- 45 - With netting Total U.S. source Foreign source Gross income Operating income $1,300,000 $800,000 $500,000 Interest income -0- -0- -0- Total 1,300,000 800,000 500,000 Gross income ratio 100% 61.54% 38.46% Expenses Operating expenses 500,000 300,000 200,000 Interest expense 175,000 107,692 67,308 Total 675,000 407,692 267,308 Taxable income 625,000 392,308 232,692 Sec. 904(a) ratio 100% 62.7692% 37.2308% Thus, in this example, the netting of interest expense and interest income has the effect of increasing, from 28 percent to 37.23 percent, the proportion of the taxpayer's taxable income, $625,000, that is attributable to foreign sources. There are several consequences of netting that should be noted. First, in order for the netting computation to arrive at the taxpayer's correct taxable income, i.e., $625,000 in the above example, the taxpayer's total gross income must be reduced by the amount of interest income that is offset against interest expense. This adjustment is necessary because only net interest expense is allocated and apportioned to the statutory grouping (i.e., foreign source) and the residual grouping (i.e., United States source) under section 1.861-8(e)(2), Income Tax Regs. Accordingly, the aggregate deductions used in the netting computation are less than actual aggregate deductions.Page: Previous 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 Next
Last modified: May 25, 2011