Reference no: EM132971206

Question - Domco is a domestic corporation that distributes scientific equipment worldwide. During the current year, Domco had $200 million of sales, a gross profit of $90 million, and incurred $60 million of selling, general and administrative expenses (SG&A), for taxable income of $20 million. Domco's sales include $50 million of sales to foreign customers. The gross profit on these foreign sales was $20 million. Domco transferred title abroad on all foreign sales, and therefore the entire $20 million is classified as foreign-source income. A time management survey was recently completed, and indicates that employees devote 80% of their time to the company's domestic operations and 20% to foreign operations. Compensation expenses account for $40 million of the $60 million of total SG&A expenses. Assume Domco's $20 million of taxable income is subject to U.S. tax at a 21% rate. Compute Domco's US tax on the foreign portion of taxable income under the following independent assumptions.

a. Domco determines the amount of SG&A expenses allocable to foreign-source income using gross sales as an apportionment base.

b. Domco determines the amount of SG&A expenses allocable to foreign-source income using gross profit as an apportionment base.

c. Domco determines the amount of SG&A expenses allocable to foreign-source income using time as an apportionment base for the compensation component of SG&A, and gross sales as an apportionment base for the all other SG&A expenses.