CTC CTC Business Tax & Entity Structures 1 — Questions and Answers
Question 1: Which entity type allows business owners to avoid self-employment tax on a portion of their income by splitting earnings into salary and distributions?
- Sole proprietorship
- S corporation (Correct answer)
- C corporation
- General partnership
Correct answer: S corporation
S corporations allow owner-employees to pay themselves a reasonable salary subject to payroll taxes while taking additional profits as distributions not subject to self-employment tax.
Question 2: A C corporation currently pays a flat federal income tax rate of:
- 25%
- 28%
- 21% (Correct answer)
- 35%
Correct answer: 21%
The Tax Cuts and Jobs Act of 2017 reduced the C corporation flat tax rate to 21%, replacing the previous graduated rate structure.
Question 3: Which deduction allows self-employed individuals and pass-through entity owners to deduct up to 20% of qualified business income?
- Section 179 deduction
- Qualified Business Income (QBI) deduction (Correct answer)
- Home office deduction
- Business start-up cost deduction
Correct answer: Qualified Business Income (QBI) deduction
The Section 199A QBI deduction allows eligible taxpayers to deduct up to 20% of qualified business income from pass-through entities, subject to income thresholds and limitations.
Question 4: When a business elects Section 179 expensing, it allows the owner to:
- Defer income to future years
- Immediately deduct the full cost of qualifying business property (Correct answer)
- Spread depreciation over 39 years
- Exclude gains from asset sales
Correct answer: Immediately deduct the full cost of qualifying business property
Section 179 allows businesses to immediately expense the full purchase price of qualifying equipment and property in the year it is placed in service, rather than depreciating it over time.
Question 5: For a Certified Tax Coach, which entity conversion strategy may trigger built-in gains tax?
- Converting a sole proprietorship to an LLC
- Converting a C corporation to an S corporation (Correct answer)
- Converting a partnership to an LLC
- Converting an S corporation to a sole proprietorship
Correct answer: Converting a C corporation to an S corporation
When a C corporation converts to an S corporation, any appreciated assets are subject to the built-in gains tax if disposed of within the recognition period (generally 5 years).
Question 6: A qualified opportunity zone investment primarily provides which tax benefit?
- Immediate deduction of the invested amount
- Deferral and potential exclusion of capital gains (Correct answer)
- Conversion of ordinary income to capital gains
- Elimination of self-employment tax
Correct answer: Deferral and potential exclusion of capital gains
Investing capital gains into a Qualified Opportunity Fund allows taxpayers to defer those gains and potentially exclude appreciation on the fund investment if held for at least 10 years.
CTC CTC Business Tax & Entity Structures 1
Which entity type allows business owners to avoid self-employment tax on a portion of their income by splitting earnings into salary and distributions?