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Foreign tax credit calculations

Valencia Corporation, a U.S. corporation, has 2003 taxable income from U.S. sources of $300,000 and from foreign sources of $120,000 before considering the impact of foreign taxes. It paid $20,000 of foreign taxes during 2003.

a. If Valencia's foreign taxes are not creditable, calculate its U.S. tax liability for 2003.

b. If Valencia's foreign taxes are creditable, calculate its allowable foreign tax credit
and net U.S. tax liability for 2003. Do you recommend that Valencia elect to credit
its foreign taxes rather than deduct them?

c. How would your answers to parts (a) and (b) change if Valencia paid $60,000 of
foreign taxes during 2003?

Solution Preview

Valencia Corporation, a U.S. corporation, has 2003 taxable income from U.S. sources of $300,000 and from foreign sources of $120,000 before considering the impact of foreign taxes. It paid $20,000 of foreign taxes during 2003.

a. If Valencia's foreign taxes are not creditable, calculate its U.S. tax liability for 2003.
If Valencia's foreign taxes are not creditable but deductible then taxable income is $300,000 plus $120,000 less $20,000 which is $400,000. The applicable taxation rate is 34% and this gives us a U.S. tax liability of $136,000.
Corporate Income Tax Rates--2006, 2005, 2004, 2003, 2002, 2000
Taxable income over Not over Tax rate

$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 ...

$2.19