Enrolled Agent (EA) Part 2 — Businesses: Entities, Income, and Deductions Syllabus

Part 2 — Businesses: Entities, Income, and Deductions syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Part 2 — Businesses: Entities, Income, and Deductions in Enrolled Agent (EA), not a summary of it.

1. 1

   Business Entities and Formation

   3 topics

   • Choice of entity and tax characteristics
     • Sole proprietorships and Schedule C reporting
     • Partnerships, LLCs, and check-the-box elections
     • C corporations and S corporations
   • Entity formation and capitalization
     • Section 351 corporate formation transfers
     • Section 721 partnership contributions
     • Initial basis and recognized gain on formation
   • Accounting methods and periods
     • Cash vs. accrual methods and eligibility
     • Tax year selection and Section 444 elections
     • Changes in accounting method (Form 3115)
2. 2

   Business Income and Deductions

   4 topics

   • Gross business income
     • Sales, services, and inventory (Section 471)
     • Uniform capitalization rules (Section 263A)
   • Ordinary and necessary business expenses
     • Compensation, rent, and supplies
     • Meals and travel limitations
     • Business use of home and vehicle expenses
   • Depreciation and cost recovery
     • MACRS systems and conventions
     • Section 179 expensing and bonus depreciation
     • Listed property and luxury auto limits
   • Special deductions and limitations
     • Qualified Business Income deduction (Section 199A)
     • Business interest expense limitation (Section 163(j))
     • Net operating losses and carryforward rules
3. 3

   Business Assets and Disposition

   3 topics

   • Basis and gain/loss on disposition
     • Adjusted basis computation
     • Amount realized and recognized gain
   • Character of gain and loss
     • Section 1231 gains and losses
     • Depreciation recapture (Sections 1245 and 1250)
   • Nonrecognition transactions
     • Like-kind exchanges (Section 1031)
     • Involuntary conversions (Section 1033)
     • Installment sales (Section 453)
4. 4

   Employment Taxes and Business Compliance

   3 topics

   • Federal employment taxes
     • FICA, FUTA, and income tax withholding
     • Forms 941, 940, and W-2/W-3 reporting
   • Worker classification
     • Employee vs. independent contractor tests
     • Form 1099-NEC reporting and backup withholding
   • Trust fund and penalty exposure
     • Trust fund recovery penalty (Section 6672)
     • Failure-to-deposit penalties

Part 2 — Businesses: Entities, Income, and Deductions flashcards for Enrolled Agent (EA)

23 of 50 cards from the Part 2 — Businesses: Entities, Income, and Deductions deck — real questions with worked answers.

1. What are the four most common business entity types for U.S. federal tax purposes, and how is each taxed?

   Sole proprietorship (Schedule C, taxed to owner), partnership (Form 1065, pass-through), C corporation (Form 1120, entity-level tax plus tax on dividends = double taxation), and S corporation (Form 1120-S, pass-through to shareholders).

2. What is 'double taxation' and which entity is subject to it?

   Income is taxed once at the corporate level and again when distributed as dividends to shareholders. It applies to C corporations.

3. What is the default federal tax classification of a single-member LLC versus a multi-member LLC?

   A single-member LLC is a disregarded entity (taxed as a sole proprietorship) by default; a multi-member LLC is taxed as a partnership by default. Either may elect corporate (or S) treatment via Form 8832/2553.

4. List the eligibility requirements to elect S corporation status.

   Be a domestic corporation; have no more than 100 shareholders; have only allowable shareholders (individuals, certain trusts, and estates—no partnerships, corporations, or nonresident aliens); have only one class of stock; and not be an ineligible corporation.

5. What form and deadline are used to elect S corporation status?

   Form 2553, filed by the 15th day of the 3rd month of the tax year (generally March 15 for a calendar-year corporation) to be effective for that year.

6. Under IRC §351, when is gain or loss recognized on the transfer of property to a controlled corporation in exchange for stock?

   No gain or loss is recognized if the transferor(s) contributing property are in control (owning at least 80% of voting power and 80% of each class of nonvoting stock) immediately after the exchange.

7. In a §351 transfer, what happens when the transferor receives 'boot' (money or other property)?

   Gain is recognized to the extent of the lesser of the realized gain or the fair market value of the boot received. Losses are never recognized.

8. How is a shareholder's basis in stock received in a §351 exchange computed?

   Basis = adjusted basis of property transferred, minus boot received, minus liabilities assumed by the corporation, plus gain recognized by the shareholder.

9. How is the corporation's basis in property received in a §351 transfer determined?

   Carryover basis: the transferor's adjusted basis, increased by any gain the transferor recognized on the exchange (with a built-in loss limitation that may cap basis at FMV).

10. Under §721, is gain or loss recognized when a partner contributes property to a partnership in exchange for a partnership interest?

    Generally no gain or loss is recognized to either the partner or the partnership on a contribution of property in exchange for a partnership interest.

11. What are the three permissible overall methods of accounting for tax purposes?

    Cash method, accrual method, and hybrid (a combination of cash and accrual). A taxpayer must also use special methods where required (e.g., for inventory or long-term contracts).

12. Under the cash method, when are income and expenses recognized?

    Income is recognized when actually or constructively received; expenses are deducted when actually paid.

13. Under the accrual method, when are income and expenses recognized?

    Income is recognized when all events have occurred fixing the right to receive it and the amount is determinable (all-events test); expenses when the all-events test is met and economic performance has occurred.

14. What is the constructive receipt doctrine?

    A cash-method taxpayer must report income when it is made available without substantial restriction, even if not physically received (e.g., interest credited to an account).

15. Which businesses are generally required to use the accrual method for purchases and sales of inventory, and what is the small-business exception?

    Businesses that produce, purchase, or sell merchandise generally must account for inventory. However, small businesses meeting the gross receipts test (average annual gross receipts of $25M, indexed—$30M for 2024) may use the cash method and treat inventory as non-incidental materials and supplies.

16. What is a tax year, and what options exist?

    The annual accounting period for reporting income. Options: calendar year (Dec 31), fiscal year (12-month period ending the last day of any month other than December), or a 52-53 week year.

17. What is the 'required tax year' rule for partnerships and S corporations?

    Partnerships must generally use the tax year of the majority/principal partners; S corporations generally must use a calendar year. Both may elect a different year under §444 if a deferral period limit and required payments are met.

18. What constitutes gross business income for a merchandising business?

    Gross income = gross receipts (total sales) minus cost of goods sold, plus other business income (e.g., interest, rents related to the business).

19. How is cost of goods sold (COGS) calculated?

    COGS = beginning inventory + purchases (and other costs such as labor and overhead) − ending inventory.

20. Under §162, what makes a business expense deductible?

    It must be ordinary (common and accepted in the trade) and necessary (helpful and appropriate), paid or incurred during the year in carrying on a trade or business, and reasonable in amount.

21. Name three common business expenses that are NOT deductible.

    Fines and penalties paid to a government, illegal bribes/kickbacks, political contributions and lobbying, and (post-TCJA) most entertainment expenses.

22. What is the general deduction limit for business meals, and what is the standard percentage?

    Business meals are generally 50% deductible if not lavish and the taxpayer (or employee) is present and there is a business purpose. Entertainment is generally nondeductible.

23. What is MACRS, and what are its two systems?

    Modified Accelerated Cost Recovery System—the depreciation method for most tangible property placed in service after 1986. Its two systems are GDS (General Depreciation System) and ADS (Alternative Depreciation System).

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