Tax Planning & Preparation Flashcards

A taxpayer qualifies for the Earned Income Tax Credit (EITC). Which of the following would DISQUALIFY them from claiming it?

Answer: Having investment income of $12,000

For tax year 2023, investment income exceeding approximately $11,000 disqualifies a taxpayer from claiming the EITC.

Under IRC Section 179, a business immediately expensed $1,200,000 in equipment purchases. The annual Section 179 deduction limit for 2023 is $1,160,000. What happens to the excess $40,000?

Answer: It is carried forward to future years as a Section 179 deduction

Section 179 deductions exceeding the annual limit are carried forward and may be deducted in future years when the limitation allows.

What is 'depreciation recapture' under IRC Section 1245?

Answer: The treatment of gain on sale of depreciable personal property as ordinary income to the extent of prior depreciation taken

Section 1245 recapture requires that gain on disposal of depreciable personal property be recognized as ordinary income to the extent depreciation was previously deducted.

A calendar-year C corporation's federal tax return is originally due on which date?

Answer: March 15 of the following year

C corporation federal income tax returns (Form 1120) for calendar-year filers are due on April 15, but after TCJA changes, they were moved to April 15—however, the traditional due date has historically been March 15; check current IRS guidance as Form 1120 is due by April 15.

Which of the following describes a 'tax credit' as opposed to a 'tax deduction'?

Answer: A deduction reduces taxable income; a credit reduces tax liability dollar-for-dollar

A deduction reduces taxable income (saving taxes at the marginal rate), while a credit directly reduces the tax owed dollar-for-dollar, making credits generally more valuable.

A taxpayer elects to use installment sale reporting for a real estate gain. What is the primary benefit of this election?

Answer: Spreads gain recognition over the years payments are received, deferring tax liability

Installment sale reporting under IRC Section 453 allows the seller to recognize gain proportionally as payments are received, deferring tax to match cash flow.

Which of the following best describes a Qualified Opportunity Zone (QOZ) investment benefit?

Answer: Deferral and potential partial exclusion of capital gains reinvested in an Opportunity Zone Fund

Investing capital gains in a Qualified Opportunity Fund allows deferral of the original gain and potential exclusion of appreciation if held 10+ years.