CTC CTC Business Tax & Entity Structures 2 — Questions and Answers
Question 1: Which type of fringe benefit allows a C corporation to deduct 100% of premiums paid for employee health insurance while the benefit is excluded from the employee's gross income?
- Group-term life insurance above $50,000
- Health Reimbursement Arrangement (HRA)
- Employer-paid health insurance premiums (Correct answer)
- Disability insurance premiums
Correct answer: Employer-paid health insurance premiums
Employer-paid health insurance premiums are fully deductible by the C corporation and excluded from the employee's gross income under IRC Section 106.
Question 2: The accumulated earnings tax is imposed on C corporations that accumulate earnings beyond reasonable business needs primarily to:
- Reward shareholders with dividends
- Avoid corporate income tax
- Avoid the personal holding company tax
- Avoid shareholder-level taxation on dividends (Correct answer)
Correct answer: Avoid shareholder-level taxation on dividends
The accumulated earnings tax (currently 20%) targets C corporations that retain earnings to prevent shareholders from paying dividend income tax, rather than distributing those earnings.
Question 3: Which business tax strategy involves hiring a spouse or child in the business to shift income to a lower tax bracket?
- Income splitting (Correct answer)
- Kiddie tax planning
- Passive activity loss planning
- Like-kind exchange
Correct answer: Income splitting
Income splitting involves employing family members at reasonable compensation levels to shift business income from the higher-bracket owner to lower-bracket family members.
Question 4: Under the IRC, what is the maximum depreciation deduction allowed under bonus depreciation for qualifying property placed in service in 2023?
- 100%
- 80% (Correct answer)
- 60%
- 40%
Correct answer: 80%
For property placed in service in 2023, bonus depreciation is 80% under the phase-down schedule established by the Tax Cuts and Jobs Act.
Question 5: A tax coach recommends converting a single-member LLC taxed as a sole proprietorship to an S corporation primarily to reduce:
- Corporate income tax
- Self-employment tax on business profits (Correct answer)
- Passive activity losses
- Capital gains tax
Correct answer: Self-employment tax on business profits
Electing S corporation status for an LLC can reduce self-employment tax by allowing the owner to characterize part of business income as distributions rather than wages.
Question 6: Which tax provision allows a taxpayer who materially participates in a real estate business as their primary occupation to deduct rental losses against ordinary income without passive loss limitations?
- Real estate professional status under IRC Section 469 (Correct answer)
- At-risk rules under IRC Section 465
- Qualified business income deduction under Section 199A
- Active participation rule allowing up to $25,000 deduction
Correct answer: Real estate professional status under IRC Section 469
A taxpayer who qualifies as a real estate professional under IRC Section 469(c)(7) can treat rental activities as non-passive, allowing losses to offset ordinary income without limitation.
CTC CTC Business Tax & Entity Structures 2
Which type of fringe benefit allows a C corporation to deduct 100% of premiums paid for employee health insurance while the benefit is excluded from the employee's gross income?