Prentice Hall s Federal Taxation 2015 Corporations Partnerships Estates and Trus
ID: 2473742 • Letter: P
Question
Prentice Hall s Federal Taxation 2015 Corporations Partnerships Estates and Trusts 28th Edition: C: 16-37
Arnie, a U.S. citizen who uses rhw calendar year as his tax year and the cash method of accounting, operates a sole proprietorship in Country Z. In Year 1, he reports 500,000 dubles of pretax profits. On June 1 of Year 2, he pays Country Z income taxes of 150,000 dubles for calendar Year 1. Duble-U.S. dollar exchanges rates on various dates in Year 1 and Year 2 are as follows:
December 31, Year 1 4.00 dubles = $1 (U.S.)
Year 1 average 3.75 dubles = $1 (U.S.)
June 1, Year 2 4.25 dubles = $$1 (U.S.)
a. In what year can Arnie clain the credits?
Explanation / Answer
The total value of foriegn tax credit available to Arnie would be calculated as follows:
Foriegn Tax Credit = Income Taxes Paid on June 1 of Year 2/Dubles Exchange Rate Per U.S. Dollar on June 1 Year 2
Using the values provided in the question, we get,
Foriegn Tax Credit = 150,000/4.25 = $35,294
In the given case, Arnie would be entitled to claim the foriegn tax credit of $35,294 in Year 2 if foreign taxes are claimed as credit in the year in which the taxes are paid by him.
Year 2 is the answer to the question.