Tax Consulting Tax Management 2 — Questions and Answers
Question 1: A client owns a sole proprietorship and wants to reduce self-employment tax exposure. Which strategy is most commonly recommended?
- Electing S corporation status and paying a reasonable salary (Correct answer)
- Filing as a C corporation only
- Deferring all income indefinitely
- Claiming the standard deduction twice
Correct answer: Electing S corporation status and paying a reasonable salary
An S corp election lets the owner split income between salary and distributions, reducing self-employment tax on the distribution portion.
Question 2: What is the primary purpose of tax planning as distinct from tax compliance?
- To proactively arrange affairs to minimize future tax liability (Correct answer)
- To file returns by the deadline
- To respond to IRS audit notices
- To calculate prior-year refunds
Correct answer: To proactively arrange affairs to minimize future tax liability
Tax planning is forward-looking, structuring transactions to legally reduce taxes, while compliance is reporting what already happened.
Question 3: Which account allows tax-free growth and tax-free qualified withdrawals in retirement?
- Roth IRA (Correct answer)
- Traditional 401(k)
- Taxable brokerage account
- Health Savings Account used for non-medical costs
Correct answer: Roth IRA
Roth IRA contributions are made after-tax, so qualified withdrawals including earnings are tax-free.
Question 4: A taxpayer wants to offset capital gains. What technique involves selling losing investments to reduce taxable gains?
- Tax-loss harvesting (Correct answer)
- Income averaging
- Like-kind exchange
- Depreciation recapture
Correct answer: Tax-loss harvesting
Tax-loss harvesting realizes losses to offset capital gains and up to $3,000 of ordinary income annually.
Question 5: Under the wash-sale rule, a loss is disallowed if a substantially identical security is repurchased within how many days?
- 30 days before or after the sale (Correct answer)
- 7 days after the sale only
- 90 days before the sale
- 1 year after the sale
Correct answer: 30 days before or after the sale
The wash-sale rule disallows the loss if the security is bought within 30 days before or after the sale.
Question 6: Which entity type generally provides pass-through taxation while limiting personal liability?
- Limited liability company (LLC) (Correct answer)
- C corporation
- General partnership
- Sole proprietorship
Correct answer: Limited liability company (LLC)
An LLC offers liability protection and, by default, pass-through taxation avoiding entity-level tax.
Question 7: A high-income client wants to reduce taxable income through charitable giving while retaining an income stream. Which vehicle fits best?
- Charitable remainder trust (Correct answer)
- Direct cash donation
- Donor-advised fund with no payout
- Private foundation distribution to self
Correct answer: Charitable remainder trust
A charitable remainder trust provides an income stream to the donor with the remainder going to charity, yielding a current deduction.
Tax Consulting Tax Management 2
A client owns a sole proprietorship and wants to reduce self-employment tax exposure.
Which strategy is most commonly recommended?