Saginaw Steel Corporation has a precredit U.S. tax of $123,000 on $518,000 of taxable income. Saginaw has $218,000 of foreign source taxable income and paid $78,000 of income taxes to the German government on this income. All of the foreign source income is treated as foreign branch income for foreign tax credit purposes. Saginaw's foreign tax credit on its tax return will be: (Do not round intermediate calculations. Round your answer to nearest whole dollar amount.)

Question

Quizplus · Accepted Answer

To calculate the foreign tax credit, we need to compare the foreign taxes paid with the U.S. taxes that would be due on the same foreign income. Since all of the foreign source income is treated as foreign branch income for foreign tax credit purposes, we can use the foreign branch income formula to calculate the U.S. taxes on the foreign income:

Foreign branch income = Foreign source taxable income – Foreign branch expenses
Foreign branch expenses = 10% × Foreign source taxable income = 10% × $218,000 = $21,800
Foreign branch income = $218,000 – $21,800 = $196,200

The U.S. precredit tax rate on the foreign branch income is 21%, so the U.S. taxes on the foreign income would be:

U.S. taxes on foreign branch income = 21% × $196,200 = $41,142

The foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. taxes on the foreign income, so the foreign tax credit is:

Foreign tax credit = Lesser of foreign taxes paid or U.S. taxes on foreign income
Foreign tax credit = Lesser of $78,000 or $41,142 = $41,142

Therefore, Saginaw's foreign tax credit on its tax return will be $41,142, which is closest to answer choice C ($51,764) after rounding to the nearest whole dollar amount.

Saginaw Steel Corporation Has a Precredit U