Question

Elmo Inc. is a U.S. corporation with a branch office in foreign country Z. During the current year, Elmo had $431,000 of U.S. source income and $63,000 of foreign source income from Z, on which Elmo paid $29,400 of country Z income tax.

A. Calculate Elmo’s U.S. tax liability before foreign tax credit, maximum foreign tax credit allowable, and net U.S. tax liability after foreign tax credit.

B. If Elmo had paid only $10,710 of country Z income tax, calculate Elmo’s foreign tax credit allowable and net U.S. tax liability after foreign tax credit.

Answer 1

Solution:

Given that the following information about

Elmo Inc. is a U.S. corporation with a branch office in foreign country Z. During the current year, Elmo had $431,000 of U.S. source income and $63,000 of foreign source income from Z, on which Elmo paid $29,400 of country Z income tax.

a) Calculation of the Elmo's U.S Tax Liability:

U.S. Source income	$431,000
Foreign Source income	$63,000
Total income subject to U.S. tax	$494,000
U.S. tax before credits ($494,000 * 0.34)	$167,960
Credit limited to the lesser of ($63,000/494,000 * $167,960 = $21,420 Or $29,400)	($21,420)
Net U.S. Tax liability	$146,540

Therefore, the U.S Tax Liability is $146,540.

b) If Elmo had Paid only $3,000 of Country Z Income Tax, then Calculation of the U.S Tax Liability:

U.S. tax before credits ($494,000 * 0.34)	$167,960
Credit limited to the lesser of ($63,000/494,000 * $167,960 = $21,420 Or $10,710)	($10,710)
Net U.S. Tax liability	$157,250

Therefore, if Elmo had Paid only $10,710 of Country Z Income Tax, then the Net U.S Tax Liability is $157,250.