CFC Business Financial Planning 1

Question 1

Which business entity structure provides limited liability to all owners while allowing profits and losses to pass through to personal tax returns?

Accepted Answer

Limited liability company (LLC)

Answer

An LLC combines limited liability protection (like a corporation) with pass-through taxation (like a partnership), avoiding double taxation on corporate profits.

Question 2

A CFC advises a business owner on a Section 1031 exchange. This provision allows deferral of capital gains tax when:

Accepted Answer

Exchanging like-kind real property for other qualifying real property

Answer

Section 1031 permits tax deferral on gains from the exchange of qualifying real property held for investment or business use, as long as strict identification and timing rules are met.

Question 3

Which business succession strategy allows a departing owner to receive installment payments over time while the business transfers to a buyer?

Accepted Answer

Installment sale

Answer

An installment sale spreads the recognition of capital gain over the payment period, reducing the seller's tax liability compared to receiving all proceeds in a single year.

Question 4

An Employee Stock Ownership Plan (ESOP) allows a business owner to sell shares to the ESOP and, if certain conditions are met under Section 1042, defer capital gains by:

Accepted Answer

Reinvesting into qualifying replacement property (QRP) like stocks and bonds

Answer

Under IRC Section 1042, a C corporation owner selling at least 30% to an ESOP can defer capital gains by reinvesting proceeds in qualified replacement property within 12 months.

Question 5

A closely held business using the 'family limited partnership' (FLP) structure can transfer wealth by leveraging:

Accepted Answer

Valuation discounts for lack of control and lack of marketability

Answer

FLPs allow senior family members to gift limited partnership interests at discounted values (due to lack of control and marketability), transferring more wealth with less gift tax.

CFC - Certified Financial Consultant Practice Test

CFC - Certified Financial Consultant Practice Test

CFC Business Financial Planning 1