Tax Planning Strategies Flashcards

An S corporation owner-employee takes all profits as distributions and pays himself no salary despite working full-time. What is the main tax risk?

Answer: The IRS may reclassify distributions as wages subject to payroll taxes

S corporation shareholder-employees must receive reasonable compensation, and the IRS can recharacterize distributions as wages subject to FICA.

Under the 'Augusta Rule' (IRC §280A(g)), a homeowner can rent their home to their business tax-free for up to how many days per year?

Answer: 14 days

Rental income is excluded if the dwelling is rented for fewer than 15 days (14 or fewer) during the year.

A sole proprietor pays his 15-year-old child reasonable wages for real work in the business. Which statement is correct?

Answer: The wages are deductible and exempt from Social Security and Medicare taxes

Wages paid by a sole proprietor (or parent-only partnership) to a child under 18 are exempt from FICA and deductible to the business.

What is the primary tax benefit of reimbursing employees under an accountable plan?

Answer: Reimbursements are deductible by the employer and excluded from the employee's income

Accountable plan reimbursements are not wages to the employee yet remain deductible business expenses for the employer.

A client purchases a $3 million commercial building. Which strategy most directly accelerates depreciation deductions on the building's components?

Answer: Cost segregation study

A cost segregation study reclassifies building components into 5-, 7-, and 15-year property eligible for faster depreciation and bonus depreciation.

In a Section 1031 like-kind exchange, within how many days must the replacement property be identified after the relinquished property is transferred?

Answer: 45 days

Replacement property must be identified within 45 days and acquired within 180 days of the transfer.

Which entity type generally allows a business owner to reduce self-employment taxes by splitting income between salary and distributions?

Answer: S corporation

S corporation distributions above reasonable compensation are not subject to self-employment or payroll taxes.