Free CPA TCP (Tax Compliance & Planning) Entity Tax Planning Practice Questions
Entity tax planning on the CPA TCP exam covers entity selection and conversion strategies, compensation planning (reasonable compensation, deferred compensation), retirement plan optimization, and tax-efficient business structuring.
Sample Questions
Question 1
Easy
What is the maximum annual contribution a self-employed individual can make to a SEP-IRA for 2025?
Solution
C is correct.
A self-employed individual may contribute to a SEP-IRA up to 25% of net self-employment income (compensation), after adjusting for the deduction for one-half of self-employment tax and the SEP contribution itself. The effective rate is approximately 20% of net self-employment earnings before the SEP deduction. The dollar cap for 2025 is 70,000 (indexed for inflation).
A self-employed individual may contribute to a SEP-IRA up to 25% of net self-employment income (compensation), after adjusting for the deduction for one-half of self-employment tax and the SEP contribution itself. The effective rate is approximately 20% of net self-employment earnings before the SEP deduction. The dollar cap for 2025 is 70,000 (indexed for inflation).
Question 2
Medium
An employer establishes a Section 125 cafeteria plan. Which of the following benefits can be offered through the cafeteria plan on a pre-tax basis?
Solution
A is correct.
Under IRC Section 125, a cafeteria plan allows employees to choose between cash (taxable salary) and qualified benefits on a pre-tax basis. Qualified benefits that can be offered include health insurance premiums, dental and vision coverage, dependent care assistance (up to 5,000 per year under Section 129), health FSA contributions (up to 3,300 for 2025), adoption assistance, and certain other benefits.
Under IRC Section 125, a cafeteria plan allows employees to choose between cash (taxable salary) and qualified benefits on a pre-tax basis. Qualified benefits that can be offered include health insurance premiums, dental and vision coverage, dependent care assistance (up to 5,000 per year under Section 129), health FSA contributions (up to 3,300 for 2025), adoption assistance, and certain other benefits.
Question 3
Hard
A business owner, age 62, earns $300,000 of self-employment income and wants to maximize retirement plan contributions. The owner has no employees. Compare the maximum contributions under a solo 401(k) versus a SEP-IRA for 2025.
Solution
C is correct.
Under a solo 401(k) (one-participant 401(k)), the self-employed individual can make both employee elective deferrals and employer profit-sharing contributions. For 2025, the employee deferral is up to 23,500 (under age 50; 31,000 for age 50-59 or 64+, or 34,750 for ages 60-63 under the enhanced catch-up). The employer contribution is up to 25% of net self-employment income after deducting one-half of SE tax and the employer contribution itself (effective rate approximately 20%). The total of employee and employer contributions cannot exceed 70,000 (the Section 415(c) limit). With 300,000 of SE income, the employer portion can reach the limit that, combined with the 23,500 deferral, provides a larger total contribution than a SEP-IRA. The SEP-IRA only allows employer contributions (no deferrals), capped at the lesser of 25% of compensation or 70,000. The solo 401(k)'s ability to combine deferrals and profit-sharing gives it a higher total contribution capacity.
Under a solo 401(k) (one-participant 401(k)), the self-employed individual can make both employee elective deferrals and employer profit-sharing contributions. For 2025, the employee deferral is up to 23,500 (under age 50; 31,000 for age 50-59 or 64+, or 34,750 for ages 60-63 under the enhanced catch-up). The employer contribution is up to 25% of net self-employment income after deducting one-half of SE tax and the employer contribution itself (effective rate approximately 20%). The total of employee and employer contributions cannot exceed 70,000 (the Section 415(c) limit). With 300,000 of SE income, the employer portion can reach the limit that, combined with the 23,500 deferral, provides a larger total contribution than a SEP-IRA. The SEP-IRA only allows employer contributions (no deferrals), capped at the lesser of 25% of compensation or 70,000. The solo 401(k)'s ability to combine deferrals and profit-sharing gives it a higher total contribution capacity.