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
Saving and SpendingMandatory minimum distributions from traditional IRAs and qualified plans cannot be avoided. But there are several ways to minimize their impact.
TaxesIf you run a business or have investment income, pay attention to this year's estimated tax deadlines. Here are the details, and what's new for 2016.
RetirementHere's a list of items you need to have in order by tax time, including paying attention to those pesky required minimum distributions.
InsuranceIf you don't have health insurance, act NOW or you could owe penalties on your 2016 taxes, in addition to this year's.
Personal FinanceThe new year is an excellent opportunity to review your personal financial plan and take steps to get on track to meet your goals in 2016 and beyond.
Your PracticeIt's time to think about tax returns again. The good news is that the regulations in 2016 have not changed dramatically from last year.
Your ClientsThe passage of the PATH legislation at the end of 2015 gives advisors more clarity on how to help clients with tax and financial planning.
Investing BasicsRead about how big oil corporations pay taxes, and learn about tax exemptions and the option to defer. Discover the argument about big oil being given tax exemptions
Saving and SpendingReady to cash in on your retirement? Here's how waiting to take social security can save you money in taxes and other ways, depending on your situation.
Investing BasicsRetirement investing can't be something you set and forget. If you aren't flexible, you could end up with a savings shortfall, a tax hit and high fees.
Skinny down distribution is corporate practice of slimming down ...
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 ...
Flexible Spending Accounts (FSAs) are employer-sponsored, tax-favored savings plans expressly for the future reimbursement ... Read Full Answer >>
The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
Dental insurance premiums may be tax deductible. To be deductible as a qualifying medical expense, the dental insurance must ... Read Full Answer >>
Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
The contributions you make to your Flexible Spending Account (FSA) are not tax-deductible because the accounts are funded ... Read Full Answer >>
Flexible Spending Accounts (FSAs) do expire and are considered to be a "use it or lose it" type of plan. They are savings ... Read Full Answer >>