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
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
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
Specialized Returns And Taxpayers
Related Articles
  1. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  2. Professionals

    Advisors: Warn Clients About These Audit Triggers

    There are several factors that may increase the risk of an audit, especially with high-net-worth clients.
  3. Professionals

    3 States Where Taxes Can Hammer Retirees

    Knowing which states ding retirees with the highest tax implications should be part of your retirement research.
  4. Professionals

    Best Ways to Avoid RMD Tax Hits on IRAs

    If you want to avoid hefty tax penalties, read this cheat sheet on IRA required minimum distributions.
  5. Retirement

    Top Tips for Minimizing Taxes on Social Security

    Social Security benefits are taxable under certain circumstances. Here are some ways retirees can lessen the tax burden.
  6. Professionals

    How to Help Retirees Manage Taxes on Distributions

    There are many variables when it comes to helping retirees manage taxes on distributions. Here's what advisors need to consider.
  7. Taxes

    Employers: Don't Forget IRS Form 941

    Your obligations as an employer include various employment taxes. Use this form to report them.
  8. Entrepreneurship

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  9. Taxes

    What's IRS Form 2848 Used For?

    It's a power of attorney tax form and here's what it can, and cannot, do.
  10. Taxes

    20 Medical Expenses You Didn't Know You Could Deduct

    To lower your tax bill, be sure not to miss out on these commonly overlooked medical tax deductions.
RELATED TERMS
  1. Structured Transaction

    A series of transactions that could have been treated as a single ...
  2. Tax Deductible Interest

    A borrowing expense that a taxpayer can claim on a federal or ...
  3. Working Tax Credit (WTC)

    A tax credit offered to low-income individuals working in the ...
  4. Proof of Charitable Contributions

    Substantiation required by the Internal Revenue Service for a ...
  5. Quid Pro Quo Contribution

    A charitable donation for which the donor receives something ...
  6. Readvanceable Mortgage

    A mortgage feature that allows the borrower to re-borrow the ...
RELATED FAQS
  1. What are the best free online calculators for calculating my taxable income?

    Free online calculators for determining your taxable income are located at Bankrate.com, TaxACT.com and Moneychimp.com. Determining ... Read Full Answer >>
  2. In what instances does overhead qualify for certain tax allowances?

    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 >>
  3. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  4. How are write-offs recorded on my tax return?

    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 >>
  5. How is the deductible I paid for my insurance claim treated for tax purposes?

    The deductible you pay on your health insurance policy may be tax-deductible if you meet certain conditions. However, whether ... Read Full Answer >>
  6. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!