Case Problem: Valencia Corporation, a U.S. corporation, has 2003 taxable income from U.S. sources of $300,000 and from foreign sources of $120,000 before considering the impact of foreign taxes. It paid $20,000 of foreign taxes during 2003.
1. If Valencia's foreign taxes are not creditable, calculate its U.S. tax liability for 2003.
2. If Valencia's foreign taxes are creditable, calculate its allowable foreign tax credit and net U.S. tax liability for 2003. Do you recommend that Valencia elect to credit its foreign taxes rather than deduct them?
3. How would your answers to parts (a) and (b) change if Valencia paid $60,000 of foreign taxes during 2003?