Bismarck Corporation has a precredit U.S.tax of $340,000 on $1,000,000 of taxable income in 2017.Bismarck has $200,000 of foreign source taxable income characterized as general category income and $50,000 of foreign source taxable income characterized as passive category income.Bismarck paid $80,000 of foreign income taxes on the general category income and $10,000 of foreign income taxes on the passive category income.What amount of foreign tax credit (FTC)can Bismarck use on its 2017 U.S.tax return and what is the amount of the carryforward,if any?
A) $90,000 FTC with $0 carryforward.
B) $85,000 FTC with $5,000 carryforward.
C) $78,000 FTC with $12,000 carryforward.
D) $78,000 FTC with $5,000 carryforward.

Question

Quizplus · Accepted Answer

Bismarck Corporation can use the foreign tax credit on their 2017 U.S. tax return for the amount of foreign taxes paid on the general category income, which is $80,000. However, the passive category income cannot be used for foreign tax credit purposes. Thus, the total foreign tax credit available is $80,000. 
Next, we need to compare the limit on FTC with the amount of the FTC available. Bismarck's limit on FTC is calculated as:
[(Foregin source taxable income) ÷ (Total taxable income)] x U.S. tax before FTC
= [($200,000 + $50,000) ÷ ($1,000,000)] x $340,000
= $78,000
Since the available FTC ($80,000) is greater than the FTC limit ($78,000), Bismarck can use the entire $80,000 as FTC on its 2017 U.S. tax return. Therefore, there is no FTC carryforward for Bismarck for 2017. 
Thus, the correct answer is C, $78,000 FTC with $12,000 carryforward.

Bismarck Corporation Has a Precredit U