INTERNATIONAL TAXATION USAco, a domestic corporation is the wholly owned U.S sub

Question

INTERNATIONAL TAXATION

USAco, a domestic corporation is the wholly owned U.S subsidiary of FORco, a foreign corporation. The U.S country F Tax treaty exempts payments from withholding taxes. USAco’s financial statements appear as follows:

Balance Sheet

Assets                                             Liabilities & Owners Equity

Cash                $1,000             Notes Payable                        $4,000

Receivables     $5,000             Owners Equity                      $2,000

Income Statement

Gross Income              $500

Admin Exp.                $350

Interest Exp.              $100

Answer should be in accordance with Section 163(j)

Explanation / Answer

As per 163(j)

Deduction allowed is lower of disqualified interest or excess interest over 50% of Adjusted taxable income

Sect. 163(j) may limit deductions for any “disqualified interest” paid or accrued during the taxable year (e.g., interest paid to a “related person” that is not subject to U.S. tax).

Amount disallowed will not exceed the “excess interest expense.”

Sect. 163(j) applies only if the ratio of debt-to-equity exceeds 1.5 to 1 (the “debt-to-equity safe harbor”).

Disqualified Interest = $100

Excess Interest = 100-((50+100)/2) = $25

Lower of 25 or 100 is 25(disallowed interest)

Maximum Interest deductible is 100-25 = $75

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