Below are 10 additional revision test questions—with answers and detailed
rationales—designed to help you review and deepen your understanding of key
concepts covered in Taxation of Individuals and Business Entities 2025
Evergreen Release by Brian Spilker, Benjamin Ayers, John Barrick, and Troy
Lewis.
1. Deferred Compensation Plans
Question:
What is one primary benefit of using a deferred compensation plan in a corporate setting?
A) It accelerates tax liability into the current year
B) It allows executives to defer a portion of their income until retirement
C) It provides immediate tax-free income
D) It automatically qualifies as a tax-exempt benefit
Answer:
B) It allows executives to defer a portion of their income until retirement
Rationale:
Deferred compensation plans enable key employees to postpone receiving a portion of their income
until retirement, potentially lowering their current taxable income and taking advantage of lower tax
rates in retirement. This incentive can also aid in employee retention.
2. Self-Employment Taxes
Question:
Self-employed individuals are subject to self-employment tax, which covers both the employer and
employee portions of Social Security and Medicare taxes. Which of the following statements is correct
regarding self-employment tax?
A) It is fully nondeductible
B) One-half of the self-employment tax is deductible as an adjustment to income
C) It only applies to gross receipts, not net earnings
D) It is optional if the individual files as a sole proprietor
Answer:
B) One-half of the self-employment tax is deductible as an adjustment to income
Rationale:
While self-employed taxpayers must pay the full amount of Social Security and Medicare taxes on their
net earnings, the tax code allows them to deduct one-half of the self-employment tax from their
adjusted gross income, thereby reducing their taxable income.
, 3. Professional Corporations
Question:
A professional corporation differs from a standard C corporation primarily in that:
A) It permits a broader range of business activities
B) It is subject to special state licensing requirements for its professionals
C) It does not need to file annual tax returns
D) It automatically qualifies for S corporation status
Answer:
B) It is subject to special state licensing requirements for its professionals
Rationale:
Professional corporations are designed specifically for licensed professionals (such as doctors, lawyers,
and accountants) and must comply with state-specific licensing and regulatory requirements. This
ensures that the business structure is aligned with the professional standards of the field.
4. Section 199A Deduction for Qualified Business Income
Question:
The Section 199A deduction provides tax relief for certain taxpayers with qualified business income from
pass-through entities. Which taxpayer is generally eligible for this deduction?
A) An employee receiving wages on a W-2
B) A sole proprietor operating a non-specified business
C) An owner of a specified service trade or business with high income above threshold
D) A taxpayer with only investment income
Answer:
B) A sole proprietor operating a non-specified business
Rationale:
The Section 199A deduction applies to individuals with qualified business income from pass-through
entities. While owners of specified service trades or businesses may face limitations if their income
exceeds certain thresholds, a sole proprietor in a non-specified business typically qualifies for the
deduction, helping to lower their taxable income.
5. Controlled Foreign Corporation (CFC) Rules
Question:
What is a key objective of the Controlled Foreign Corporation (CFC) rules in U.S. taxation?
A) To allow U.S. taxpayers to indefinitely defer foreign income tax
B) To tax certain income earned by U.S. shareholders of foreign corporations on a current basis
C) To exempt U.S. corporations from foreign tax liabilities
D) To simplify the tax reporting for multinational companies
rationales—designed to help you review and deepen your understanding of key
concepts covered in Taxation of Individuals and Business Entities 2025
Evergreen Release by Brian Spilker, Benjamin Ayers, John Barrick, and Troy
Lewis.
1. Deferred Compensation Plans
Question:
What is one primary benefit of using a deferred compensation plan in a corporate setting?
A) It accelerates tax liability into the current year
B) It allows executives to defer a portion of their income until retirement
C) It provides immediate tax-free income
D) It automatically qualifies as a tax-exempt benefit
Answer:
B) It allows executives to defer a portion of their income until retirement
Rationale:
Deferred compensation plans enable key employees to postpone receiving a portion of their income
until retirement, potentially lowering their current taxable income and taking advantage of lower tax
rates in retirement. This incentive can also aid in employee retention.
2. Self-Employment Taxes
Question:
Self-employed individuals are subject to self-employment tax, which covers both the employer and
employee portions of Social Security and Medicare taxes. Which of the following statements is correct
regarding self-employment tax?
A) It is fully nondeductible
B) One-half of the self-employment tax is deductible as an adjustment to income
C) It only applies to gross receipts, not net earnings
D) It is optional if the individual files as a sole proprietor
Answer:
B) One-half of the self-employment tax is deductible as an adjustment to income
Rationale:
While self-employed taxpayers must pay the full amount of Social Security and Medicare taxes on their
net earnings, the tax code allows them to deduct one-half of the self-employment tax from their
adjusted gross income, thereby reducing their taxable income.
, 3. Professional Corporations
Question:
A professional corporation differs from a standard C corporation primarily in that:
A) It permits a broader range of business activities
B) It is subject to special state licensing requirements for its professionals
C) It does not need to file annual tax returns
D) It automatically qualifies for S corporation status
Answer:
B) It is subject to special state licensing requirements for its professionals
Rationale:
Professional corporations are designed specifically for licensed professionals (such as doctors, lawyers,
and accountants) and must comply with state-specific licensing and regulatory requirements. This
ensures that the business structure is aligned with the professional standards of the field.
4. Section 199A Deduction for Qualified Business Income
Question:
The Section 199A deduction provides tax relief for certain taxpayers with qualified business income from
pass-through entities. Which taxpayer is generally eligible for this deduction?
A) An employee receiving wages on a W-2
B) A sole proprietor operating a non-specified business
C) An owner of a specified service trade or business with high income above threshold
D) A taxpayer with only investment income
Answer:
B) A sole proprietor operating a non-specified business
Rationale:
The Section 199A deduction applies to individuals with qualified business income from pass-through
entities. While owners of specified service trades or businesses may face limitations if their income
exceeds certain thresholds, a sole proprietor in a non-specified business typically qualifies for the
deduction, helping to lower their taxable income.
5. Controlled Foreign Corporation (CFC) Rules
Question:
What is a key objective of the Controlled Foreign Corporation (CFC) rules in U.S. taxation?
A) To allow U.S. taxpayers to indefinitely defer foreign income tax
B) To tax certain income earned by U.S. shareholders of foreign corporations on a current basis
C) To exempt U.S. corporations from foreign tax liabilities
D) To simplify the tax reporting for multinational companies
