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Waco Leather Inc., a U.S. corporation, reported total taxable income of $5.6 million. Taxable income included...

Waco Leather Inc., a U.S. corporation, reported total taxable income of $5.6 million. Taxable income included $1.9 million of foreign source taxable income from the company’s branch operations in Mexico. Assume all of the income is general category income. Waco paid Mexican income taxes of $361,000 on its branch income.

Compute Waco’s allowable foreign tax credit.

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Answer #1

Solution:-

Waco’s pre credit U.S. tax is $1,904,000 ($5,600,000 × 34%).

The company’s foreign tax credit limitation is computed as:$1,900,000 / $5,600,000 × $1,904,000 = $646,000

Waco’s allowable foreign tax credit for the year is the full $361,000. Waco has an “excess limitation” of $285,000,which could absorb foreign tax credit carry forwards from prior years.

Note:-

Assume a U.S. corporate tax rate of 34 percent.

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