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

San Carlos Corporation can take a foreign tax credit for the $100,000 of income tax paid to Country W, which will reduce its U.S. tax liability. The foreign tax credit is limited to the lesser of the foreign tax paid or the U.S. tax on the foreign source income. In this case, the U.S. tax liability on the foreign source income is $200,000 x 21% = $42,000. Therefore, San Carlos can take a foreign tax credit of $42,000, which reduces the U.S. tax liability to $34,000 ($76,000 - $42,000). The amount of foreign tax credit that cannot be used in the current year can be carried forward to future years.

Therefore, San Carlos' tax savings is $66,000 ($100,000 - $34,000) if it takes a foreign tax credit rather than deducting the tax.