FAC Tax Planning & Preparation 3 — Questions and Answers
Question 1: The kiddie tax applies a child's unearned income in excess of the threshold at:
- The child's marginal tax rate
- A flat 10% rate
- The parent's marginal tax rate (Correct answer)
- The capital gains rate of 0%
Correct answer: The parent's marginal tax rate
The kiddie tax subjects a child's net unearned income above the threshold to tax at the parent's marginal rate to prevent income shifting.
Question 2: An individual taxpayer has a net capital loss of $8,000 for the tax year. How much can be deducted against ordinary income?
- $8,000
- $6,000
- $3,000 (Correct answer)
- $0
Correct answer: $3,000
Individual taxpayers may deduct up to $3,000 of net capital losses against ordinary income per year; the remaining $5,000 carries forward.
Question 3: Which of the following fringe benefits is generally excludable from an employee's gross income?
- Cash bonuses
- Employer-provided group-term life insurance up to $50,000 (Correct answer)
- Personal use of a company car
- Country club membership dues
Correct answer: Employer-provided group-term life insurance up to $50,000
Employer-provided group-term life insurance premiums for coverage up to $50,000 are excludable from the employee's gross income under IRC §79.
Question 4: A taxpayer uses the home office deduction under the simplified method. The maximum deduction per square foot is:
- $3
- $5 (Correct answer)
- $7
- $10
Correct answer: $5
The simplified method allows a deduction of $5 per square foot of the home used exclusively for business, up to 300 square feet.
Question 5: For purposes of the earned income tax credit (EITC), investment income above the annual limit causes:
- Reduction of the credit by 50 cents per dollar
- Complete disqualification from the credit (Correct answer)
- Phased reduction starting at 10%
- No effect on EITC eligibility
Correct answer: Complete disqualification from the credit
A taxpayer is completely disqualified from claiming the EITC if their investment income exceeds the IRS-set annual threshold.
Question 6: A C corporation's net operating loss (NOL) generated after 2017 can be carried:
- Back 2 years and forward 20 years
- Forward indefinitely but limited to 80% of taxable income (Correct answer)
- Back 3 years and forward 5 years
- Forward 20 years with no income limitation
Correct answer: Forward indefinitely but limited to 80% of taxable income
Under the Tax Cuts and Jobs Act, post-2017 NOLs have no carryback (with limited exceptions) and carry forward indefinitely, limited to 80% of taxable income.
Question 7: Which of the following expenditures must be capitalized rather than expensed under the UNICAP rules (IRC §263A)?
- Office supplies purchased for resale administration
- Interest paid on a business line of credit
- Overhead costs allocable to self-constructed assets (Correct answer)
- Advertising costs for a new product line
Correct answer: Overhead costs allocable to self-constructed assets
IRC §263A (UNICAP) requires capitalization of direct costs and allocable indirect costs, including overhead, into the cost of self-constructed or inventory assets.
FAC Tax Planning & Preparation 3
The kiddie tax applies a child's unearned income in excess of the threshold at: