CFP Tax Planning & Compliance 3 — Questions and Answers
Question 1: A cross-border fintech payment platform processes transactions between US merchants and EU customers. Under FATCA, the platform's foreign financial institution partners must report to the IRS information about accounts held by:
- All non-US persons transacting through the platform
- Specified US persons with financial interests in foreign financial accounts (Correct answer)
- EU residents earning income from US sources only
- Foreign corporations with more than 10% US beneficial ownership
Correct answer: Specified US persons with financial interests in foreign financial accounts
FATCA requires FFIs to identify and report on accounts held by specified US persons, including US citizens and residents with foreign financial accounts.
Question 2: An embedded finance company issues co-branded credit cards. For tax purposes, cash-back rewards earned by cardholders through purchases are generally treated as:
- Taxable ordinary income reportable on Form 1099-MISC
- A non-taxable reduction in the purchase price (rebate) (Correct answer)
- Capital gains income if rewards exceed $600 in a year
- Self-employment income if the cardholder runs a business
Correct answer: A non-taxable reduction in the purchase price (rebate)
The IRS treats cash-back and purchase rewards as non-taxable rebates or purchase price reductions, not as income, because they are tied to spending.
Question 3: A US fintech company earns income from a subsidiary in a low-tax jurisdiction. Under the GILTI (Global Intangible Low-Taxed Income) rules, this income is subject to US tax at an effective rate of approximately:
- 0%, because foreign subsidiary income is fully exempt under the participation exemption
- 10.5% (half the corporate rate of 21%) with a 50% deduction and 80% foreign tax credit (Correct answer)
- 21%, the same as domestic corporate income
- 37%, matching the top individual rate for pass-through entities
Correct answer: 10.5% (half the corporate rate of 21%) with a 50% deduction and 80% foreign tax credit
GILTI is taxed at an effective rate of approximately 10.5% for C-corporations after applying the 50% Section 250 deduction and 80% foreign tax credit.
Question 4: Under the CARES Act and subsequent guidance, a fintech company that issued PPP loans must recognize fee income from the SBA over the:
- Life of the loan using the effective interest method
- Period the loan is outstanding, accelerated upon forgiveness (Correct answer)
- Tax year the loan was originated, regardless of forgiveness
- Tax year forgiveness is granted by the SBA
Correct answer: Period the loan is outstanding, accelerated upon forgiveness
PPP origination fees paid by the SBA are recognized as interest income over the loan's life using the effective interest method, accelerated when loans are forgiven.
Question 5: A neobank operating as an S-corporation distributes profits to shareholders. Unlike C-corporations, S-corporation distributions are generally:
- Subject to double taxation at both corporate and shareholder level
- Not subject to corporate-level income tax; income passes through to shareholders (Correct answer)
- Exempt from all federal income tax if reinvested in technology infrastructure
- Taxed at a flat 15% qualified dividend rate at the shareholder level
Correct answer: Not subject to corporate-level income tax; income passes through to shareholders
S-corporations are pass-through entities; income is not taxed at the corporate level but flows through to shareholders who report it on their personal returns.
Question 6: A US resident receives an airdrop of new cryptocurrency tokens she did not request. Per IRS Revenue Ruling 2023-14, she must recognize:
- No income until she sells or exchanges the tokens
- Ordinary income equal to the fair market value of the tokens when she gains dominion and control (Correct answer)
- Capital gain income based on the market value at the time of the airdrop
- A gift exclusion because airdrops are unsolicited transfers
Correct answer: Ordinary income equal to the fair market value of the tokens when she gains dominion and control
IRS Revenue Ruling 2023-14 clarifies that unsolicited airdrop tokens are taxable as ordinary income at fair market value when the taxpayer acquires dominion and control.
Question 7: A fintech company's R&D department develops a proprietary fraud detection algorithm. Under the TCJA change effective 2022, domestic R&D expenditures must be:
- Expensed immediately under Section 179 as tangible property
- Amortized over 5 years using the midpoint convention under Section 174 (Correct answer)
- Capitalized indefinitely until the algorithm is sold or abandoned
- Deducted in the year paid if the company is a cash-basis taxpayer
Correct answer: Amortized over 5 years using the midpoint convention under Section 174
Starting in 2022, Section 174 requires domestic R&E costs to be amortized over 5 years (15 years for foreign research) rather than immediately expensed.
CFP Tax Planning & Compliance 3
A cross-border fintech payment platform processes transactions between US merchants and EU customers.
Under FATCA, the platform's foreign financial institution partners must report to the IRS information about accounts held by: