CTC Tax Planning Strategies 2

Question 1

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?

Accepted Answer

The IRS may reclassify distributions as wages subject to payroll taxes

Answer

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

Question 2

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?

Accepted Answer

14 days

Answer

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

Question 3

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

Accepted Answer

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

Answer

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

Question 4

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

Accepted Answer

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

Answer

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

Question 5

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

Accepted Answer

Cost segregation study

Answer

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

CTC - Certified Tax Coach Practice Test