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credit_vs_deduction_solution - [b Compute Lincoln’s net...

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Solution : Foreign tax credit vs. tax deduction Lincoln Corporation operates a foreign branch (not a separate legal entity) in Africa. The foreign branch earns income before taxes of $100,000. Income taxes paid to the foreign government are $30,000 (30 percent) and sales and other taxes paid to the foreign government are $15,000. Lincoln must include the $1000,000 of foreign branch income in its U.S. tax return in calculating its U.S. taxable income. Required: [a] Compute Lincoln’s net U.S. tax liability from their foreign branch operations if they take a credit for foreign taxes paid.
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Unformatted text preview: [b] Compute Lincoln’s net U.S. tax liability from their foreign branch operations if they take a deduction for foreign taxes paid. Note: In both cases assume that Lincoln’s other U.S. source-income puts them in the 35% tax bracket. Deduction Credit Foreign source income $100,000 $100,000 Less: Deduction for all foreign taxes paid (45,000) Increase in U.S. taxable income 55,000 $100,000 X tax rate X 35% X 35% U.S. income tax before FTC 19,250 35,000 Less: Foreign tax credit 0 (30,000) Net increase in U.S. tax liability $19,250 $5,000...
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