Tax Consulting Business Tax Planning 1 — Questions and Answers
Question 1: Which entity type allows owners to avoid double taxation while providing limited liability protection?
- C Corporation
- S Corporation (Correct answer)
- General Partnership
- Sole Proprietorship
Correct answer: S Corporation
An S Corporation passes income and losses through to shareholders, avoiding the double taxation imposed on C Corporations.
Question 2: Under IRC Section 179, what is the primary benefit for small businesses purchasing equipment?
- Deferred depreciation
- Immediate expensing of qualifying assets (Correct answer)
- Tax credit equal to purchase price
- Exclusion from gross income
Correct answer: Immediate expensing of qualifying assets
Section 179 allows businesses to deduct the full cost of qualifying equipment in the year of purchase rather than depreciating it over time.
Question 3: A C Corporation's net operating loss (NOL) can generally be carried forward for how many years under current tax law?
- 5 years
- 10 years
- 20 years
- Indefinitely (Correct answer)
Correct answer: Indefinitely
Under the Tax Cuts and Jobs Act of 2017, NOLs generated after December 31, 2017 can be carried forward indefinitely, but are limited to 80% of taxable income.
Question 4: Which depreciation method allows a business to take larger deductions in the early years of an asset's life?
- Straight-line depreciation
- Modified Accelerated Cost Recovery System (MACRS) (Correct answer)
- Units of production
- Sum-of-the-years-digits only
Correct answer: Modified Accelerated Cost Recovery System (MACRS)
MACRS is the standard depreciation system in the US that accelerates deductions by applying higher percentages in earlier years.
Question 5: What is the tax treatment of a guaranteed payment made to a partner in a partnership?
- Capital gain to the partner
- Ordinary income to the partner, deductible by the partnership (Correct answer)
- Non-taxable distribution
- Subject to corporate tax rates
Correct answer: Ordinary income to the partner, deductible by the partnership
Guaranteed payments are treated as ordinary income to the receiving partner and are generally deductible by the partnership as a business expense.
Question 6: Which tax strategy involves shifting income to a family member in a lower tax bracket through gifts of income-producing property?
- Tax deferral
- Income splitting (Correct answer)
- Tax arbitrage
- Basis shifting
Correct answer: Income splitting
Income splitting is a strategy of transferring income-producing assets to family members in lower tax brackets to reduce the family's overall tax burden.
Tax Consulting Business Tax Planning 1
Which entity type allows owners to avoid double taxation while providing limited liability protection?