FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows. How should FLCo assign its interest expense between U.S.and foreign sources to maximize its FTC for the current year?

Question

FLCo,a U.S.corporation,has $250,000 interest expense for the tax year.None of the interest relates to nonrecourse debt or loans from affiliated corporations.FLCo's U.S.and foreign assets are as follows.  How should FLCo assign its interest expense between U.S.and foreign sources to maximize its FTC for the current year?

Quizplus · Accepted Answer

The interest expense should be assigned based on the tax book values of the assets because that is what is used to calculate taxable income. The FTC is a tax credit that is designed to reduce the double taxation of income that occurs as a result of taxation in both the foreign and domestic jurisdiction. By assigning the interest expense based on tax book values, FLCo will maximize its FTC. This is because the FTC is calculated based on foreign taxes paid or accrued on foreign source income, so by maximizing the allocation of interest expense to foreign sources, FLCo will have a higher amount of foreign-source income, which will increase its FTC.

FLCo,a USCorporation,has $250,000 Interest Expense for the Tax Year