CIA Tax Planning & Compliance 2 — Questions and Answers
Question 1: Under IRC Section 1033, a taxpayer who receives insurance proceeds from an involuntary conversion must reinvest within how many years to defer gain recognition on business property?
- 1 year
- 2 years
- 3 years (Correct answer)
- 5 years
Correct answer: 3 years
IRC Section 1033 generally requires replacement of involuntarily converted business property within 3 years after the close of the tax year in which gain is realized.
Question 2: A homeowner receives a $200,000 insurance settlement for fire damage to a home with an adjusted basis of $150,000. If they do NOT reinvest under Section 1033, how much gain must they recognize?
- $0
- $50,000 (Correct answer)
- $150,000
- $200,000
Correct answer: $50,000
The recognized gain equals insurance proceeds minus adjusted basis: $200,000 − $150,000 = $50,000.
Question 3: Which IRS form is used to report casualty and theft losses for individuals?
- Form 4684 (Correct answer)
- Form 4797
- Schedule D
- Form 8949
Correct answer: Form 4684
Form 4684 (Casualties and Thefts) is used by individuals to calculate and report deductible casualty and theft losses.
Question 4: After the Tax Cuts and Jobs Act of 2017, personal casualty loss deductions for individuals are generally limited to losses arising from:
- Any accident or storm
- Federally declared disasters only (Correct answer)
- Losses exceeding $500
- Theft and vandalism only
Correct answer: Federally declared disasters only
The TCJA suspended the personal casualty loss deduction for 2018–2025 except for losses attributable to a federally declared disaster.
Question 5: Business interruption insurance proceeds received by a sole proprietor are generally treated for tax purposes as:
- Tax-exempt income
- Ordinary income replacing lost profits (Correct answer)
- Capital gain
- Return of capital
Correct answer: Ordinary income replacing lost profits
Business interruption proceeds replace lost taxable profits, so they are taxable as ordinary income in the year received.
Question 6: A corporation pays premiums on a key-person life insurance policy where the corporation is the beneficiary. How are those premiums treated for tax purposes?
- Fully deductible as a business expense
- Deductible only if the employee consents
- Not deductible (Correct answer)
- Deductible up to $50,000 per year
Correct answer: Not deductible
Premiums on key-person life insurance where the employer is the beneficiary are NOT deductible under IRC Section 264(a)(1).
Question 7: The individual threshold rule for deducting personal casualty losses (when allowed) requires the loss to exceed what percentage of adjusted gross income after the $100 per-event floor?
- 2%
- 5%
- 7.5%
- 10% (Correct answer)
Correct answer: 10%
Personal casualty losses must exceed a $100-per-event floor and then 10% of AGI before any deduction is allowed.
CIA Tax Planning & Compliance 2
Under IRC Section 1033, a taxpayer who receives insurance proceeds from an involuntary conversion must reinvest within how many years to defer gain recognition on business property?