REG 39 - Multijurisdictional Tax Issues Flashcards Preview

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Flashcards in REG 39 - Multijurisdictional Tax Issues Deck (10):
1

Woods Corporation's federal taxable income for the current year is $250,000 which includes the following:

$15,000 of deducted state income taxes

$25,000 of interest income on United States Treasury Bonds

Woods also had $10,000 of interest from state and local bonds that it owns. Federal depreciation in excess of that allowed for state purposes was $7,000. Woods operates exclusively in State F, which does not tax income earned on federal obligations, taxes all municipal bond interest, and disallows a deduction for state income taxes. What is Wood's state taxable income?

The starting point for computing state taxable income is $250,000. Adjustments are:

State income taxes + $15,000
Municipal interest income + $10,000
Excess federal depreciation + $ 7,000
U.S. Treasury interest income -$25,000
State taxable income $257,000

2

T/F: Business income is generally apportioned among the states in which it is earned based on one or more apportionment factors such as sales, property, and depreciation expense.

False.
Business income is generally apportioned among the states in which it is earned based on one or more apportionment factors such as sales, property, and PAYROLL.

3

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2014, he has the following income from Spanish sources:

Salary Interest Income
Gross amount $90,000 $20,000
Spanish income tax (20%) (18,000) (4,000)
Net cash received (80%) $72,000 $16,000

The interest income was from a Spanish money market account. Mr. Travel also was provided housing from his employer that had a fair market value of $30,000 (not subject to Spanish tax). Total U.S.-source earned income for Mr. Travel was $60,000. What is Mr. Travel's minimum includible United States gross income from these transactions? The housing exclusion is $13,888 and foreign earned income exclusion is $99,200 in 2014.

$96,112
The $90,000 of salary is completely excluded. Foreign-earned income from personal services is limited to $99,200 in 2014.The housing is excludable to the extent it exceeds 16% × $99,200, or $15,872. This excess is $14,128 ($30,000 − $15,872). However, the housing exclusion may never exceed $13,888 in 2014, so the includible housing income is $16,112 ($30,000 − $13,888). The interest income is fully includible as is the U.S. source earned income of $60,000. Therefore, includible income is $16,112 + $20,000 + $60,000, or $96,112.

4

Which of the following statements is incorrect?
A. Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary.
B. Foreign currency exchange gains and losses resulting from investment transactions are capital.
C. Foreign currency exchange gains and losses resulting from personal transactions are capital.
D. Foreign currency exchange gains and losses resulting from the normal course of business operations are capital.

D. Foreign currency exchange gains and losses resulting from the normal course of business operations are ordinary, not capital.

5

ABC, Inc., has $120,000 U.S. source income, $80,000 of foreign source income, and $25,000 foreign taxes deemed paid. Assume that the U.S. income tax liability before the foreign tax credit is $61,250. ABC's foreign tax credit is
A. - $0 -
B. $24,500
C. $25,000
D. $61,250

B. $25,000, but not to exceed the foreign tax credit limitation of $80,000/($120,000 + $80,000) x $61,250 = $24,500.

6

T/F: Income earned by a controlled foreign corporation that is not connected economically to the country in which it is organized is Subpart F income.

True

7

T/F: U.S. taxpayers are taxed on all income earned anywhere in the world.

True

8

T/F: A taxpayer can take a credit for the greater of the foreign taxes paid or the foreign tax credit.

False.
Three provisions mitigate the potential double taxation of this income:
1. Foreign income taxes paid are an itemized deduction for individuals.
2. Alternatively, a credit may be claimed for foreign taxes paid.
3. Certain individuals can elect to exclude foreign-earned income.

9

T/F: A controlled foreign corporation is a foreign corporation for which more than 80% of the voting power or value of stock is owned by U.S. shareholders (limited to those who own, direct and indirect, 10% or more of the foreign corporation) on any day of the tax year of the foreign corporation.

False.
for which more than 50% of the voting power or value of stock is owned by U.S. shareholders

10

T/F: Excess foreign tax credits can be carried back one year and carried forward 20 years.

False.
Excess foreign tax credits can be carried back 1 year and carried forward 10 years.

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