CTC Business Tax & Entity Structures Flashcards

Which type of business expense is disallowed as a deduction for both C corporations and pass-through entities under IRC Section 280E?

Answer: Expenses of a business trafficking in controlled substances

IRC Section 280E disallows deductions for any amount paid in carrying on a trade or business that consists of trafficking in controlled substances scheduled under federal law, including cannabis businesses.

A net operating loss (NOL) generated after December 31, 2017 can generally be carried:

Answer: Forward indefinitely but limited to 80% of taxable income

Under the TCJA, NOLs arising after 2017 may only be carried forward (no carryback for most taxpayers) and are limited to 80% of taxable income in the year of use.

Which vehicle-related deduction method typically results in a higher deduction for a high-mileage business driver?

Answer: Standard mileage rate method

For high-mileage drivers, the standard mileage rate method often yields a larger deduction because the per-mile rate multiplied by high mileage can exceed actual vehicle costs.

A business owner who uses part of their home exclusively and regularly for business may deduct home office expenses. Under the simplified method, the deduction is calculated as:

Answer: $5 per square foot up to 500 sq ft

The IRS simplified method allows a standard deduction of $5 per square foot of the home used for business, up to a maximum of 300 square feet ($1,500 maximum deduction).

When planning the sale of a closely held business, which approach allows the selling shareholder to spread taxable gain over multiple years?

Answer: Installment sale method under Section 453

An installment sale under IRC Section 453 allows sellers to recognize gain proportionally as payments are received, deferring tax to future years when installment payments are made.

Which payroll tax strategy allows a business owner to make pre-tax contributions to reduce both income tax and self-employment tax liability?

Answer: Solo 401(k) employee elective deferrals

Solo 401(k) employee elective deferrals reduce self-employment net earnings subject to SE tax because they are deducted from the owner's W-2 wages (if an S corp) or as an adjustment for sole proprietors.