Question

Elmo Inc. is a U.S.corporation with a branch office in foreign country Z. During the current year, Elmo had $356,000 of U.S. source income and $57,000 of foreign source income from Z, on which Elmo paid $26,600 of country Z income tax. a. Calculate Elmo's U.S. tax liability before foreign tax credit, maximum foreign tax credit allowable, and net U.S. tax liability after foreign tax credit. b. If Elmo had paid only $9,120 of country Z income tax, calculate Elmo's foreign tax credit allowable and net U.S. tax liability after foreign tax credit Complete this question by entering your answers in the tabs below. Required A Required B U.S. tax liability before foreign tax credit, maximum foreign tax credit allowable, and net U.S. tax liability Calculate Elmo's after foreign tax credit. (Do not round any intermediate division.) U.S. tax liability before foreign tax credit Maximum foreign tax credit allowable Net U.S. tax liability after foreign tax credit Required B Required A

Answer 1

Answer A:

U.S. source Income = $356,000

Foreign source income = $57,000

Worldwide taxable income = 356000 + 57000 =$413,000

Corporate tax rate = 21%

Pre-credit U.S. liability = 413000 * 21% = $86,730

Foreign tax credit limitation = (Foreign source income / Worldwide taxable income) * Pre-credit U.S. liability

= (57000 /413000) * 86730

= $11,970

Foreign tax credit = Lesser of creditable taxes (26,600) or the limitation (11970) = $11,970

U.S. Tax liability before foreign tax credit $86,730 Maximum foreign tax credit allowable Net U.S. tax liability after foreign tax credi74,760 $11,970

Answer B:

If Elmo paid only $9120 of country Z income tax:

Foreign tax credit = Lesser of creditable taxes (9120) or the limitation (11970) = $9,120

Net U.S tax liability = Pre-credit U.S. liability - Foreign tax credit allowable = 86730 - 9120 = $77,610

$9,120 $77,610 Foreign tax credit allowable Net U.S. tax liability after foreign tax credit