CPA Tax Planning & Compliance 3 — Questions and Answers
Question 1: Which of the following is NOT a deductible business expense under IRC Section 162?
- Political contributions made on behalf of the business (Correct answer)
- Salaries paid to employees
- Rent paid for business premises
- Advertising costs
Correct answer: Political contributions made on behalf of the business
Political contributions are explicitly disallowed as business deductions under IRC Section 162(e), even if made for business purposes.
Question 2: Under the passive activity loss rules, rental losses are generally:
- Deductible only against passive income unless the taxpayer is a real estate professional (Correct answer)
- Always fully deductible against ordinary income
- Never deductible for individual taxpayers
- Deductible only in the year the property is sold
Correct answer: Deductible only against passive income unless the taxpayer is a real estate professional
Rental activities are passive by default; losses can only offset other passive income unless the taxpayer qualifies as a real estate professional under IRC Section 469.
Question 3: What is the tax treatment of a like-kind exchange under IRC Section 1031?
- Gain is deferred until the replacement property is sold (Correct answer)
- Gain is fully recognized in the year of exchange
- Gain is permanently excluded from income
- Loss is recognized but gain is deferred
Correct answer: Gain is deferred until the replacement property is sold
A qualifying Section 1031 exchange defers—not eliminates—gain recognition by substituting the basis of the old property into the new property.
Question 4: Which of the following retirement accounts allows after-tax contributions with tax-free qualified withdrawals?
- Roth IRA (Correct answer)
- Traditional IRA
- SEP-IRA
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRAs are funded with after-tax dollars; qualifying distributions (age 59½, 5-year holding period met) are completely tax-free including earnings.
Question 5: A taxpayer with a Schedule C business pays $8,000 in self-employment tax. What deduction is allowed on Form 1040?
- 50% of self-employment tax ($4,000) as an above-the-line deduction (Correct answer)
- 100% of self-employment tax as an itemized deduction
- No deduction is allowed
- 50% of self-employment tax as an itemized deduction
Correct answer: 50% of self-employment tax ($4,000) as an above-the-line deduction
Self-employed taxpayers may deduct 50% of their self-employment tax as an above-the-line adjustment to income on Schedule 1.
Question 6: Under the at-risk rules, a partner's deductible loss from a partnership is limited to:
- The amount the partner has at risk, including cash invested and recourse debt (Correct answer)
- The partner's capital account balance only
- The fair market value of partnership assets
- Total partnership liabilities allocated to the partner
Correct answer: The amount the partner has at risk, including cash invested and recourse debt
IRC Section 465 limits loss deductions to amounts actually at risk—cash invested plus recourse liabilities for which the partner is personally liable.
Question 7: What is the primary tax advantage of a Health Savings Account (HSA)?
- Contributions are deductible, growth is tax-free, and qualified withdrawals are tax-free (Correct answer)
- Only contributions are tax-deductible; withdrawals are always taxable
- Contributions are made with after-tax dollars but qualified withdrawals are tax-free
- Only employer contributions are excluded from income
Correct answer: Contributions are deductible, growth is tax-free, and qualified withdrawals are tax-free
HSAs offer a unique triple tax benefit: deductible contributions, tax-free investment growth, and tax-free distributions for qualified medical expenses.
CPA Tax Planning & Compliance 3
Which of the following is NOT a deductible business expense under IRC Section 162?