Translation of Foreign Tax Payments. Arnie, a U.S. citizen who uses the calendar year as his tax year and the cash method of accounting, operates a sole proprietorship in Country Z. In Year 1, he reports 500,000 dubles of pretax profits. On June 1 of Year 2, he pays Country Z income taxes of 150,000 dubles for calendar Year 1.
Duble-U.S. dollar exchange rates on various dates in Year 1 and Year 2 are as follows:
December 31, Year 1 4.00 dubles = $1 (U.S.)
Year 1 average 3.75 dubles = $1 (U.S.)
June 1, Year 2 4.25 dubles = $1 (U.S.)
a. What is the U.S. dollar amount of Arnie's foreign tax credit? In what year can Arnie claim the credit?
b. How would your answer to Part a change if Arnie elected to accrue his foreign income taxes on December 31 of Year 1, and filed his Year 1 U.S. income tax return on April 15 of Year 2?
c. What adjustment to the credit claimed in Part b would Arnie have to make when he pays his Country Z taxes on June 1 of Year 2?