Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income. $$\begin{array} { l l l }
\text { U.S. source income } & & \$ 580,000 \
\text { Foreign source income: } & & \
\quad \text { Country X } & \$ 65,000 & \
\quad \text { Country Y } & \underline { 105,000 } & \underline { 170,000 } \
\text { Total } & & \$ 750,000
\end{array}$$ Many Mountains paid $15,000 income tax to Country X and $28,500 income tax to Country Y. Compute Many Mountains' allowable foreign tax credit.

Question

Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income. $$\begin{array} { l l l } 
\text { U.S. source income } & & \$ 580,000 \
\text { Foreign source income: } & & \
\quad \text { Country X } & \$ 65,000 & \
\quad \text { Country Y } & \underline { 105,000 } & \underline { 170,000 } \
\text { Total } & & \$ 750,000
\end{array}$$ Many Mountains paid $15,000 income tax to Country X and $28,500 income tax to Country Y. Compute Many Mountains' allowable foreign tax credit.

Quizplus · Accepted Answer

The foreign tax credit is limited to the lesser of the foreign taxes paid or the U.S. tax liability on the foreign income. The U.S. tax liability on the foreign income is calculated as (foreign income/total income) * total U.S. tax liability. Assuming a U.S. tax rate of 21%, the U.S. tax on foreign income is 21% * ($170,000/$750,000) * $750,000 = $35,700. Since $43,500 (total foreign taxes paid) is greater than $35,700, the allowable foreign tax credit is $35,700.

Many Mountains, Inc Many Mountains Paid $15,000 Income Tax to Country X and It