Dark, Inc., a U.S. corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S. tax return along with $400,000 of taxable income from its U.S. operations. Dark paid $30,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S. tax rate of 21%, what is Dark's U.S. tax liability after any allowable foreign tax credits?

Question

Quizplus · Accepted Answer

Dark's total taxable income is $500,000 ($400,000 from U.S. operations + $100,000 from Dunkel). The U.S. tax before credits is $500,000 * 21% = $105,000. Dark can claim a foreign tax credit for the $30,000 paid to Germany, reducing its U.S. tax liability to $105,000 - $30,000 = $75,000. However, the foreign tax credit cannot reduce U.S. tax liability on U.S. income, so the correct calculation involves allocating the U.S. tax liability proportionally to the foreign income. The foreign income is 20% of total income ($100,000 of $500,000), so 20% of the U.S. tax ($105,000) is $21,000, which is fully offset by the $30,000 foreign tax credit. However, the initial calculation mistake led to the incorrect final answer; the correct U.S. tax liability after the foreign tax credit is indeed $75,000, not $84,000 as implied. The explanation mistakenly suggests an additional step that does not align with the calculation provided. The correct U.S. tax liability, considering the foreign tax credit correctly, should be $105,000 - $30,000 = $75,000. This error in explanation led to the wrong conclusion. The correct answer, based on the initial correct calculation, should be B) $75,000, not C) $84,000.

Dark, Inc, a U