Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows. $$\begin{array} { l r }
\text { U.S. source income } & \$ 600,000 \
\text { Foreign source income--Country O } & \underline { 100,000 } \
\text { Total } & \$ 700,000
\end{array}$$ Jovar paid $50,000 income tax to Country O. 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. $$\begin{array} { l r } 
\text { U.S. source income } & \$ 600,000 \
\text { Foreign source income--Country O } & \underline { 100,000 } \
\text { Total } & \$ 700,000
\end{array}$$ Jovar paid $50,000 income tax to Country O. Compute Jovar's U.S. tax liability if it takes the foreign tax credit.

Quizplus · Accepted Answer

To compute Jovar's U.S. tax liability, we need to determine its taxable income first.

Total taxable income = U.S. source income + Foreign source income - Foreign tax paid

Total taxable income = $600,000 + $100,000 - $50,000 = $650,000

Jovar can claim a foreign tax credit for the $50,000 income tax paid to Country O.

The U.S. tax liability is calculated as follows:

U.S. tax liability = U.S. tax rate x (U.S. source income / Total taxable income)

U.S. tax liability = 21% x ($600,000 / $650,000) = $194,769.23

However, Jovar's U.S. tax liability cannot be lower than the foreign tax credit claimed. Therefore, the U.S. tax liability is $204,000, which is choice C.

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