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

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.

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.

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).

What are the MACRS recovery periods for residential rental property and nonresidential real property?

Residential rental property: 27.5 years (straight-line); nonresidential real property: 39 years (straight-line).

What averaging conventions apply under MACRS?

Half-year convention (default for personal property), mid-quarter convention (if more than 40% of personal property is placed in service in the last quarter), and mid-month convention (for real property).

What is the §179 expensing election and its 2024 limits?

It allows immediate expensing of qualifying tangible personal property (and certain real property improvements) up to a dollar limit ($1,220,000 for 2024), phased out dollar-for-dollar once purchases exceed a threshold ($3,050,000 for 2024). The deduction cannot exceed business taxable income.

What is bonus depreciation and what is its phase-down schedule?

An additional first-year depreciation allowance for qualified property. It was 100% through 2022 and phases down: 80% (2023), 60% (2024), 40% (2025), 20% (2026), 0% (2027), unless changed by law.

How does §179 differ from bonus depreciation in order of application and limitations?

§179 is elected per asset, limited by a dollar cap, an investment phase-out, and taxable income; it is applied first. Bonus depreciation has no dollar or income limit, applies automatically (with an opt-out by class), and is taken after §179.

What is amortization, and over how many years are §197 intangibles amortized?

Amortization recovers the cost of intangible assets ratably. §197 intangibles (goodwill, going-concern value, customer lists, etc.) are amortized straight-line over 15 years (180 months).

What is the net operating loss (NOL) deduction limitation under current law?

For NOLs arising in 2018 and later, there is generally no carryback (with limited exceptions) and an indefinite carryforward, but the deduction is limited to 80% of taxable income (computed before the NOL).

What is the business interest expense limitation under §163(j)?

Deductible business interest is limited to business interest income plus 30% of adjusted taxable income plus floor plan financing interest. Small businesses under the gross receipts test are exempt.

What is the Qualified Business Income (QBI) deduction under §199A?

A deduction of up to 20% of qualified business income from pass-through entities and sole proprietorships, subject to taxable income thresholds, W-2 wage/UBIA limits, and limitations on specified service trades or businesses (SSTBs).

Define 'adjusted basis' of an asset.

Original cost (or other initial basis) plus capital improvements, minus depreciation/amortization/depletion and other reductions (e.g., casualty losses, deductions previously allowed).

What is the formula for realized gain or loss on the disposition of property?

Realized gain/loss = amount realized − adjusted basis. Amount realized = cash + FMV of property received + liabilities assumed by the buyer − selling expenses.

How is basis determined for property acquired by gift?

For gain, the donor's carryover (adjusted) basis; for loss, the lesser of donor's basis or FMV at the date of gift (dual-basis rule). Basis may be increased by gift tax attributable to net appreciation.

How is basis determined for inherited property?

Generally the FMV at the date of the decedent's death (stepped-up or stepped-down basis), or the alternate valuation date if elected. Inherited property is automatically treated as long-term.

What distinguishes a capital asset from an ordinary asset (e.g., §1231 property)?

A capital asset is property held by the taxpayer not falling within statutory exclusions. Inventory, accounts receivable, and depreciable/real property used in a trade or business (§1231) are NOT capital assets, though §1231 gains may receive capital treatment.

How does §1231 treat net gains versus net losses?

Net §1231 gains are treated as long-term capital gains (favorable rates); net §1231 losses are treated as ordinary losses (fully deductible). This 'best of both worlds' is subject to the 5-year lookback recapture rule.

What is §1245 depreciation recapture?

On the sale of depreciable personal property, gain is recaptured as ordinary income to the extent of all depreciation/amortization taken; any remaining gain is §1231 gain.

What is §1250 depreciation recapture, and what is 'unrecaptured §1250 gain'?

§1250 recaptures only depreciation taken in excess of straight-line as ordinary income (usually $0 under MACRS). 'Unrecaptured §1250 gain' is the portion of gain attributable to straight-line depreciation on real property, taxed at a maximum 25% rate.

What are the long-term capital gain holding period requirement and tax rate brackets?

Property must be held more than one year to be long-term. Preferential rates are 0%, 15%, and 20% depending on taxable income; short-term gains are taxed as ordinary income.

What is the corporate capital loss rule?

Corporations may deduct capital losses only against capital gains (no offset against ordinary income); excess losses carry back 3 years and forward 5 years, all as short-term.

What are the requirements for a tax-deferred §1031 like-kind exchange under current law?

Both properties must be real property held for productive use in a trade/business or investment, must be of like-kind, and the replacement property must be identified within 45 days and received within 180 days. (Post-TCJA, personal property no longer qualifies.)

How is gain recognized in a §1031 exchange when boot is received?

Recognized gain = the lesser of realized gain or boot received (cash, non-like-kind property, or net debt relief). Realized loss is never recognized.

What is an involuntary conversion under §1033, and how is gain deferred?

Property is destroyed, stolen, condemned, or taken (e.g., by eminent domain). Gain may be deferred if proceeds are reinvested in similar/related property within the replacement period (generally 2-3 years); gain is recognized to the extent proceeds are not reinvested.

What are the components and rates of FICA taxes?

Social Security tax of 6.2% on wages up to the annual wage base ($168,600 for 2024) and Medicare tax of 1.45% on all wages, each paid by both employer and employee (12.4% and 2.9% combined). An additional 0.9% Medicare tax applies to employee wages over $200,000.

What is FUTA tax, its rate, and wage base?

Federal Unemployment Tax: 6.0% on the first $7,000 of each employee's wages, paid solely by the employer. A credit of up to 5.4% for state unemployment taxes reduces the effective rate to 0.6%.

What is self-employment (SE) tax, its rate, and how is the deductible portion computed?

SE tax is 15.3% (12.4% Social Security up to the wage base + 2.9% Medicare) on 92.35% of net SE earnings. The employer-equivalent half (one-half of SE tax) is deductible as an above-the-line adjustment.

What common-law factors determine worker classification as employee vs. independent contractor?

The IRS examines three categories: behavioral control (right to direct how work is done), financial control (investment, profit/loss opportunity, payment method), and the type of relationship (contracts, benefits, permanency). Greater control points to employee status.

What is the Trust Fund Recovery Penalty (TFRP) and who is liable?

Under §6672, a penalty equal to 100% of the unpaid trust fund taxes (withheld income tax and the employee's share of FICA) may be assessed personally against any 'responsible person' who willfully fails to collect, account for, or pay over the taxes.