Foreign Tax Credit Limitation. Tucson, a U.S. corporation organized in Year 1, reports the following items for a three-year period.
Year 1 Year 2 Year 3
Foreign tax accrual $ 100,000 $ 120,000 $ 180,000
Foreign source taxable income 400,000 300,000 500,000
Worldwide taxable income 1,000,000 1,000,000 1,000,000
The foreign source and worldwide taxable income items are determined under U.S. law.
a. What is Tucson’s foreign tax credit limitation for each of the three years (assume a 34% U.S. corporate tax rate and that income from all foreign activities fall into a single basket)?
b. How are Tucson’s excess foreign tax credits (if any) treated? Do any carryovers remain after Year 3?
c. How would your answers to Parts a and b change if the IRS determines that $100,000 of expenses allocated to U.S.-source income should have been allocated to foreignsource income?
d. What measures should Tucson consider if it expects its current excess foreign tax credit position to persist in the long-run?