Peanut, Inc., a U.S. corporation, receives $500,000 of foreign-source interest income, on which foreign taxes of $5,000 are withheld. Peanut's worldwide taxable income is $900,000, and its U.S. Federal income tax liability before FTC is $270,000. What is Peanut's foreign tax credit?

Question

Quizplus · Accepted Answer

Peanut's foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. tax on the foreign-source income. In this case, the U.S. tax on the foreign-source income is $45,000 (900,000 x 5%), which is greater than the foreign taxes paid of $5,000. Therefore, Peanut's foreign tax credit is limited to $5,000.