Tax Planning & Compliance Flashcards
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Read the first 7 Tax Planning & Compliance flashcards as text
A business communicator is writing an annual report section on tax risk. Which metric best communicates the company's effective tax burden to investors?
Answer: Effective tax rate (ETR)
The effective tax rate — total income tax expense divided by pre-tax book income — reflects the actual percentage of earnings paid in taxes and is the most informative metric for investors.
An S-corporation owner takes a salary of $30,000 but receives $200,000 in distributions. What is the IRS most likely to challenge?
Answer: The unreasonably low salary used to avoid payroll taxes
The IRS requires S-corporation owner-employees to pay themselves a reasonable salary before taking distributions, because distributions are not subject to self-employment or payroll taxes.
Under GAAP ASC 740, which term describes a temporary difference that will result in a future tax deduction?
Answer: Deferred tax asset
A deferred tax asset arises from temporary differences where book expenses exceed tax deductions today, creating a future tax benefit when the deduction is eventually taken.
A U.S. company earns income through a foreign subsidiary. Under the TCJA's GILTI provisions, what type of income is subject to current U.S. taxation?
Answer: Global intangible low-taxed income exceeding a routine return threshold
GILTI (Global Intangible Low-Taxed Income) taxes U.S. shareholders on foreign subsidiary income that exceeds a 10% routine return on depreciable tangible assets.
Which of the following is a key distinction between tax avoidance and tax evasion?
Answer: Tax avoidance is legal; tax evasion is illegal and involves willful noncompliance
Tax avoidance uses legal means to reduce tax liability, while tax evasion involves illegal conduct such as hiding income or falsifying records — a critical compliance distinction.
What document does a U.S. employer file annually with the Social Security Administration to report wages paid and taxes withheld for employees?
Answer: Form W-3 with W-2s
Employers transmit Copy A of all W-2 forms to the SSA along with Form W-3, the transmittal summary, by January 31 each year.
A business is considering whether to lease or purchase equipment. Which tax benefit is exclusive to purchasing (not leasing) the asset?
Answer: Taking bonus depreciation or Section 179 expensing on the asset
Only the owner of qualifying property can claim bonus depreciation or Section 179 expensing; a lessee deducts lease payments but cannot depreciate an asset it does not own.