CTC Client Advisory & Consultation 3 — Questions and Answers
Question 1: A client who is a sole proprietor asks how net operating losses from their business affect their taxes. What is the most accurate advisory statement?
- NOLs can be carried back 2 years and forward 20 years for full offset
- Post-2017 NOLs can only be carried forward and are limited to 80% of taxable income (Correct answer)
- NOLs from sole proprietorships cannot offset W-2 income from other employment
- The IRS requires a profit motive determination before any NOL is allowed
Correct answer: Post-2017 NOLs can only be carried forward and are limited to 80% of taxable income
Under the TCJA, NOLs arising after 2017 have an indefinite carryforward but are limited to offsetting 80% of taxable income in any given year.
Question 2: A client contributed $7,000 to a traditional IRA but is an active participant in an employer plan and their MAGI exceeds the phase-out range. What advisory action is appropriate?
- The contribution is non-deductible and should be tracked on Form 8606 (Correct answer)
- The contribution must be withdrawn before the tax filing deadline to avoid penalties
- The client should convert the IRA to a Roth immediately to avoid taxation
- No contribution is allowed because they participate in an employer plan
Correct answer: The contribution is non-deductible and should be tracked on Form 8606
Non-deductible IRA contributions are allowed regardless of plan participation; they must be reported on Form 8606 to establish basis and avoid double taxation on future distributions.
Question 3: A business client wants to adopt a Section 179 deduction for equipment purchases. Which limitation should you emphasize?
- Section 179 cannot exceed the taxpayer's net income from active business
- The deduction is limited to 50% of the asset's original cost
- Section 179 property must be listed property to qualify
- The deduction is subject to a phase-out once total asset purchases exceed the investment limit (Correct answer)
Correct answer: The deduction is subject to a phase-out once total asset purchases exceed the investment limit
Section 179 deductions phase out dollar-for-dollar once total asset purchases exceed the phase-out threshold ($2,890,000 in 2023), making it less beneficial for high-investment years.
Question 4: A client asks about the tax treatment of alimony paid under a divorce agreement finalized in 2019. What is the correct advice?
- Alimony is deductible by the payor and includible in the recipient's income (Correct answer)
- Alimony is not deductible by the payor and not taxable to the recipient
- Alimony treatment depends on which party had higher income in the year of divorce
- The recipient may exclude alimony only if they file jointly with the payor
Correct answer: Alimony is deductible by the payor and includible in the recipient's income
Divorce agreements finalized before January 1, 2019, retain the pre-TCJA treatment: alimony is deductible above-the-line by the payor and included in the recipient's gross income.
Question 5: A client with a rental property wants to claim depreciation. The property was purchased for $400,000, with $80,000 allocated to land. What annual depreciation should you advise?
- $14,545 using a 27.5-year recovery period on $400,000
- $11,636 using a 27.5-year recovery period on $320,000 (Correct answer)
- $10,000 using a 40-year recovery period on $400,000
- $8,000 using a 40-year recovery period on $320,000
Correct answer: $11,636 using a 27.5-year recovery period on $320,000
Residential rental property is depreciated over 27.5 years using the straight-line method on the depreciable basis (cost minus land), so $320,000 ÷ 27.5 = approximately $11,636.
Question 6: A client's dependent child received $4,500 in investment income. How should you advise regarding the Kiddie Tax?
- The child's net unearned income above $2,500 is taxed at the parent's marginal rate (Correct answer)
- All investment income is taxed at the child's rate since they are a dependent
- The Kiddie Tax only applies when the child's investment income exceeds $10,000
- Investment income of a dependent child is always reportable on the parent's return
Correct answer: The child's net unearned income above $2,500 is taxed at the parent's marginal rate
Under the Kiddie Tax rules, net unearned income exceeding the threshold ($2,500 in 2024) is taxed at the parent's marginal rate, not the child's lower rate.
Question 7: A client is considering making a large charitable contribution of appreciated securities. What is the primary tax benefit you should highlight?
- They can deduct the fair market value and avoid recognizing the built-in capital gain (Correct answer)
- They must report the appreciation as income first, then claim a charitable deduction
- The deduction is limited to the donor's adjusted basis in the securities
- Appreciated securities donations trigger the alternative minimum tax preference
Correct answer: They can deduct the fair market value and avoid recognizing the built-in capital gain
Donating appreciated securities held long-term allows the donor to deduct the full fair market value while permanently avoiding capital gains tax on the appreciation.
CTC Client Advisory & Consultation 3
A client who is a sole proprietor asks how net operating losses from their business affect their taxes.
What is the most accurate advisory statement?