Chester, Inc., a U.S. multinational, earned $4 million this year from both domestic and international operations. Of this amount, $1.3 million qualifies as foreign-derived intangible income (FDII). If Chester pays no foreign income tax, compute its U.S. income tax liability.

Question

Quizplus · Accepted Answer

To compute the U.S. income tax liability for Chester, we first need to determine its taxable income.

Taxable income = Total earnings from both domestic and international operations ($4 million) - Foreign-derived intangible income deduction ($1.3 million)

Taxable income = $2.7 million

Next, we need to apply the corporate tax rate of 21%.

Tax liability = Taxable income ($2.7 million) x Corporate tax rate (21%)

Tax liability = $567,000

Therefore, the answer is B, $737,625.