Ames Corporation has a precredit U.S.tax of $340,000 on $1,000,000 of taxable income in 2017.Ames has $600,000 of foreign source taxable income and paid $120,000 of income taxes to the Australian government on this income.All of the foreign source income is treated as general category income for foreign tax credit purposes.Ames's foreign tax credit on its 2017 tax return will be:
A) $72,000.
B) $120,000.
C) $204,000.
D) $340,000.

Question

Quizplus · Accepted Answer

The foreign tax credit is calculated by taking the lesser of the foreign taxes paid ($120,000) or the U.S. tax on foreign source taxable income ($200,000, calculated by multiplying the foreign source taxable income of $600,000 by the precredit U.S. tax rate of 33.33%). Therefore, the foreign tax credit allowed is $120,000.

Ames Corporation Has a Precredit U