Free CPA TCP (Tax Compliance & Planning) Entity Tax Planning Practice Questions

B 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). The 7,000 limit applies to traditional/Roth IRA contributions, not SEP contributions. SEP-IRAs do have contribution limits (both percentage and dollar caps). The 23,500 limit applies to 401(k) elective deferrals, which are a different type of contribution.

B 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. Cash bonuses are not qualified benefits. Long-term disability insurance premiums can be paid through a cafeteria plan, but including them pre-tax means the benefits would be taxable when received. Qualified retirement plan contributions (401(k) deferrals) are handled separately under Section 401(k), not through Section 125. The cafeteria plan rules specify which benefits qualify; the employer cannot include any benefit it chooses.

B is correct. For a stationary AR(2) process $Y_t = c + \phi_1 Y_{t-1} + \phi_2 Y_{t-2} + \epsilon_t$, taking expectations of both sides and using $E[Y_t] = E[Y_{t-1}] = E[Y_{t-2}] = \mu$ and $E[\epsilon_t] = 0$:
$$\mu = c + \phi_1 \mu + \phi_2 \mu$$
$$\mu(1 - \phi_1 - \phi_2) = c$$
$$\mu = \frac{c}{1 - \phi_1 - \phi_2} = \frac{4}{1 - 0.5 - (-0.2)} = \frac{4}{1 - 0.5 + 0.2} = \frac{4}{0.7} = 5.714$$
Choice A is incorrect because 4.000 is simply the intercept $c$, not the unconditional mean.
Choice C is incorrect because 5.000 uses the formula $c/(1 - \phi_1)$ = 4/0.8, ignoring the second AR coefficient.
Choice D is incorrect because 8.000 uses $c/(1 - \phi_1 + \phi_2)$ = 4/(1 - 0.5 + 0) = 4/0.5, misapplying the formula.
Choice E is incorrect because 6.667 uses $c/(1 - \phi_1 - |\phi_2|)$ = 4/(1 - 0.5 - 0.2) = 4/0.3, treating $\phi_2$ as positive when it is negative.