AD Corporation is a large U. S. manufacturer of frozen bananas. In year 1, AD has $ 100 million of Canadian- source income, taxed at a 40% Canadian rate. AD’s U.S. source income is negative $ 30 million due to a casualty loss arising from a fire in its primary warehouse, giving AD $ 70 million of U. S. taxable income. The U. S. tax rate is 35%. AD has $ 5 million of foreign tax credit carry forwards from the prior year. In year 2, AD projects that it will again have $ 100 million of Canadian-source income, taxed at a 40% Canadian rate. However, AD’s U. S.- source income will increase to $ 150 million.
a. What is AD’s foreign tax credit and U. S. tax in year 1?
b. What is AD’s foreign tax credit and U. S. tax in year 2?
c. Suppose that AD could accelerate $ 30 million of U.S source income from year 2 into year 1. How does this option change your answers to parts a and b?