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

How does S corporation debt basis differ from stock basis, and why does it matter?

Debt basis arises only from direct loans by the shareholder to the corporation (not from guaranteeing third-party debt). Losses can be deducted against debt basis after stock basis is exhausted; distributions only reduce stock basis.

How are distributions from an S corporation with no accumulated E&P taxed?

Distributions are tax-free to the extent of stock basis (return of capital), reducing basis; amounts exceeding basis are taxed as capital gain.

What is the Accumulated Adjustments Account (AAA) and its role in S corp distributions?

AAA tracks the cumulative undistributed income of an S corp that has C-corp E&P. Distributions from AAA are tax-free (to the extent of basis); once AAA is exhausted, distributions come from accumulated E&P and are taxed as dividends.

How does the loss limitation work for an S corporation shareholder?

Deductible losses are limited to the sum of stock basis plus debt basis. Excess losses are suspended and carried forward until the shareholder restores basis. At-risk and passive loss rules then apply.

What is the S corporation built-in gains (BIG) tax?

A corporate-level tax (at the highest corporate rate, 21%) on net recognized built-in gains existing at the time of S election conversion from C status, if disposed of within the 5-year recognition period. It prevents avoiding C-corp tax via conversion.

What is the S corporation excess net passive income tax?

A tax at 21% imposed when an S corp with accumulated C-corp E&P has passive investment income exceeding 25% of gross receipts. Excessive passive income for 3 consecutive years also terminates the S election.

How is a more-than-2% S corporation shareholder's health insurance treated?

Premiums paid by the corporation are included in the shareholder's W-2 wages (subject to income tax but not FICA if part of a plan), and the shareholder may claim the self-employed health insurance deduction above the line.

What is the current federal corporate income tax rate for C corporations?

A flat 21% rate on taxable income, established by the Tax Cuts and Jobs Act (TCJA) for tax years beginning after 2017.

What is the corporate dividends-received deduction (DRD) and its tiers?

A deduction for dividends a C corp receives from other domestic corporations: 50% if ownership is less than 20%, 65% if 20% to less than 80%, and 100% if 80% or more (affiliated group).

How are corporate capital losses treated?

C corporations may deduct capital losses only against capital gains (not ordinary income). Excess capital losses carry back 3 years and forward 5 years, always treated as short-term.

What is the charitable contribution deduction limit for a C corporation?

Generally limited to 10% of taxable income (computed before the charitable deduction, DRD, and certain carrybacks). Excess carries forward 5 years.

What is the general rule on gain/loss recognition for property contributed to a controlled corporation under Section 351?

No gain or loss is recognized if property is transferred solely in exchange for stock and the transferors control (at least 80%) the corporation immediately after. Boot received triggers gain recognition up to the boot amount.

What is Earnings and Profits (E&P) and why is it important?

E&P measures a corporation's economic ability to pay dividends. The character of a corporate distribution (dividend vs. return of capital vs. capital gain) depends on current and accumulated E&P.

How is a corporate distribution to a shareholder taxed, in order, based on E&P?

(1) Dividend to the extent of current and accumulated E&P, (2) then a tax-free return of capital reducing stock basis, (3) then capital gain to the extent it exceeds basis.

How do current E&P and accumulated E&P interact when one is positive and the other negative?

Distributions are dividends to the extent of current E&P first. If current E&P is positive, distributions are dividends even if accumulated E&P is negative. Current and accumulated deficits/positives are netted on a specific deficit-allocation basis.

How is a corporation taxed on a distribution of appreciated property to shareholders?

The corporation recognizes gain as if it sold the property at fair market value (Section 311(b)). The gain increases E&P; the shareholder's dividend amount is the FMV of the property received.

What is the accumulated earnings tax and at what rate?

A penalty tax of 20% on accumulated taxable income retained beyond reasonable business needs to avoid shareholder-level tax on dividends. A credit (generally $250,000, or $150,000 for personal service corps) is allowed.

What is the personal holding company (PHC) tax?

A 20% penalty tax on undistributed PHC income. A corporation is a PHC if 5 or fewer individuals own more than 50% of stock AND at least 60% of adjusted ordinary gross income is PHC income (dividends, interest, rents, royalties).

What are the corporate estimated tax payment rules to avoid an underpayment penalty?

Corporations must pay quarterly estimates. Generally pay the lesser of 100% of the current year tax or 100% of the prior year tax. Large corporations (taxable income at least $1M in any of prior 3 years) must use 100% of current-year tax.

What form and due date apply to a C corporation income tax return?

Form 1120, due by the 15th day of the 4th month after year-end (April 15 for calendar-year corps). A 6-month extension is available with Form 7004. (June 15 due date applies to June 30 fiscal-year filers.)

What distinguishes a 501(c)(3) organization and what are its main categories?

A 501(c)(3) is organized and operated exclusively for charitable, religious, educational, scientific, or similar exempt purposes. Categories include public charities and private foundations; contributions are generally tax-deductible.

What is Unrelated Business Income Tax (UBIT)?

Tax imposed on a tax-exempt organization's net income from a trade or business that is regularly carried on and not substantially related to its exempt purpose. The first $1,000 of gross UBI is exempt; income above is taxed at corporate rates.

Which annual information return do most tax-exempt organizations file, and what affects which version?

Form 990 series. The version depends on gross receipts/assets: Form 990-N (e-Postcard) for gross receipts normally at or below $50,000, Form 990-EZ for smaller orgs, and full Form 990 for larger orgs. Private foundations file Form 990-PF.

What happens if a tax-exempt organization fails to file required annual returns for three consecutive years?

Its tax-exempt status is automatically revoked. The organization must reapply for exemption to regain its status.

How is the income of an estate or trust taxed - at the entity or beneficiary level?

Estates and trusts are pass-through-like: they get a deduction for income distributed to beneficiaries (the distribution/income distribution deduction), so distributed income is taxed to beneficiaries; income retained is taxed to the entity on Form 1041.

What is Distributable Net Income (DNI) and its purpose?

DNI limits the deduction an estate/trust may take for distributions and limits the amount taxable to beneficiaries. It also determines the character of income passed through to beneficiaries on Schedule K-1.

What is the difference between a simple trust and a complex trust?

A simple trust must distribute all income currently, makes no charitable contributions, and makes no distributions of corpus. A complex trust may accumulate income, distribute principal, and/or make charitable contributions.

What is the contribution limit and 'catch-up' for a 401(k) plan (general structure)?

Employees may make elective deferrals up to an annual dollar limit set by the IRS, with an additional catch-up contribution allowed for participants age 50 and older. Total additions are also capped under Section 415 limits.

What is the difference between a traditional IRA and a Roth IRA in tax treatment?

Traditional IRA contributions may be deductible and grow tax-deferred; withdrawals are taxed as ordinary income. Roth IRA contributions are after-tax (nondeductible); qualified distributions of earnings are tax-free.

What is the penalty for an early distribution from a qualified retirement plan or IRA, and key exceptions?

A 10% additional tax applies to distributions before age 59 1/2. Exceptions include death, disability, certain medical expenses, qualified higher education, first-time home purchase (IRA, up to $10,000), and substantially equal periodic payments.

What are Required Minimum Distributions (RMDs) and when must they begin?

RMDs are minimum amounts that must be withdrawn annually from traditional IRAs and qualified plans, beginning at the required beginning age (age 73 under SECURE 2.0). Roth IRAs have no RMDs during the owner's lifetime; failure incurs an excise tax.