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 borrower's vehicle is totaled and the GAP waiver cancels $4,200 in remaining debt. The borrower is solvent. How much of the $4,200 is generally includable in the borrower's gross income?
Answer: $4,200, as cancellation of debt income under IRC §61
A solvent borrower who has debt cancelled must include the full cancelled amount in gross income as COD income under IRC §61(a)(12), absent a specific exclusion.
Which form must a lender file with the IRS when it acquires a financed vehicle through repossession, which may precede a GAP claim?
Answer: Form 1099-A
Form 1099-A (Acquisition or Abandonment of Secured Property) must be filed by lenders when they acquire property (such as a repossessed vehicle) used as collateral for a loan.
A GAP insurance product sold by a licensed insurer is subject to state premium tax. Which entity is responsible for remitting this premium tax to the state?
Answer: The licensed insurer that underwrites the GAP product
State premium taxes on insurance products are the obligation of the licensed insurer underwriting the policy, not the dealer, lender, or consumer.
Under GAAP (not tax), how must an insurer recognize GAP premiums written on a monthly basis?
Answer: Earned ratably over the exposure period using the pro-rata method
Under GAAP, insurance premiums are earned ratably (pro-rata) over the policy term as the insurer provides coverage, matching revenue to the risk exposure period.
An auto dealer that participates in a retrospective commission program for GAP products receives additional income based on low claim experience. How should this contingent commission be reported?
Answer: As ordinary business income in the year it is received or accrued
Contingent or retrospective commissions paid to dealers are ordinary business income, recognized under the dealer's accounting method (cash or accrual) when earned.
Which tax planning strategy allows a dealer group to potentially reduce its tax liability on GAP product income by ceding risk to a related captive insurance company?
Answer: Captive insurance arrangement under IRC §831(b) if premiums are within limits
IRC §831(b) allows small insurance companies with premiums under $2.45 million (indexed) to be taxed only on investment income, potentially reducing tax on underwriting income when a captive is properly structured.
When a GAP administrator files its federal corporate tax return, which IRS form is used specifically for property and casualty insurance companies to report income, deductions, and tax?
Answer: Form 1120-PC
Licensed property and casualty insurance companies file Form 1120-PC (U.S. Property and Casualty Insurance Company Income Tax Return) instead of the standard Form 1120.