V. Federal Taxation of Entities - 7. Tax Credits

Question 1

V. Federal Taxation of Entities

137. Business Tax Credits

I. Foreign Tax Credit
A. The credit is limited to the lower of the foreign tax paid, or the proportion of U.S. tax allocable to foreign sourced income (known as the foreign tax credit limitation).

1. The proportion of U.S. tax allocable to foreign sourced income (foreign tax credit limitation) is determined by multiplying U.S. tax times the ratio of foreign taxable income to total taxable income.
2. Excess foreign tax credits carryback one year and forward 10 years. The excess amount is the foreign taxes paid or accrued for a tax year that exceeds the foreign tax credit limitation.

B. In lieu of a credit, a taxpayer can elect to mitigate foreign taxes in two other ways.

1. Taxpayers can claim the foreign tax as an itemized deduction.
2. Taxpayers can elect to exclude income earned (in excess of housing costs) while a bona fide resident in a foreign country. The exclusion is a maximum of $105,900 (2019; adjusted for inflation) if the taxpayer is physically present in the foreign country for at least 330 days in any 12 consecutive months.

Answer 1

Example

TP records 20% of his income from abroad. TP can claim a foreign tax credit in the amount of the lesser of his foreign tax paid or 20% of the U.S. tax paid.

Question 2

V. Federal Taxation of Entities

137. Business Tax Credits

II. General Business Credit While each credit is calculated independently, the combination of credits is subject to an overall limit

III. The Rehabilitation Credit—A credit is allowed for the rehabilitation of certain buildings.

IV. Small Employer Health Insurance Credit— An eligible small employer (ESE) can claim a credit equal to 50% of its nonelective contributions for health insurance for its employees (25% for small tax-exempt employers).

Answer 2

Example

TP records 20% of his income from abroad. TP can claim a foreign tax credit in the amount of the lesser of his foreign tax paid or 20% of the U.S. tax paid.

Question 3

V. Federal Taxation of Entities

137. Business Tax Credits

Which of the following statements concerning tax credits is true?

1. The foreign tax credit is available for business entities, such as corporations, but not for individuals.
2. Unused general business credits are carried back two years and forward 20 years.
3. For the rehabilitation credit, expenditures to rehabilitate property placed in service before 1936 are eligible for a 20% credit.
4. The work opportunity tax credit is calculated on the amount of wages paid per eligible employee during the first year of employment. The maximum credit is $2,400 per eligible employee.

Answer 3

1. Individuals are eligible to claim the foreign tax credit.
2. The carryback period as stated is for net operating losses. The carry back period for the general business credit is only one year.
3. Beginning in 2018, the rehabilitation credit no longer applies to property placed in service before 1936 (unless it is a certified historic structure).
4. The work opportunity tax credit is 40% of the first $6,000 of wages per employee, so the maximum credit is $2,400.

Question 4

V. Federal Taxation of Entities

137. Business Tax Credits

Which of the following is required to claim the family and medical leave credit?

1. The employee must receive while on leave more than 50% of the wages normally paid to an employee.
2. All qualifying employees must receive at least four weeks of annual paid family and medical leave.
3. The credit percentage can never exceed 25%.
4. The employee must be on leave for more than three months for the credit to apply.

Answer 4

1. Incorrect. Businesses can claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while on family and medical leave. The employee must receive 50% or more of regular wages, not more than 50%.
2. Incorrect. Businesses can claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while on family and medical leave. All qualifying employees must receive at least two weeks of annual paid family and medical leave, not four.
3. Correct! Businesses can claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while on family and medical leave. The credit percentage can never exceed 25%.
4. Incorrect. Businesses can claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while on family and medical leave. There is no requirement that the employee be on leave for a certain time period for this credit to apply.

Question 5

V. Federal Taxation of Entities

137. Business Tax Credits

XII. Employer-Paid Medical and Family Leave Credit

Answer 5

1. Businesses can claim a general business tax credit equal to 12.5% of wages paid to qualifying employees while on family and medical leave.
2. The employee must receive at least 50% of the wages normally paid to an employee.
3. All qualifying employees must receive at least two weeks of annual paid family and medical leave.
4. The 12.5% is increased by .25 percentage points for each percentage point by which the wages paid exceed 50%.
5. Credit percentage can never exceed 25%.
6. Applies for tax years beginning in 2018 and 2019.