Summer Corporation’s business is international in scope and is subject to income

Question

Summer Corporation’s business is international in scope and is subject to income taxes in several countries. Summer’s earnings and income taxes paid in the relevant foreign countries are: Country Income Taxes A $1,000,000 $500,000 B 300,000 30,000 C 400,000 120,000 Total $1,700,000 $650,000 If Summer Corporation’s worldwide income subject to taxation in the United States is $2,400,000 and the U.S. income tax due prior to the foreign tax credit is $816,000, compute the allowable foreign tax credit. If, instead, the total foreign income taxes paid were $550,000, compute the allowable foreign tax credit.

Explanation / Answer

(a) Income subject to taxation in the United States = $2,400,000

(b) Income tax due calculated prior to the foreign tax credit = $816,000

(c) Foreign-source taxable income = $1,700,000

(d) Total foreign income taxes paid = $650,000

(e) Limitation = $816,000x ($1,700,000/ $2,400,000) = $ 5,78,000

(f) Credit = (d) or (e) whichever is lower

So, Credit = $ 5,78,000 Ans.

Case B: If, instead, the total foreign income taxes paid were $550,000, then allowable  foreign tax credit =

(a) Total foreign income taxes paid = $550,000

(b) Limitation = $816,000x ($1,700,000/ $2,400,000) = $ 5,78,000

(c) Credit = (a) or (b) whichever is lower

So, Credit = $550,000 Ans.

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