Tax Consulting Business Tax Planning 2 — Questions and Answers
Question 1: What is a 'qualified opportunity zone' investment and what tax benefit does it provide?
- A municipal bond exempt from federal tax
- An investment allowing deferral and potential exclusion of capital gains (Correct answer)
- A retirement account for small business owners
- A deduction for charitable contributions
Correct answer: An investment allowing deferral and potential exclusion of capital gains
Qualified Opportunity Zone investments allow taxpayers to defer and potentially reduce capital gains by investing in designated economically distressed communities.
Question 2: Under the qualified business income (QBI) deduction, eligible pass-through business owners may deduct up to what percentage of their qualified business income?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The QBI deduction under IRC Section 199A allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities.
Question 3: Which type of retirement plan allows self-employed individuals to contribute both as employee and employer, maximizing contribution limits?
- Traditional IRA
- SEP-IRA
- Solo 401(k) (Correct answer)
- SIMPLE IRA
Correct answer: Solo 401(k)
A Solo 401(k) allows self-employed individuals to contribute as both employee (up to the elective deferral limit) and employer (profit-sharing contributions), resulting in higher total contribution limits.
Question 4: What is the primary tax advantage of using a Health Savings Account (HSA) for a self-employed tax consultant?
- Credits reduce tax dollar for dollar
- Triple tax advantage: deductible contributions, tax-free growth, and tax-free qualified withdrawals (Correct answer)
- Contributions are matched by the IRS
- No contribution limits apply
Correct answer: Triple tax advantage: deductible contributions, tax-free growth, and tax-free qualified withdrawals
HSAs offer a triple tax advantage: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free.
Question 5: When a business converts from a C Corporation to an S Corporation, what built-in gains tax applies?
- No tax applies if conversion is immediate
- Tax on appreciation that existed at conversion date if sold within the recognition period (Correct answer)
- Tax on all future gains at C Corp rates
- A one-time 21% flat tax on all assets
Correct answer: Tax on appreciation that existed at conversion date if sold within the recognition period
The built-in gains tax applies to appreciation that existed on the date of S Corp election if the appreciated assets are disposed of within the 5-year recognition period.
Question 6: Which method of accounting generally provides more tax planning flexibility for a small business by controlling the timing of income and deductions?
- Accrual method
- Cash method (Correct answer)
- Installment method
- Percentage of completion method
Correct answer: Cash method
The cash method allows businesses to control the timing of income recognition and deductions by choosing when to receive payments and pay expenses.
Tax Consulting Business Tax Planning 2
What is a 'qualified opportunity zone' investment and what tax benefit does it provide?