Bismarck Corporation has a precredit U.S. tax of $210,000 on $1,000,000 of taxable income in the current year. Bismarck has $200,000 of foreign source taxable income characterized as foreign branch income and $50,000 of foreign source taxable income characterized as passive category income. Bismarck paid $80,000 of foreign income taxes on the foreign branch income and $10,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC)can Bismarck use on its current-year U.S. tax return and what is the amount of the carryforward, if any?
A)$90,000 FTC with $0 carryforward
B)$52,000 FTC with $0 carryforward
C)$52,000 FTC with $38,000 carryforward
D)$16,500 FTC with $73,500 carryforward

Question

Quizplus · Accepted Answer

To calculate the foreign tax credit that Bismarck can use on its current-year U.S. tax return, we need to first calculate the limitation based on the foreign income taxes paid on the foreign source income. The limitation is calculated separately for passive category income and all other income combined.

For the foreign branch income, the limitation is calculated as follows:
Foreign branch income / Total taxable income x Foreign income taxes paid
$200,000 / $1,000,000 x $80,000 = $16,000

For the passive category income, the limitation is calculated as follows:
Passive category income / Total taxable income x Foreign income taxes paid
$50,000 / $1,000,000 x $10,000 = $500

The total FTC that Bismarck can claim on its current-year U.S. tax return is the lesser of the two limitations, which is $16,500 ($16,000 + $500). The excess foreign tax credit of $35,500 ($80,000 + $10,000 - $16,500) can be carried forward for up to 10 years. Therefore, the answer is C, $52,000 FTC with $38,000 carryforward.

Bismarck Corporation Has a Precredit U