Tax Planning & Compliance Flashcards
7 cards from real GAP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Tax Planning & Compliance flashcards as text
A state insurance department classifies a dealer's GAP waiver as a debt cancellation product rather than insurance. What is the primary tax compliance implication for the dealer?
Answer: The dealer treats GAP waiver revenue as ordinary business income, not subject to insurance premium tax
When GAP waivers are classified as debt cancellation contracts rather than insurance, the dealer treats proceeds as ordinary business income and is not subject to state insurance premium taxes.
Which accounting method must most small auto dealerships use when recognizing GAP product income under IRS rules if their gross receipts are below the threshold for mandatory accrual?
Answer: Cash method
Small businesses with average annual gross receipts of $29 million or less (2024 threshold, indexed for inflation) may use the cash method of accounting, recognizing GAP income when received.
When a GAP-covered vehicle is declared a total loss and the primary insurer's payout is less than the ACV, which party is responsible for reporting the settlement to the IRS?
Answer: The primary auto insurer reports its payment; the GAP entity reports any additional waiver benefit separately per applicable rules
Each party reports the amounts they pay: the primary insurer reports its insurance proceeds and the GAP entity handles reporting of any debt waiver or insurance benefit under its own applicable rules.
Under IRC §165, when can an auto lender deduct a bad debt loss on the deficiency balance after GAP proceeds are applied?
Answer: Only when the debt is wholly worthless and has been charged off in accordance with consistent accounting practices
IRC §166 (not §165 for business bad debts) allows a deduction for wholly worthless business debts in the year they become worthless and are charged off per consistent accounting practice.
A multi-state GAP administrator allocates income across states for apportionment purposes. Which factor is typically NOT included in a standard three-factor apportionment formula?
Answer: Number of policyholders
The standard three-factor apportionment formula uses sales (receipts), payroll, and property; the number of policyholders is not a standard apportionment factor.
For a dealership that sells GAP products, which of the following best describes the tax treatment of a reinsurance participation agreement between the dealer's captive and a GAP insurer?
Answer: The captive's underwriting income and investment income are subject to federal income tax under applicable insurance company tax rules
Captive reinsurers are subject to federal income tax on underwriting and investment income under IRC Subchapter L; they are not tax-exempt simply because they are captive entities.
Which IRS publication or code section addresses the federal excise tax that may apply to insurance premiums paid to foreign insurers, potentially affecting GAP programs with offshore reinsurance?
Answer: IRC §4371
IRC §4371 imposes a federal excise tax on insurance premiums paid to foreign insurers or reinsurers, which can apply when GAP programs involve offshore reinsurance arrangements.