C16-41 - ANSWER KEY a. Tucson’s foreign tax credit...

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Unformatted text preview: ANSWER KEY a. Tucson’s foreign tax credit limitations are calculated as follows: Worldwide taxable income $1,000,000 Times: U.S. tax rate 0.34 Gross U.S. tax liability for each of Years 1 through 3 $ 340,000 Year 1 foreign tax credit is $100,000, which is the lesser of: 1. or 2. $ 400,000 x $340,000 = $136,000 (FTC limitation) $1,000,000 $100,000 (foreign tax accrual). Year 2 foreign tax credit is $102,000, which is the lesser of: 1. or $ 300,000 x $340,000 = $102,000 (FTC limitation) $1,000,000 2. $120,000 (foreign tax accrual). Year 3 foreign tax credit is $170,000, which is the lesser of: 1. or $ 500,000 x $340,000 = $170,000 (FTC limitation) $1,000,000 2. $180,000 (foreign tax accrual). b. The excess foreign tax credit from Year 2 of $18,000 ($120,000 - $102,000) carries back to Year 1 (the year the company started in business). The carryback to Year 1 eliminates all the $18,000 excess credit amount because the Year 1 foreign tax credit limitation exceeded the Year 1 tax accrual by $36,000 ($136,000 - $100,000) and the tax carryback was only $18,000 ($120,000 - $102,000). The $10,000 of excess foreign taxes from Year 3 carryback to offset part of the $36,000 excess limit determined for Year 1. The remaining limit is $8,000 ($36,000 excess limit in Year 1 - $18,000 excess taxes in Year 2 - $10,000 excess taxes in Year 3). No foreign tax credit carrybacks or carryovers remain after Year 3. c. Parts a and b would change as follows (assuming the deductions are not allowed to be claimed in calculating the foreign jurisdiction's taxes): Year 1 foreign tax credit is $100,000, which is the lesser of: 1. $ 300,000 x $340,000 = $102,000 (FTC limitation) $1,000,000 or 2. $100,000 (foreign tax accrual). For each year, the numerator (foreign source taxable income) is reduced by $100,000 from what it was in part (a), but the denominator (worldwide taxable income) remains constant. Year 2 foreign tax credit is $68,000, which is the lesser of: 1. or 2. $ 200,000 x $340,000 = $68,000 (FTC limitation) $1,000,000 $120,000 (foreign tax accrual). Year 3 foreign tax credit is $136,000, which is the lesser of: 1. or $ 400,000 x $340,000 = $136,000 (FTC limitation) $1,000,000 2. $180,000 (foreign tax accrual). The $52,000 of excess taxes paid in Year 2 carryback to Year 1 where $2,000 is used. None of the Year 2 excess credits can be used in Year 3. An additional $44,000 of excess taxes is paid in Year 3. Total excess credit carryovers of $94,000 ($52,000 - $2,000 + $44,000) remain after Year 3. The excess taxes from Year 2 carry over through Year 12. The excess taxes from Year 3 carry over through Year 13. d. Tucson Corporation should consider shifting part or all of its operations to another foreign jurisdiction having lower tax rates. By earning income in two jurisdictions, Tucson would calculate the foreign tax credit using the average of the tax rates in the two countries. Tucson might attempt to negotiate a temporary or permanent tax rate reduction with the foreign government of the country in which it is currently operating that would reduce or eliminate the current excess foreign tax credit situation. pp. C:16-5 through C:16-8. ...
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This note was uploaded on 01/18/2012 for the course HOMEWORK AC420 taught by Professor Atkins during the Spring '11 term at Kaplan University.

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