Dark, Inc, a U.S. corporation, operates Dunkel, an unincorporated branch manufacturing operation in Germany. Dark reports $100,000 of taxable income from Dunkel on its U.S. tax return, along with $400,000 of taxable income from its U.S. operations. Dark paid $40,000 in German income taxes related to the $100,000 of Dunkel income. Assuming a U.S. tax rate of 35%, what is Dark's U.S. tax liability

Question

after any allowable foreign tax credits?
a. $35,000
b. $135,000
c. $140,000
d. $175,000

Answer 1

c
RATIONALE: Dunkel's income is $100,000 and the U.S. operations income is $400,000 . Accordingly, the total U.S. taxable income is $500,000 . The U.S. tax on this amount is $175,000 ($500,000 × 35%). The German branch income is all general basket income. The FTC limit in this basket is $35,000 . Because the actual foreign income taxes are $40,000, Dark's FTC is limited to $35,000 . Accordingly, Dark's net U.S. tax liability is $140,000 ($175,000 – $35,000).