Question

3-10. US source loss/foreign source income

In Year 1, DC has a $100 U.S.-source general limitation loss and has $100 of foreign-source general limitation income on which it pays $30 of foreign tax. In Year 2 DC has $100 of U.S.-source general limitation income and $100 of foreign-source general limitation income in Year 2. Assume the US tax rate is 35% for both years. What amount of foreign taxes can DC claim for Years 1 and 2?

Answer 1

	US Source income	Foreign source income
Year 1	($100)	$100
Overall domestic loss account	$100
Final taxable income	$0	$0
Tax on income	$0	$0
Year 2	$100	$100
Overall domestic loss account		$50
Final taxable income	$100	$150
Tax on income @ 35%	$35	$52.50
Total federal tax		$87.50
Foreign income tax credit		21.00
In year 1, as the taxable income is $0, due to offseting foreign source income against US source loss,
DC can not claim foreign tax credit as the limitation applied to it
Foreign tax credit = (foreign tax income/Worldwide tax income) x Precredit US tax
In year 2, the overall domestic loss account created in Year 1, will be recaptured as foreign source income
in the amount of lessor of:
ODL amount	$100
50% of taxpayers US source income ($100 x 50%)	$50
Thus $50 will be recaptured as foreign source income
Foreign tax credit =(150/250) x 35 = 21