USCo, a domestic corporation, receives $100,000 of foreign-source income in the general income basket and $40,000 of foreign-source income in the passive income basket. Worldwide taxable income is $1,200,000 and the U.S. tax liability before FTC is $420,000. Foreign taxes attributable to the general income basket are $60,000 and to the passive income are $4,000. What is USCo's foreign tax credit for the tax year?

Question

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The foreign tax credit (FTC) is limited to the lesser of the foreign taxes paid or the U.S. tax liability on the foreign-source income. The U.S. tax liability on the foreign-source income is calculated by multiplying the U.S. tax rate by the ratio of foreign-source income to worldwide income. For the general income basket: ($100,000 / $1,200,000) * $420,000 = $35,000. For the passive income basket: ($40,000 / $1,200,000) * $420,000 = $14,000. The FTC is the sum of the lesser of foreign taxes paid or U.S. tax liability for each basket: $35,000 (general) + $4,000 (passive) = $39,000.

USCo, a Domestic Corporation, Receives $100,000 of Foreign-Source Income in the General