CFC Tax Planning & Strategy 5 — Questions and Answers
Question 1: A calendar-year C corporation files its federal income tax return. What is the standard due date (without extension) for its Form 1120?
- March 15
- April 15 (Correct answer)
- April 15 with automatic 6-month extension only
- September 15
Correct answer: April 15
Form 1120 for a calendar-year C corporation is due on April 15, with an available automatic 6-month extension to October 15.
Question 2: Which tax planning technique involves deliberately realizing capital losses before year-end to offset capital gains and reduce the current year's tax bill?
- Tax-loss harvesting (Correct answer)
- Like-kind exchange
- Installment sale deferral
- Charitable remainder trust
Correct answer: Tax-loss harvesting
Tax-loss harvesting is the strategic sale of securities or assets at a loss to offset realized capital gains, reducing net taxable gain for the year.
Question 3: Under the unified gift and estate tax system, what is the primary purpose of annual exclusion gifting ($18,000 per recipient in 2024)?
- Reducing the donor's income tax liability
- Transferring wealth out of the taxable estate free of gift tax (Correct answer)
- Creating a charitable deduction for the donor
- Converting capital gains to ordinary income
Correct answer: Transferring wealth out of the taxable estate free of gift tax
Annual exclusion gifts remove assets from the donor's taxable estate without using any lifetime exemption or triggering gift tax, gradually reducing the gross estate.
Question 4: A corporation leases rather than purchases equipment. From a tax planning perspective, one key advantage is:
- Eligibility for §179 expensing on leased property
- The full lease payment is typically deductible as a business expense (Correct answer)
- Lease payments generate a step-up in asset basis
- Leased assets qualify for bonus depreciation
Correct answer: The full lease payment is typically deductible as a business expense
Operating lease payments are generally fully deductible as ordinary business expenses, which may provide greater immediate deductions than capitalizing and depreciating purchased property.
Question 5: Which international tax concept requires that a multinational's profit be allocated to the country where economic value is created, based on OECD BEPS guidelines?
- Formulary apportionment
- Value chain analysis / economic substance (Correct answer)
- Thin capitalization rules
- Treaty shopping
Correct answer: Value chain analysis / economic substance
OECD BEPS Action Plans require that profits be aligned with the actual functions, assets, and risks in the value chain—preventing profit allocation to jurisdictions with no real economic activity.
Question 6: A financial controller is structuring an employee stock ownership plan (ESOP). A key federal tax benefit for a C corporation sponsoring an ESOP is:
- ESOP contributions are not subject to FICA taxes
- The corporation can deduct contributions of stock or cash used to repay ESOP acquisition loans (Correct answer)
- Employees pay capital gains rates on all ESOP distributions
- ESOPs eliminate corporate AMT liability
Correct answer: The corporation can deduct contributions of stock or cash used to repay ESOP acquisition loans
C corporations can deduct both principal and interest on loans used by the ESOP to acquire employer stock, making ESOPs a tax-efficient way to finance acquisitions and reward employees.
Question 7: Under IRC §1245, when depreciable personal property is sold at a gain, what portion of the gain is subject to recapture as ordinary income?
- None—all gain is capital gain
- Only gain attributable to straight-line depreciation
- All depreciation previously deducted, up to the total gain recognized (Correct answer)
- Only bonus depreciation taken under §168(k)
Correct answer: All depreciation previously deducted, up to the total gain recognized
§1245 recaptures all depreciation deductions previously taken on personal property as ordinary income, up to but not exceeding the total gain realized on the sale.
CFC Tax Planning & Strategy 5
A calendar-year C corporation files its federal income tax return.
What is the standard due date (without extension) for its Form 1120?