Enrolled Agent (EA) Part 2 — Businesses: Pass-Through and Corporate Entities Syllabus

Part 2 — Businesses: Pass-Through and Corporate Entities 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: Pass-Through and Corporate Entities in Enrolled Agent (EA), not a summary of it.

1. 1

   Partnerships

   3 topics

   • Partnership taxation fundamentals
     • Distributive share and Schedule K-1
     • Outside basis, inside basis, and Section 754 elections
     • Guaranteed payments and partner transactions
   • Partnership distributions and liquidations
     • Current vs. liquidating distributions
     • Hot assets and Section 751
   • Partnership losses and special rules
     • At-risk and passive loss limitations
     • Self-employment income for partners
2. 2

   S Corporations

   3 topics

   • S corporation eligibility and election
     • Eligibility requirements and shareholder limits
     • Election (Form 2553) and termination
   • S corporation taxation and basis
     • Shareholder stock and debt basis
     • Accumulated adjustments account
     • Loss limitation ordering rules
   • S corporation special taxes
     • Reasonable compensation for shareholder-employees
     • Built-in gains tax and excess net passive income tax
3. 3

   C Corporations

   3 topics

   • Corporate income taxation
     • Corporate tax computation and flat rate
     • Dividends-received deduction
     • Charitable contribution and capital loss limits
   • Corporate distributions and E&P
     • Dividends, return of capital, and capital gain
     • Current and accumulated earnings and profits
     • Stock redemptions and liquidations
   • Corporate penalty taxes and compliance
     • Accumulated earnings and personal holding company taxes
     • Corporate estimated tax requirements
4. 4

   Specialized Entities and Fiduciary Returns

   3 topics

   • Tax-exempt organizations
     • Exemption requirements and Form 990 series
     • Unrelated business income tax
   • Estates and trusts
     • Fiduciary income tax (Form 1041)
     • Distributable net income and beneficiary K-1s
   • Retirement and benefit plans
     • Qualified plans and SEP/SIMPLE plans
     • Plan reporting (Form 5500) basics

Part 2 — Businesses: Pass-Through and Corporate Entities flashcards for Enrolled Agent (EA)

18 of 51 cards from the Part 2 — Businesses: Pass-Through and Corporate Entities deck — real questions with worked answers.

1. What tax form does a partnership file, and is the partnership itself subject to income tax?

   A partnership files Form 1065 (an informational return). The partnership is not subject to income tax; it is a pass-through entity, and income/loss flows to partners via Schedule K-1 to be taxed on their individual returns.

2. How is a partner's initial outside basis in a partnership interest determined when contributing property?

   Outside basis equals the adjusted basis of cash and property contributed, plus the partner's share of partnership liabilities, minus any liabilities of the partner assumed by the partnership.

3. What is the general rule on gain/loss recognition when a partner contributes appreciated property to a partnership in exchange for an interest?

   Under IRC Section 721, no gain or loss is recognized on the contribution of property in exchange for a partnership interest (with exceptions, such as contributions to investment partnerships or when liabilities relieved exceed basis).

4. How does a partner's basis change each year for partnership operations?

   Basis is increased by the partner's share of income (taxable and tax-exempt) and additional contributions, and decreased by distributions, the partner's share of losses, and nondeductible expenses. Liability changes adjust basis as deemed contributions/distributions.

5. What is a guaranteed payment in partnership taxation and how is it treated?

   A guaranteed payment is compensation to a partner for services or use of capital, determined without regard to partnership income. It is deductible by the partnership (if otherwise deductible) and is ordinary income to the receiving partner, reported on the K-1.

6. How is a partner's distributive share of income/loss generally determined, and what limits it?

   It is determined by the partnership agreement (must have substantial economic effect). A partner's deductible loss is limited to outside basis, then by the at-risk rules, then by passive activity loss rules.

7. In a current (nonliquidating) partnership distribution, when does a partner recognize gain?

   A partner recognizes gain only when cash (including marketable securities and deemed cash from liability relief) distributed exceeds the partner's outside basis. Gain is treated as capital gain from sale of the partnership interest.

8. What is a partner's basis in property received in a current (nonliquidating) distribution?

   The partner takes a carryover basis equal to the partnership's adjusted basis in the property, but not exceeding the partner's outside basis (after reduction for any cash). Outside basis is reduced by the cash and the basis of property received.

9. How is a partner's basis allocated to property received in a liquidating distribution?

   The partner's entire remaining outside basis (after cash) is allocated to the distributed property. Basis is first assigned to cash, then to unrealized receivables/inventory (to a max of partnership basis), then the remainder to other property.

10. When does a partner recognize loss on a liquidating distribution?

    A loss is recognized only in a liquidating distribution and only when the partner receives solely cash, unrealized receivables, and/or inventory whose total basis is less than the partner's outside basis. The loss is capital.

11. What are 'hot assets' (Section 751) and why do they matter in distributions/sales?

    Hot assets are unrealized receivables and inventory items. They cause ordinary income treatment on the sale of a partnership interest or on disproportionate distributions, preventing conversion of ordinary income into capital gain.

12. What is the at-risk limitation for partnership losses?

    Under IRC Section 465, a partner may deduct losses only to the extent of the amount at risk (generally cash and property contributed plus recourse debt). Nonrecourse debt is generally not at-risk except qualified nonrecourse real estate financing.

13. In what order are the partnership loss limitation rules applied?

    (1) Basis (tax basis) limitation, (2) at-risk limitation (Section 465), then (3) passive activity loss limitation (Section 469). Losses disallowed at one level carry forward.

14. What happens to a partnership loss that exceeds a partner's outside basis?

    The excess loss is suspended (carried forward indefinitely) and may be deducted in a future year when the partner has sufficient basis.

15. When is a partnership considered terminated for tax purposes under current law?

    Under post-TCJA rules, a partnership terminates only when no part of any business/financial operation continues to be carried on by any partners (the old 50%-interest-sale technical termination rule was repealed).

16. List the eligibility requirements for a corporation to elect S corporation status.

    Must be a domestic corporation, have only allowable shareholders (individuals, certain estates/trusts, and some exempt orgs - no partnerships, corporations, or nonresident aliens), have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation.

17. How and when is the S corporation election made, and when is it effective?

    File Form 2553 with shareholder consent. To be effective for the current tax year, file by the 15th day of the 3rd month of that year; filed later, it is effective the following year (late-election relief may apply).

18. Does the S corporation one-class-of-stock rule prohibit differences in voting rights?

    No. Differences in voting rights are allowed. The rule requires identical rights to distribution and liquidation proceeds; differences in voting do not create a second class of stock.

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