CA Taxation & Compliance 3 — Questions and Answers
Question 1: Under IRC §199A, a qualified business income (QBI) deduction allows eligible taxpayers to deduct up to what percentage of QBI from a qualified trade or business?
- 15%
- 20% (Correct answer)
- 25%
- 30%
Correct answer: 20%
IRC §199A allows a deduction of up to 20% of qualified business income from pass-through entities and sole proprietorships, subject to limitations.
Question 2: Which of the following is a 'specified service trade or business' (SSTB) excluded from the full §199A benefit at higher income levels?
- Engineering firm
- Architectural practice
- Law firm (Correct answer)
- Manufacturing company
Correct answer: Law firm
Law, health, consulting, financial services, and performing arts are SSTBs; engineering and architecture were explicitly carved out from the SSTB definition.
Question 3: A C corporation distributes $50,000 to its sole shareholder who has a $10,000 basis in the stock. The corporation has $60,000 of current E&P and $0 accumulated E&P. How is the distribution taxed?
- $50,000 ordinary dividend income (Correct answer)
- $40,000 capital gain and $10,000 return of basis
- $50,000 capital gain
- $10,000 return of basis and $40,000 ordinary income
Correct answer: $50,000 ordinary dividend income
Since the distribution ($50,000) does not exceed current E&P ($60,000), the entire amount is a qualified dividend taxable as ordinary income.
Question 4: Under the FBAR (FinCEN Form 114) rules, who must file if they have foreign financial accounts?
- Any U.S. person with aggregate foreign account balances exceeding $10,000 at any point during the calendar year (Correct answer)
- Only U.S. corporations with foreign subsidiaries
- U.S. persons with foreign real estate holdings over $100,000
- Only U.S. persons with accounts in tax haven jurisdictions
Correct answer: Any U.S. person with aggregate foreign account balances exceeding $10,000 at any point during the calendar year
Any U.S. person (including individuals, corporations, partnerships) must file FinCEN 114 if aggregate foreign account balances exceeded $10,000 at any time during the year.
Question 5: A partnership has a §754 election in effect. A partner sells their interest at a gain of $40,000 above their share of inside basis. What is the effect of the election?
- The partnership recognizes a $40,000 gain immediately
- The partnership adjusts the basis of its assets by $40,000 for the purchasing partner under §743(b) (Correct answer)
- The selling partner's gain is deferred
- No adjustment is made until the partnership liquidates
Correct answer: The partnership adjusts the basis of its assets by $40,000 for the purchasing partner under §743(b)
A §754 election triggers a §743(b) basis adjustment for the purchasing partner equal to the difference between their cost basis and share of inside basis.
Question 6: Which depreciation method must be used for residential rental property placed in service after 1986 under MACRS?
- 200% declining balance over 27.5 years
- Straight-line over 27.5 years (Correct answer)
- 150% declining balance over 39 years
- Straight-line over 39 years
Correct answer: Straight-line over 27.5 years
Residential rental property uses the straight-line method over a 27.5-year recovery period under the GDS of MACRS.
Question 7: Under the Affordable Care Act employer mandate, what is the threshold number of full-time equivalent employees that triggers the 'large employer' shared responsibility payment?
- 25 FTE employees
- 50 FTE employees (Correct answer)
- 100 FTE employees
- 500 FTE employees
Correct answer: 50 FTE employees
Applicable Large Employers (ALEs) with 50 or more full-time equivalent employees may be subject to the employer shared responsibility payment under IRC §4980H.
CA Taxation & Compliance 3
Under IRC §199A, a qualified business income (QBI) deduction allows eligible taxpayers to deduct up to what percentage of QBI from a qualified trade or business?