CA Taxation & Compliance 2

Question 1

A U.S. corporation has $500,000 of foreign-source income and pays $120,000 in foreign income taxes. If the U.S. tax on that income would be $150,000, what is the allowable foreign tax credit?

Accepted Answer

$120,000

Answer

The foreign tax credit is limited to the lesser of foreign taxes paid ($120,000) or the U.S. tax on foreign income ($150,000), so $120,000 is allowed.

Question 2

Under IRC Section 1031, which of the following exchanges qualifies for like-kind treatment?

Accepted Answer

Office building exchanged for farmland held for investment

Answer

Real property held for productive use or investment can be exchanged for any other qualifying real property, including farmland, under IRC §1031.

Question 3

Which penalty applies when a corporation fails to deposit employment taxes on time under the Trust Fund Recovery Penalty?

Accepted Answer

100% of the unpaid trust fund taxes assessed against responsible persons

Answer

The Trust Fund Recovery Penalty equals 100% of unpaid trust fund taxes (withheld income and FICA) and is assessed personally against responsible persons.

Question 4

A self-employed individual with net self-employment income of $100,000 calculates the deductible portion of self-employment tax. What is that deduction?

Accepted Answer

$7,065

Answer

SE tax is 15.3% on 92.35% of net SE income; the deductible portion is one-half of SE tax, or approximately $7,065 on $100,000 net SE income.

Question 5

Under the U.S. transfer pricing rules of IRC §482, which method is generally preferred for tangible goods transactions?

Accepted Answer

Comparable Uncontrolled Price (CUP) Method

Answer

The IRS's Best Method Rule favors the Comparable Uncontrolled Price method when reliable uncontrolled comparables exist, as it most directly measures arm's-length prices.

(CA) Chartered Certified Accountant Practice Test

(CA) Chartered Certified Accountant Practice Test

CA Taxation & Compliance 2