Tax Consulting Tax Management 2

Question 1

A client owns a sole proprietorship and wants to reduce self-employment tax exposure. Which strategy is most commonly recommended?

Accepted Answer

Electing S corporation status and paying a reasonable salary

Answer

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?

Accepted Answer

To proactively arrange affairs to minimize future tax liability

Answer

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?

Accepted Answer

Roth IRA

Answer

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?

Accepted Answer

Tax-loss harvesting

Answer

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?

Accepted Answer

30 days before or after the sale

Answer

The wash-sale rule disallows the loss if the security is bought within 30 days before or after the sale.

Tax Consulting Practice Test