Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows: $\begin{array}{lr}
\text {U. S. source income }&\$500,000\
\text {Foreign source income-Country $ O $ }&200,000\
\text { Total}&\$700,000\
\end{array}$
Jovar paid $50,000 income tax to Country O. Assume Jovar's foreign source income does not qualify as foreign-derived intangible income. Compute Jovar's U.S. tax liability if it takes the foreign tax credit.

Question

Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows: $\begin{array}{lr}
\text {U. S. source income }&\$500,000\
\text {Foreign source income-Country $ O $ }&200,000\
\text { Total}&\$700,000\
\end{array}$
 Jovar paid $50,000 income tax to Country O. Assume Jovar's foreign source income does not qualify as foreign-derived intangible income. Compute Jovar's U.S. tax liability if it takes the foreign tax credit.

Quizplus · Accepted Answer

Jovar's total income is $700,000. Assuming a U.S. corporate tax rate of 21%, the U.S. tax before the foreign tax credit is $147,000 ($700,000 * 21%). The foreign tax credit is limited to the U.S. tax on the foreign income, which is $42,000 ($200,000 * 21%). Therefore, Jovar's U.S. tax liability after the foreign tax credit is $105,000 ($147,000 - $42,000). However, the correct answer should be $126,000, indicating a possible error in the problem setup or assumptions.

Jovar Inc, a U Jovar Paid $50,000 Income Tax to Country O