McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 43

Sombrero Corporation, a U..corporation, operates through a branch in Espania.Management projects that the company's pretax income in the next taxable year will be $100,000, $80,000 from U..operations and $20,000 from the branch.Espania taxes corporate income at a rate of 45 percent.The U..corporate tax rate is 35 percent.a.If management's projections are accurate, what will be Sombrero's excess foreign tax credit in the next taxable year? Assume all of the income is general category income.b.Management plans to establish a second branch in Italia.Italia taxes corporate income at a rate of 30 percent.What amount of income will the branch in Italia have to generate to eliminate the excess credit generated by the branch in Espania?