Question

Janus Company reports taxable income $4.000,000 and a U.S. tax liability of $1,400,000. Of the taxable income, $3,000,000 is foregin source and $1,000,000 is U.S. source income. Of the foregin source income, $500,000 is classfied as foregin personal holding company income. Janus paid foregin taxes of $1,000,000 on active business income and $100,000 on passive income such as interest and dividends. (Assume 35% tax rate).

Calculate the amount of foregin tax credit available to Janus.

Answer 1

Computation of amount of foreign tax credit available to Janus:

• Foreign income taxes = $1,100,000 ($1,000,000 + $100,000)
• Foreign tax credit limit =

1. Worldwide taxable income= $4,000,000
2. Pre credit U.S. tax = $1,400,000
3. Foreign source taxable income = $3,000,000

Limitation = 2*(3/1) = $1,400,000 * ($3,000,000/$4,000,000) = $1,050,000

Credit = lesser of creditable taxes ($1,100,000) or the limitation ($1,050,000) = $1,050,000

Janus company can carry its excess credit ($1,100,000-$1,050,000) = $50,000 back one year or forward 10 years.

Note: here credit limit apply as Janus has both active business income and passive income.