Ames Corporation has a precredit U.S. tax of $210,000 on $1,000,000 of taxable income. Ames has $600,000 of foreign source taxable income and paid $120,000 of income taxes to the U.K. government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Ames's foreign tax credit on its tax return will be:
A)$210,000.
B)$126,000.
C)$120,000.
D)$72,000.

Question

Quizplus · Accepted Answer

Since all of the foreign source income is treated as foreign branch income, Ames can claim a foreign tax credit for the full amount of taxes paid to the U.K. government on that income ($120,000). This will reduce Ames's U.S. tax liability to $90,000 ($210,000 precredit U.S. tax minus $120,000 foreign tax credit), resulting in a net tax liability of $270,000 ($90,000 + $180,000 on the remaining $400,000 of taxable income). Therefore, the correct answer is C.

Ames Corporation Has a Precredit U