John is the sole shareholder and employee of his S corporation. He wants to minimize his self-employment tax liability while remaining compliant with tax law. Which of the following strategies is the most appropriate for John to achieve this goal?

Paying himself a reasonable salary as wages, with remaining profits taken as distributions.

Not paying any salary, thereby avoiding payroll taxes and maximizing pass-through income.

Converting to a C corporation, which eliminates self-employment tax on all shareholder distributions.

Paying himself a reasonable salary as wages, with remaining profits taken as distributions.

Taking only guaranteed payments, which are not subject to self-employment tax in an S corporation.

On March 1, 2026, Priya sold a parcel of land for $1,000,000. Her adjusted basis in the land, a capital asset held for several years, was $400,000. On May 15, 2026, Priya invested the entire $600,000 gain into a Qualified Opportunity Fund (QOF). Priya plans to hold the QOF investment for more than 10 years. What are the tax consequences for Priya related to the original $600,000 gain?

A $600,000 long-term capital gain must be recognized on her tax return for the year 2026.

The gain is deferred until 2036, at which point a $600,000 long-term capital gain must be recognized.

The $600,000 gain is permanently excluded from income because the QOF investment is held for more than 10 years.

A $540,000 long-term capital gain must be recognized on her 2026 tax return due to a 10% basis increase.

A $600,000 long-term capital gain must be recognized on her tax return for the year 2026.

Exchange of a rental apartment building for a commercial warehouse

Exchange of inventory held for resale for other inventory

Exchange of a rental apartment building for a commercial warehouse

Exchange of a personal residence for a vacation home used personally

Exchange of corporate stock for partnership interests

No gain or loss is recognized, and Parent Corp. takes a carryover basis in the assets received from Subsidiary Corp.

Gain is recognized to the extent of any cash or 'boot' received, but losses are not recognized.

No gain or loss is recognized, but Parent Corp. takes a basis in the assets equal to their fair market value.

No gain or loss is recognized, and Parent Corp. takes a carryover basis in the assets received from Subsidiary Corp.

Both gain and loss are recognized as if the subsidiary's stock were sold, but the gain is deferred under consolidated return rules.

Assets in the trust appreciate faster than the §7520 rate

The trust is structured so that income tax on earnings is paid by the beneficiaries.

The grantor's death occurs before the trust term ends, triggering estate inclusion.

The total return on trust assets is less than the annuity payments made to the grantor.

Assets in the trust appreciate faster than the §7520 rate

$500 per unit, based on the comparable uncontrolled price (CUP) method.

$375 per unit, based on the cost plus method, applying a 25% markup to the full cost.

$500 per unit, based on the comparable uncontrolled price (CUP) method.

$300 per unit, based on the cost plus method using the full manufacturing cost without a markup.

A price determined by the resale price method, based on EuroServe's subsequent sales to end customers.

Grantor pays income tax on trust earnings, allowing tax-free growth for beneficiaries

The transfer of assets to the IDGT is an incomplete gift, thereby avoiding any gift tax liability for the grantor upon funding.

The assets within the IDGT are included in the grantor's gross estate, which provides the beneficiaries with a step-up in basis.

The trust's income is taxed directly to the beneficiaries as it is earned, regardless of whether distributions are made.

Grantor pays income tax on trust earnings, allowing tax-free growth for beneficiaries

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CPA TCP (Tax Compliance & Planning) 10-Question Diagnostic

~10 minutes· Question 1 of 10· 12-Week Plan PDF

TCP-IVTopic: Annual exclusion and lifetime exemption