CFC Tax Planning & Strategy 2 — Questions and Answers
Question 1: A corporation has both domestic and foreign-source income. Which method allows it to reduce US tax on foreign income by crediting taxes paid abroad?
- Territorial exemption
- Foreign tax credit (FTC) (Correct answer)
- Subpart F inclusion
- GILTI deduction
Correct answer: Foreign tax credit (FTC)
The foreign tax credit allows US corporations to credit taxes paid to foreign governments against their US tax liability on the same income.
Question 2: Under IRC §199A, qualified business income (QBI) deduction for pass-through entities is generally limited to what percentage?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The §199A deduction allows eligible taxpayers to deduct up to 20% of qualified business income from pass-through entities.
Question 3: Which depreciation method accelerates deductions most aggressively in early years for tax planning purposes?
- Straight-line
- Units of production
- Double-declining balance (Correct answer)
- Sum-of-years-digits
Correct answer: Double-declining balance
Double-declining balance applies twice the straight-line rate to the declining book value, front-loading the largest depreciation in early years.
Question 4: A company wants to defer income to the following tax year. Which of the following strategies best achieves this for a cash-basis taxpayer?
- Accelerate billing and collections before year-end
- Delay sending invoices until early next year (Correct answer)
- Recognize long-term contract revenue on completion
- Elect installment sale treatment on all sales
Correct answer: Delay sending invoices until early next year
A cash-basis taxpayer recognizes income when received, so delaying invoicing until next year defers the cash receipt and the tax liability.
Question 5: Which type of corporate reorganization under IRC §368 allows a company to acquire a target's assets in exchange for stock without triggering gain to the target?
- Type A merger
- Type C reorganization (Correct answer)
- Type D reorganization
- Type G reorganization
Correct answer: Type C reorganization
A Type C reorganization involves the acquisition of substantially all of the target's assets in exchange for the acquiring corporation's voting stock, generally tax-free.
Question 6: A US parent receives dividends from a wholly-owned foreign subsidiary. Under the TCJA participation exemption, what percentage of foreign-source dividends may be deducted?
- 50%
- 65%
- 80%
- 100% (Correct answer)
Correct answer: 100%
IRC §245A provides a 100% dividends-received deduction for dividends from specified 10%-owned foreign corporations, creating a territorial tax system.
Question 7: Which tax planning strategy involves shifting income to a lower-bracket family member through the use of gifts of income-producing property?
- Income splitting (Correct answer)
- Step-up in basis
- Like-kind exchange
- Loss harvesting
Correct answer: Income splitting
Income splitting transfers income-producing assets to lower-bracket taxpayers (e.g., family members) to reduce the overall family tax burden.
CFC Tax Planning & Strategy 2
A corporation has both domestic and foreign-source income.
Which method allows it to reduce US tax on foreign income by crediting taxes paid abroad?