USCo, a domestic corporation, reports worldwide taxable income of $500,000, including a $100,000 dividend from ForCo, a wholly-owned foreign corporation.ForCo's undistributed earnings and profits are $1 million and it has paid $200,000 of foreign income taxes attributable to these earnings.What is USCo's deemed paid foreign tax credit related to the dividend received (before consideration of any limitation)?

Question

Quizplus · Accepted Answer

The deemed paid foreign tax credit is calculated based on the proportion of the dividend to the total earnings and profits of the foreign corporation. Here, the dividend is $100,000, and the total earnings and profits are $1,000,000. The foreign taxes paid are $200,000. Thus, the deemed paid foreign tax credit is ($100,000 / $1,000,000) * $200,000 = $20,000.

USCo, a Domestic Corporation, Reports Worldwide Taxable Income of $500,000