Dark,Inc.,a U.S.corporation,operates Dunkel,an unincorporated branch manufacturing operation in Germany.Dark reports $100,000 of taxable income from Dunkel on its U.S.tax return,along with $400,000 of taxable income from its U.S.operations.Dark paid $40,000 in German income taxes related to the $100,000 of Dunkel income.Assuming a U.S.tax rate of 35%,what is Dark's U.S.tax liability after any allowable foreign tax credits?

Question

Quizplus · Accepted Answer

The U.S. tax liability of Dark, Inc. will be calculated as follows:

Total taxable income = $400,000 (from U.S. operations) + $100,000 (from Dunkel) - $40,000 (foreign tax credit) = $460,000

Total U.S. tax liability = $460,000 x 35% = $161,000

However, Dark can claim a foreign tax credit of $40,000 (the amount of German income taxes paid on Dunkel income). This will reduce the U.S. tax liability to $140,000 (i.e., $161,000 - $40,000).

Therefore, the correct answer is C) $140,000.

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