i (The year the Com pany Stayted business). The Carry back y ear i because exceé ded to etiminates all the $ 14000 year foreign tax year (redit amount Excess the credit timitation the tar accrual carry ba ck by $14000 ie, $ 84000 -$ 70000 and the was $ 57000 · The $ 4360o ie$ 5700 - ta xes from the first $ 14000] of excess foreign over beyond year 3 to Carry over credit - gear 2 Carries ten-year within the year period in which is an there excess $75000 [e $ 180000 -$105000] frcom Same appties excess foreign tares The to the of year 3. The foreign tar Credit is $ 63000 in year 1 $ 42000 in y ear 2 84000 in year 3 parts "a" and 'b" woold change as follows (assoming cla med in tares): deductions the allowed not are to be calcolating the foveign jurisdiction's

year!: Foseign tax Credit is $63000, which is the lesser of $ 300 000 * $ 21000o = $ 63000 $1000 000 CFTC limitation) (OY) =$ 70,000 Foreign tax accroal Note point:→ for each year, the nomeratoy (foreiqn Source taxable income) is reduced by $100000 from what it was in part (a), Taka ble income) remains de nominator (worldwide but the Constant- Foreign tax credit is $42000 lesser of the which is $ 200 00 = $ 42000 (FTC limitation) Cor) Foreign tax accrual = $ 12000 year 3: Foreign tax credrtis lesser of 84000, which is the 40000 *$210000 = $ 84000 (ffc tirotika tion) $ 1 Doc o00 (or) Foreign tax aCerual $ 1 80000

excess foreign texes to the first ending The 7000 ie $ Fo000 -4 63000] of from year Carry over beyond years a &3 perrod Credit year within ten-year carryover the year ", in cwhich there excess The Same applies to excess foxeign $ 78000 Eie$ t20000 -$ 42000 the of taxes from year 2 for period ending year 12. And excess forergn ten -year carry over period ending year 13° ten -y eav the carry over Lire 180000 -$84000) for the $ 96000 tares from year of : ToTal excess foregn tax [e, 4 7000 + $ 7800 + $ 96000] remain Cary overs of$181000 after year 3. TUCkSon torporation Should Consider Shifting part forergn jorisdiction (or) all its opevations to another having lower tar Yates . By earning income in two jovisdictions, TUCKSON calcolate woold the forergn t ax average credit using the tar Yates of the in two Countyres - the Tuckson might attempt to negotiate permanent of the a temporary cor) forugn gove- Corrently operating tax reduction rate the with Country in would reduce excess foreign tax which that etiminate COY) the CUrrent Credit Situation.