V. Federal Taxation of Entities - 2. Multijurisdictional Tax Issues

Question 1

V. Federal Taxation of Entities - 2. Multijurisdictional Tax Issues

119. State and Local Taxation

III. State Income Tax Computation—A model law known as the Uniform Division of Income for Tax Purposes Act (UDIPTA) helps to minimize differences among state tax laws.

Answer 1

1. The starting point for computing state income taxes is federal taxable income, increased by adjustments such as (specific rules depend on state):
   
   1. Dividends received deduction
   2. Expenses related to interest earned on U.S. bonds
   3. State income taxes
   4. Depreciation in excess of that allowed for state
   5. Municipal interest taxed for state purposes
2. Decreased by:
   
   1. Federal income taxes paid
   2. Expenses related to municipal interest income
   3. Interest on U.S. bonds
   4. Depreciation in addition to that allowed for federal purposes

Question 2

V. Federal Taxation of Entities - 2. Multijurisdictional Tax Issues

119. State and Local Taxation

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?

1. $257,000.
2. $243,000.
3. $307,000.
4. $250,000.

Answer 2

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

Question 3

V. Federal Taxation of Entities - 2. Multijurisdictional Tax Issues

120. Taxation of Foreign Income

IV. Territorial Tax System Beginning in 2018

Americano, Inc. owns an interest in the following foreign corporations on December 31, 2019.

Name % owned Date purchased Dividends rec’d

Sol, Inc. 5% March 9, 2017 $100,000

Soleil, Inc. 15% October 28, 2016 $ 75,000

Sonne, Inc. 25% July 28, 2019 $ 25,000

How much dividend received deduction can Americano claim for dividends received in 2019?

1. $200,000
2. $175,000
3. $125,000
4. $75,000

Answer 3

1. The new system provides a 100% deduction by U.S. corporations for the foreign-source portion of dividends received from the earnings and profits of 10%-owned foreign affiliates. This deduction completely offsets the income from the foreign subsidiary.
2. The U.S. business must have owned stock in the foreign affiliate for at least one year.

D.

A 100% dividend received deduction may be claimed for a dividend received from a foreign corporation in which ownership exceeds 10% and the stock was owned for more than 365 days. Americano may claim a DRD for Soleil only because ownership exceeded 365 days and Americano owns at least 10%.

Question 4

V. Federal Taxation of Entities - 2. Multijurisdictional Tax Issues

120. Taxation of Foreign Income

Mr. Travel is a U.S. citizen who has been a resident of Spain for five years. In 2019, he has the following income from Spanish sources:

SalaryInterest 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 $40,000 (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 $14,826 and foreign earned income exclusion is $105,900 in 2019.

1. $ 60,000
2. $105,174
3. $110,000
4. $200,000

Answer 4

B.

The $90,000 of salary is completely excluded. Foreign-earned income from personal services is excluded up to 105,900 in 2019. The housing is excludable to the extent it exceeds 16% × $105,900, or $16,944. This excess is $23,056 ($40,000 − $16,944). However, the housing exclusion may never exceed $14,826 in 2019, so the includible housing income is $25,174 ($40,000 − $14,826). The interest income is fully includible as is the U.S.-source earned income of $60,000. Therefore, includible income is $25,174 + $20,000 + $60,000, or $105,174.