Question

Which of the following is an example of the conversion strategy?

1) Accelerated deductions
2) Deferring income
3) An employer providing tax free benefits to employees instead of salary
4) A high-tax rate parent employing her low-tax-rate son in the family business
5) None of the above

Answer 1

The conversion strategy example is providing tax-free benefits to employees instead of salary, as this converts taxable income into non-taxable benefits.

Step-by-step explanation:

An example of the conversion strategy would be an employer providing tax-free benefits to employees instead of salary. This approach converts what would be taxable income into non-taxable benefits, effectively lowering the tax liability for the employee. This is a common tactic used in tax planning to optimize the net income of individuals by taking advantage of various tax laws and regulations.

The conversion strategy refers to the practice of using different methods to minimize the amount of tax paid by individuals or businesses. Out of the given options, the example of an employer providing tax free benefits to employees instead of salary is an example of the conversion strategy. By offering tax-free benefits, the employer can reduce the taxable income of their employees, thereby potentially lowering the overall tax liability for both parties.