CA Taxation & Regulatory Compliance 3 — Questions and Answers
Question 1: A sole proprietor's net self-employment income is $100,000. What is the deductible portion of self-employment tax on Schedule 1?
- $7,065
- $14,130
- $7,065 × 50% = $7,065
- One-half of the SE tax calculated on Schedule SE (Correct answer)
Correct answer: One-half of the SE tax calculated on Schedule SE
IRC Section 164(f) allows a deduction equal to one-half of the self-employment tax computed on Schedule SE, reducing adjusted gross income.
Question 2: Under the at-risk rules of IRC Section 465, a taxpayer's deductible loss is limited to the amount:
- Invested in the activity only
- Borrowed on a nonrecourse basis only
- The taxpayer is personally liable for or has at risk (Correct answer)
- Equal to the activity's book value
Correct answer: The taxpayer is personally liable for or has at risk
The at-risk rules limit deductions to amounts the taxpayer has personally invested plus recourse debt for which the taxpayer is personally liable.
Question 3: A corporation distributes a dividend of $10,000 to an individual shareholder. The dividends qualify as 'qualified dividends.' What is the maximum federal tax rate on this income for a high-income taxpayer?
- 37%
- 20%
- 15%
- 23.8% (Correct answer)
Correct answer: 23.8%
High-income taxpayers pay 20% on qualified dividends plus the 3.8% Net Investment Income Tax (NIIT), totaling 23.8%.
Question 4: Which of the following is NOT a requirement for the home office deduction under IRC Section 280A?
- Exclusive use of the space
- Regular use of the space
- Principal place of business or meeting clients
- The taxpayer must own (not rent) the home (Correct answer)
Correct answer: The taxpayer must own (not rent) the home
The home office deduction is available to both homeowners and renters; ownership of the home is not a requirement under Section 280A.
Question 5: When an S corporation has a built-in gain from its prior C corporation status, the built-in gains tax applies during the:
- First 3 years after S election
- First 5 years after S election (Correct answer)
- First 10 years after S election
- Indefinitely until assets are sold
Correct answer: First 5 years after S election
The built-in gains tax under IRC Section 1374 applies to dispositions of assets within 5 years of the S corporation election (recognition period).
Question 6: For gift tax purposes, the annual exclusion per donee in 2024 is:
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
For 2024, the annual gift tax exclusion is $18,000 per donee, indexed for inflation.
Question 7: Which entity type is NOT subject to the corporate alternative minimum tax (CAMT) enacted by the Inflation Reduction Act?
- C corporations with average annual adjusted financial statement income over $1 billion
- S corporations (Correct answer)
- Large publicly traded companies
- Consolidated groups meeting the $1 billion threshold
Correct answer: S corporations
S corporations are pass-through entities not subject to the 15% Corporate AMT; the CAMT applies only to large C corporations.
CA Taxation & Regulatory Compliance 3
A sole proprietor's net self-employment income is $100,000.
What is the deductible portion of self-employment tax on Schedule 1?