CFC Tax Planning & Strategy 4 — Questions and Answers
Question 1: Which IRS safe harbor allows a taxpayer to avoid underpayment penalties by paying at least 100% of the prior year's tax liability (110% if prior-year AGI exceeded $150,000)?
- Current-year safe harbor
- Prior-year safe harbor (Correct answer)
- Annualized income installment method
- De minimis exception
Correct answer: Prior-year safe harbor
The prior-year safe harbor shields taxpayers from underpayment penalties if estimated tax payments equal at least 100% (or 110%) of the prior year's total tax.
Question 2: Under IRC §382, what is restricted after a corporation undergoes an ownership change of more than 50%?
- Future dividend payments
- Use of pre-change NOL carryforwards (Correct answer)
- Depreciation deductions on acquired assets
- The dividends-received deduction
Correct answer: Use of pre-change NOL carryforwards
§382 limits the amount of pre-change NOL that can offset post-change income to a rate equal to the company's value multiplied by the long-term tax-exempt rate.
Question 3: A controller implements a captive insurance arrangement. The primary tax planning benefit is:
- Deferring revenue recognition indefinitely
- Deducting premiums paid while retaining the underwriting profit within a related entity (Correct answer)
- Converting ordinary income to capital gains
- Avoiding state and local income taxes
Correct answer: Deducting premiums paid while retaining the underwriting profit within a related entity
Captive insurance allows a company to deduct insurance premiums paid to a related insurer, while the captive retains reserves and potential profit, creating a tax and cash flow benefit.
Question 4: Which of the following is a key advantage of a Roth 401(k) over a traditional 401(k) from a long-term tax planning perspective?
- Higher annual contribution limits
- Pre-tax contributions reducing current taxable income
- Tax-free qualified withdrawals in retirement (Correct answer)
- Employer matching contributions are excluded from income
Correct answer: Tax-free qualified withdrawals in retirement
Roth 401(k) contributions are made after-tax, but qualified distributions in retirement are completely tax-free, including all accumulated earnings.
Question 5: A company expects tax rates to increase next year. Which immediate tax planning action would be most beneficial?
- Defer deductions to next year and accelerate income into the current year (Correct answer)
- Accelerate deductions into the current year and defer income to next year
- Convert all assets to long-term capital assets
- Elect S corporation status immediately
Correct answer: Defer deductions to next year and accelerate income into the current year
When rates are expected to rise, deductions become more valuable in the future, and income taxed at today's lower rates is preferable, so accelerating income and deferring deductions is optimal.
Question 6: Which provision allows certain small businesses to immediately expense the full cost of qualifying depreciable assets rather than depreciating over their useful life?
- §179 expensing election (Correct answer)
- §167 MACRS deduction
- §197 amortization
- §168(k) bonus depreciation
Correct answer: §179 expensing election
IRC §179 permits businesses to elect to immediately deduct the cost of qualifying property placed in service, subject to annual dollar and income limitations.
Question 7: The GILTI (Global Intangible Low-Taxed Income) regime primarily targets:
- Dividends repatriated from foreign subsidiaries
- Excess profits of controlled foreign corporations above a routine return on tangible assets (Correct answer)
- Capital gains from sale of foreign affiliates
- Transfer pricing adjustments on intercompany loans
Correct answer: Excess profits of controlled foreign corporations above a routine return on tangible assets
GILTI captures the excess income of CFCs beyond a 10% routine return on tangible assets, subjecting it to current US tax (at a reduced rate with the §250 deduction).
CFC Tax Planning & Strategy 4
Which IRS safe harbor allows a taxpayer to avoid underpayment penalties by paying at least 100% of the prior year's tax liability (110% if prior-year AGI exceeded $150,000)?