ABC Tax Planning & Compliance 3

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?

Accepted Answer

Effective tax rate (ETR)

Answer

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?

Accepted Answer

The unreasonably low salary used to avoid payroll taxes

Answer

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?

Accepted Answer

Deferred tax asset

Answer

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?

Accepted Answer

Global intangible low-taxed income exceeding a routine return threshold

Answer

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?

Accepted Answer

Tax avoidance is legal; tax evasion is illegal and involves willful noncompliance

Answer

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.

(ABC) Accredited Business Communicator Practice Test

(ABC) Accredited Business Communicator Practice Test

ABC Tax Planning & Compliance 3