ABC Tax Planning & Compliance 2 — Questions and Answers
Question 1: A company wants to accelerate deductions into the current tax year to reduce taxable income. Which strategy best achieves this?
- Defer recognition of revenue to next year
- Prepay deductible expenses before year-end (Correct answer)
- Convert capital losses to ordinary losses
- Elect S-corporation status
Correct answer: Prepay deductible expenses before year-end
Prepaying deductible expenses such as rent, insurance, or subscriptions before December 31 allows businesses to accelerate deductions into the current tax year.
Question 2: Under the Internal Revenue Code, what is the general statute of limitations for the IRS to audit a standard federal income tax return?
- 1 year from filing date
- 3 years from filing date or due date, whichever is later (Correct answer)
- 5 years from filing date
- 7 years from filing date
Correct answer: 3 years from filing date or due date, whichever is later
The IRS generally has 3 years from the later of the filing date or due date to assess additional tax on a standard return.
Question 3: A business communicator drafting a press release about a corporate merger must avoid disclosing which of the following without proper authorization?
- The company's public stock ticker symbol
- Material nonpublic information that could affect stock price (Correct answer)
- The names of executive officers already listed in SEC filings
- Previously announced quarterly earnings
Correct answer: Material nonpublic information that could affect stock price
Material nonpublic information (MNPI) must not be disclosed publicly before official release, as doing so can violate SEC Regulation FD and insider trading rules.
Question 4: Which tax form do U.S. partnerships use to report income, deductions, and credits passed through to partners?
- Form 1120
- Form 1065 (Correct answer)
- Form 1040 Schedule C
- Form 1120-S
Correct answer: Form 1065
Form 1065 is the U.S. Return of Partnership Income, used to report the partnership's income and pass through items to partners via Schedule K-1.
Question 5: What is the primary purpose of a Section 1031 like-kind exchange in business tax planning?
- To convert ordinary income into capital gains
- To defer capital gains taxes on the sale of qualifying business property (Correct answer)
- To eliminate depreciation recapture permanently
- To transfer property to heirs tax-free
Correct answer: To defer capital gains taxes on the sale of qualifying business property
A Section 1031 exchange allows taxpayers to defer recognition of capital gains when they sell business or investment property and reinvest proceeds in like-kind replacement property.
Question 6: A corporation pays dividends to shareholders. How are qualified dividends generally taxed at the individual level in the U.S.?
- As ordinary income at the taxpayer's marginal rate
- At preferential long-term capital gains rates (Correct answer)
- They are fully tax-exempt
- At a flat 28% rate regardless of income
Correct answer: At preferential long-term capital gains rates
Qualified dividends are taxed at the preferential long-term capital gains rates of 0%, 15%, or 20%, depending on the taxpayer's taxable income.
Question 7: Which concept describes the practice of timing income recognition and deductions to minimize total tax liability across multiple years?
- Tax avoidance through shelters
- Intertemporal income shifting (Correct answer)
- Tax evasion
- Bracket arbitrage
Correct answer: Intertemporal income shifting
Intertemporal income shifting legally moves income and deductions between tax years to take advantage of lower rates or higher deductions in specific periods.
ABC Tax Planning & Compliance 2
A company wants to accelerate deductions into the current tax year to reduce taxable income.
Which strategy best achieves this?