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 $189,000. What is Peanut's foreign tax credit?

Question

Quizplus · Accepted Answer

The foreign tax credit is limited to the U.S. tax liability on foreign-source income. In this case, the foreign taxes withheld are $5,000, which is the maximum amount that can be credited against the U.S. tax liability, assuming it does not exceed the limitation based on the ratio of foreign-source income to worldwide income.