Part 2 - Businesses - Business Financial Information
This section of the exam covers information regarding a business's finances, including its income, expenses, deductions and credits, assets, analysis of financial records and methods by which Enrolled Agents counsel business clients.
Business income is defined as any income that is realized as a result of business activity, typically through the sale of products and services. Business income is a type of earned income and for tax purposes is classified as ordinary income. Business income can often be offset by business expenses and losses. Payments that are received in the form of property or services are included as income at the fair market value.
IRS Topic 407 "Business Income" provides a brief description of income as it relates to businesses. Enrolled Agents should have knowledge of topics relating to business income, including:
- Gain or loss on disposition of depreciable property
- Gross business income
- Net income
- Net operating losses and loss limitations
- Cancellation of business debt
Business Expenses, Deductions and Credits
Business expenses, discussed in IRS Publication 535 "Business Expenses," include the wide variety of costs to which a business is subject. Expenses are the opposite of income and include payments to suppliers, employee wages, factory leases and depreciation. Enrolled Agents must know the various types of business expenses and the filing requirements. Important topics to know include:
- Business bad debts
- Business credits
- Business rental deduction
- Business travel, entertainment and gift expenses
- Casualty and theft losses
- Depreciation, amortization and depletion
- Domestic production activities
- Employee pay – compensation deductibility, fringe benefits, education expenses, loans and advances, etc.
- Employment taxes
- Federal excise tax
- Insurance expenses
- Interest expenses – deductible and nondeductible
- Rent expense – conditional sales contract, leveraged leases, etc.
- Reporting requirements for employees – W-2, W-4, Form 1099
- Alternative minimum tax net operating loss deduction
- Home office
Business assets are property or equipment that were purchased exclusively or primarily for business use, including vehicles, real estate, computers, office furniture and other fixtures. Business assets are listed on the firm's balance sheet as items of ownership and can be written off and either depreciated or expensed. As an enrolled agent, you will need to know about business assets, including:
- Calculating the basis of assets
- Disposition of depreciable property
- Like-kind exchange of assets (1031 exchange)
Analysis of Financial Records
The understanding and analysis of financial records is important to the enrolled agent. Financial statement analysis involves the process of reviewing and evaluating a company's financial records (such as the balance sheet) to gain an understanding of the financial health of the company. This provides an evaluative means of determining the past, current and forecasted performance of a company. Enrolled Agents must be familiar with various terms and aspects of financial records analysis, including:
- Accounting methodology – accrual, cash, hybrid, OCBOA
- Balance sheet
- Business type – service, retail, manufacturer, farm
- Depreciation and amortization
- Depreciation recovery
- Income statement
- Pass-through activity (Form K-1)
- Related party activity
- Tax versus books reconciliation
- Loans to and from owners
Advising the Business Taxpayer
Just as an enrolled agent can advise individuals, they are also qualified and expected to provide counsel to business taxpayers. These services vary and can including advising clients regarding:
- Accounting methods and procedures
- Business life cycle – startup, decline, etc.
- Client habits – separation of business and personal accounts
- Depositing obligations – employee taxes, excise tax
- Filing obligations – due dates, extensions
- Industry type
- Related party transactions
- Reporting business obligations – IRC sections 1099 and 1031 exchanges
- Requirements for record keeping
- Transfer elections in/out of the business
- Types of business entities
- Worker classification
ProfessionalsIt's almost time for year-end capital gains distributions for mutual funds. Here's how to monitor them and minimize their tax impact.
InvestingBeing vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
ProfessionalsAlthough market crashes are usually bad news for your portfolio, there are several ways to minimize losses or even profit outright from market movement.
TaxesLearn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
ProfessionalsBefore you sell mutual fund shares, consider these tax strategies first.
ProfessionalsSelf-directed IRAs are an attractive option for investors looking to build nest eggs. But they should exercise caution in avoiding prohibited transactions.
ProfessionalsFinding a way to convert a traditional IRA to a Roth IRA is a tricky process. Here's when it makes sense to do so.
ProfessionalsHarvesting tax losses is a key skill that investors can use to keep more of their money in their pockets the next time they file taxes.
Fundamental AnalysisTaxes may be a necessary evil, but that doesn't mean they can't be reduced. Here's a host of smart moves today's investors can make.
EntrepreneurshipAnd how to make sure you do it the right way, following IRS guidelines.
A series of transactions that could have been treated as a single ...
A borrowing expense that a taxpayer can claim on a federal or ...
A tax credit offered to low-income individuals working in the ...
Substantiation required by the Internal Revenue Service for a ...
A charitable donation for which the donor receives something ...
A mortgage feature that allows the borrower to re-borrow the ...
The Cayman Islands is one of the most well-known tax havens in the world. Unlike most countries, the Cayman Islands does ... Read Full Answer >>
Andorra is one of many locations around the globe considered a tax haven because of its relatively lenient tax laws. However, ... Read Full Answer >>
Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
The way your write-offs are recorded on your tax return varies depending on whether you are filing a personal or business ... Read Full Answer >>