Question

Raleigh Inc., a domestic corporation, has $40 million of worldwide taxable income. Worldwide income includes $10 million of income from foreign sources. Raleigh Inc. paid $5 million of qualified foreign taxes during the year. Assume the U.S. tax rate is 21 percent (Note: type answer my writing millions as opposed to the zeros, ex. 20 million instead of 20,000,000).

A. What is the amount Qualified foreign taxes paid?

B. What is the amount of U.S. Tax Liability (before foreign tax credits, based on worldwide income?

C. What is the ratio (percent) of foreign source income in total income (type as 10% instead of 10 percent)?

D. The credit is limited to the percent of foreign source income of the U.S. worldwide tax liability. Based on the U.S. tax liability and ratio of foreign income, what is the Foreign tax credit limitation?

Answer 1

a) For calculating the taxable qualified for paying the foreign taxes, the taxable income of the domestic corporation is systematically arranged below:

Income from foreign sources $10 million

Business income($40million-$10million) $30 million

Less: Foreign taxes ($5million)

= $35 million

b) US tax liability

US tax liability is determined by multiplying the income before deducting the foreign tax credit by the tax rate of IS

= $40million*21%

= $8.4 million

c) The ratio of foreign income in the total income is derived by dividing the portion of foreign income by the total worldwide income

= $10million/$40million

= 25%

d) The foreign tax credit limitation is determined by using the US tax liability by multiplying it with the ratio of the foreign tax credit

= $8.4 million*25%

= $2.1 million