CPA Tax Planning & Compliance 2 — Questions and Answers
Question 1: A corporation has $500,000 of taxable income and pays $105,000 in federal income tax. What is the effective tax rate?
- 21% (Correct answer)
- 35%
- 28%
- 15%
Correct answer: 21%
Under the Tax Cuts and Jobs Act of 2017, the flat corporate tax rate is 21%, so $500,000 × 21% = $105,000.
Question 2: Which depreciation method generally provides the largest tax deductions in the early years of an asset's life?
- Double-declining balance (Correct answer)
- Straight-line
- Units of production
- Sum-of-the-years'-digits
Correct answer: Double-declining balance
Double-declining balance is an accelerated method that applies twice the straight-line rate to the declining book value, front-loading deductions.
Question 3: Under IRC Section 179, what is the primary benefit to a business?
- Immediate expensing of qualifying property rather than depreciating over its useful life (Correct answer)
- Deferring gain on asset disposals
- Avoiding self-employment tax on business income
- Converting ordinary income to capital gains
Correct answer: Immediate expensing of qualifying property rather than depreciating over its useful life
Section 179 allows businesses to immediately deduct the full cost of qualifying depreciable property in the year placed in service, subject to annual limits.
Question 4: A taxpayer sells a capital asset held for 18 months at a $10,000 gain. How is this gain classified?
- Long-term capital gain (Correct answer)
- Short-term capital gain
- Ordinary income
- Section 1231 gain
Correct answer: Long-term capital gain
Assets held more than 12 months qualify for long-term capital gain treatment, which is taxed at preferential rates (0%, 15%, or 20%).
Question 5: Which entity type allows owners to avoid double taxation while providing liability protection similar to a corporation?
- S corporation (Correct answer)
- C corporation
- Sole proprietorship
- General partnership
Correct answer: S corporation
An S corporation passes income and losses directly to shareholders, avoiding corporate-level tax while still providing limited liability protection.
Question 6: What is the purpose of the alternative minimum tax (AMT) for individuals?
- To ensure high-income taxpayers pay a minimum level of tax by limiting certain deductions and preferences (Correct answer)
- To impose an additional tax on investment income above $200,000
- To tax Social Security benefits at a higher rate
- To limit deductions for business losses
Correct answer: To ensure high-income taxpayers pay a minimum level of tax by limiting certain deductions and preferences
The AMT recalculates taxable income by adding back preferences and adjustments, ensuring taxpayers who benefit from many deductions still pay a baseline amount of tax.
Question 7: A married couple filing jointly has $250,000 in net investment income and $300,000 in modified AGI. How much of their investment income is subject to the Net Investment Income Tax (NIIT)?
- $50,000 (Correct answer)
- $250,000
- $300,000
- $0
Correct answer: $50,000
NIIT applies to the lesser of net investment income or the excess of MAGI over the threshold ($250,000 for MFJ); $300,000 − $250,000 = $50,000 subject to the 3.8% NIIT.
CPA Tax Planning & Compliance 2
A corporation has $500,000 of taxable income and pays $105,000 in federal income tax.
What is the effective tax rate?