ABC Tax Planning & Compliance 3 — Questions and Answers
Question 1: A business communicator is writing an annual report section on tax risk. Which metric best communicates the company's effective tax burden to investors?
- Statutory corporate tax rate
- Effective tax rate (ETR) (Correct answer)
- Marginal tax rate on the last dollar of income
- Alternative minimum tax rate
Correct answer: Effective tax rate (ETR)
The effective tax rate — total income tax expense divided by pre-tax book income — reflects the actual percentage of earnings paid in taxes and is the most informative metric for investors.
Question 2: An S-corporation owner takes a salary of $30,000 but receives $200,000 in distributions. What is the IRS most likely to challenge?
- The amount of distributions taken
- The unreasonably low salary used to avoid payroll taxes (Correct answer)
- The S-election itself
- The timing of the distributions
Correct answer: The unreasonably low salary used to avoid payroll taxes
The IRS requires S-corporation owner-employees to pay themselves a reasonable salary before taking distributions, because distributions are not subject to self-employment or payroll taxes.
Question 3: Under GAAP ASC 740, which term describes a temporary difference that will result in a future tax deduction?
- Deferred tax liability
- Deferred tax asset (Correct answer)
- Permanent difference
- Tax valuation allowance
Correct answer: Deferred tax asset
A deferred tax asset arises from temporary differences where book expenses exceed tax deductions today, creating a future tax benefit when the deduction is eventually taken.
Question 4: A U.S. company earns income through a foreign subsidiary. Under the TCJA's GILTI provisions, what type of income is subject to current U.S. taxation?
- All foreign-source income regardless of type
- Global intangible low-taxed income exceeding a routine return threshold (Correct answer)
- Only passive income from foreign subsidiaries
- Income from foreign branches only
Correct answer: Global intangible low-taxed income exceeding a routine return threshold
GILTI (Global Intangible Low-Taxed Income) taxes U.S. shareholders on foreign subsidiary income that exceeds a 10% routine return on depreciable tangible assets.
Question 5: Which of the following is a key distinction between tax avoidance and tax evasion?
- Tax avoidance involves offshore accounts; evasion uses only domestic shelters
- Tax avoidance is legal; tax evasion is illegal and involves willful noncompliance (Correct answer)
- Tax evasion reduces taxes more than avoidance
- Both are illegal but evasion carries higher penalties
Correct answer: Tax avoidance is legal; tax evasion is illegal and involves willful noncompliance
Tax avoidance uses legal means to reduce tax liability, while tax evasion involves illegal conduct such as hiding income or falsifying records — a critical compliance distinction.
Question 6: What document does a U.S. employer file annually with the Social Security Administration to report wages paid and taxes withheld for employees?
- Form 941
- Form W-2
- Form 1099-NEC
- Form W-3 with W-2s (Correct answer)
Correct answer: Form W-3 with W-2s
Employers transmit Copy A of all W-2 forms to the SSA along with Form W-3, the transmittal summary, by January 31 each year.
Question 7: A business is considering whether to lease or purchase equipment. Which tax benefit is exclusive to purchasing (not leasing) the asset?
- Deducting lease payments as business expenses
- Taking bonus depreciation or Section 179 expensing on the asset (Correct answer)
- Treating the transaction as off-balance-sheet
- Receiving a tax credit for the lease term
Correct answer: Taking bonus depreciation or Section 179 expensing on the asset
Only the owner of qualifying property can claim bonus depreciation or Section 179 expensing; a lessee deducts lease payments but cannot depreciate an asset it does not own.
ABC Tax Planning & Compliance 3
A business communicator is writing an annual report section on tax risk.
Which metric best communicates the company's effective tax burden to investors?