Question

night, inc., a domestic corporation, earned $300,000 from offshore manufacturing activities on which it paid $36,000 of foreign income taxes. night's foreign sales income is taxed at a 50% income tax rate. assume a 21% u.s. tax rate. round your answer to the nearest dollar. what amount of foreign sales income can night earn without generating any excess ftcs for the current year?

Answer 1

The maximum amount of foreign sales income that Night Inc. can earn without generating any excess Foreign Tax Credits (FTCs) is $72,000.

Step-by-step explanation:

To calculate the amount of foreign sales income that Night Inc. can earn without generating any excess Foreign Tax Credits (FTCs), we need to determine the maximum amount of foreign income taxes that can be used to offset U.S. taxes. The maximum FTCs can be calculated by multiplying the eligible foreign income taxes by the U.S. tax rate. In this case, Night Inc. earned $300,000 from offshore manufacturing activities and paid $36,000 of foreign income taxes. Therefore, the maximum amount of foreign sales income that can be earned without generating any excess FTCs is $72,000 ($36,000 / 0.5).

Answer 2

Night, Inc. can earn up to $171,429 in foreign sales income without generating any excess foreign tax credits for the current year, calculated by setting the U.S. tax liability at 21% equal to the foreign income taxes ($36,000) already paid.

Step-by-step explanation:

We are tasked with determining the amount of foreign sales income (FSI) Night, Inc. can earn without generating any excess foreign tax credits (FTCs) for the current year under U.S. taxation rules. To do this, we need to consider both the foreign taxes paid and the U.S. tax rate.

First, we calculate the U.S. tax liability on the FSI, which is the FSI multiplied by the U.S. tax rate. Since Night, Inc. already paid taxes on its offshore manufacturing activities at a 50% rate, we want to find the FSI amount where the U.S. tax liability would equal the foreign taxes already paid.

To avoid excess FTCs, the U.S. tax liability must be at least equal to the foreign taxes paid. Thus, we set the U.S. tax liability at 21% equal to the $36,000 of foreign income taxes paid:

FSI x U.S. tax rate = Foreign income taxes

FSI x 0.21 = $36,000

Solving for FSI gives us:

FSI = $36,000 / 0.21

FSI = $171,429 (rounded to the nearest dollar)

Therefore, Night, Inc. can earn up to $171,429 in foreign sales income without incurring any excess FTCs for the current year.