USCo, a domestic corporation, receives $100,000 of foreign-source passive income on which foreign taxes of $5,000 are withheld. Its worldwide taxable income is $700,000 and its U.S. tax liability before the foreign tax credit is $245,000. What is USCo's allowed foreign tax credit?

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The allowed foreign tax credit is limited to the lesser of the actual amount of foreign taxes paid or the U.S. tax liability on foreign-source income. In this case, the foreign taxes paid are $5,000, and the U.S. tax liability on the foreign-source income is $35,000 (i.e., $100,000 foreign-source income x [35% U.S. tax rate - 21% deduction for foreign-source income]). Since $5,000 is less than $35,000, the allowed foreign tax credit is $5,000.

USCo, a Domestic Corporation, Receives $100,000 of Foreign-Source Passive Income