San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows. San Carlos paid $100,000 income tax to Country W. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

Question

San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows.  San Carlos paid $100,000 income tax to Country W. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

Quizplus · Accepted Answer

The tax credit is limited to the lesser of the foreign income tax actually paid or the U.S. tax liability on that foreign source income. In this case, San Carlos' U.S. tax liability on its foreign source income is $150,000 [(0.4 x $500,000) + (0.2 x $500,000)], which is greater than the $100,000 foreign income tax paid to Country W. Therefore, San Carlos can claim a foreign tax credit of $100,000 against its U.S. tax liability of $150,000, resulting in a tax savings of $50,000 ($100,000 foreign tax credit - $50,000 U.S. tax liability on foreign source income without credit). Thus, the correct choice is B.