Problem:
USAco's only item of gross income is $100,000 from sales of widgets in the United States. Its only expense is a $60,000 interest payment to its parent, FORco, its country F parent. The tax treaty between the U.S. and country F exempts interest payments from withholding tax.
Required:
Question: If USAco's debt to equity ratio exceeds 1.5 to 1, the amount of interest that USAco can deduct is:
1) $50,000.
2) $60,000.
3) $10,000.
4) $0.
Note: Be sure to show how you arrived at your answer.