USCo, a U.S. corporation, receives $700,000 of foreign-source passive income on which foreign taxes of $70,000 are withheld. Its worldwide taxable income is $1,500,000, and its U.S. tax liability before the foreign tax credit is $315,000. What is USCo's allowed foreign tax credit?

Question

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The allowed foreign tax credit is the lesser of the actual foreign taxes paid ($70,000) or the U.S. tax liability on the foreign-source income. The U.S. tax liability on the foreign-source income is calculated as (foreign-source income / worldwide taxable income) * U.S. tax liability before the foreign tax credit = ($700,000 / $1,500,000) * $315,000 = $147,000. Since $70,000 (actual foreign taxes paid) is less than $147,000 (U.S. tax liability on the foreign-source income), the allowed foreign tax credit is $70,000.

USCo, a US