Part 2 - Businesses - Specialized Returns And Taxpayers

This section of the exam pertains to specialized returns, including those involving trusts, exempt organizations, retirement plans, and farmers. As part of a thorough understanding of businesses, Enrolled Agents are expected to be familiar with these specialized returns.

Trust and Estate Income Tax
A trust is a fiduciary relationship that exists between a trustor and a trustee. The trustor gives the trustee the right to hold title to property or assets for the benefit of a third party, known as the beneficiary. Estates and trusts must file income tax returns just as individuals are required to; however, a trust or a decedent's estate is a separate legal entity for federal tax purposes. A trust can be created during an individual's life (inter vivos) or upon his or her death as provided by a will. A decedent's estate comes into existence at the time of the individual's death.

Many of the same deductions and credits that are allowed to individuals are also provided to estates and trusts. A trust or decedent's estate, however, is allowed an income distribution deduction (for distributions made to beneficiaries). Because of this, a trust or decedent's estate is sometimes considered a "pass-through" entity: the beneficiary, and not the trust or decedent's estate, pays income tax of the distributive share of income.

Enrolled Agents should understand the various types of trusts, and related terms and tax treatments including:

  • Distributable net income
  • Exclusions and deductions
  • Form 1041, Income Tax Return for Estates and Trusts
  • Fraudulent trusts (abusive trust arrangements)
  • Income
  • Income in respect of a decedent
  • Trust types – grantor, irrevocable, tax shelters, etc.
  • Income - allocations
  • Separately stated items
  • Filing requirements

Exempt Organizations
Exempt organizations are those that are excused from paying federal income tax. IRS Publication 557 provides guidance regarding the rules and regulations that an organization must follow to obtain tax-exempt status, including required forms and documents, the appeals process if tax-exempt status is not granted, and causes of a revocation of tax-exempt status. Organizations that are granted tax-exempt status have certain filing requirements and disclosures that have to be provided to people who donate funds to the organization. Publication 557 also provides information about organizations that fall under section 501(c)(3). 

There is a difference between nonprofit and tax-exempt status. Nonprofit status is a state law concept, and may make an organization entitled to certain benefits, such as exemptions from state sales, property and income taxes. Although most federal tax-exempt organizations are nonprofits, organizing as a nonprofit at the state level does not automatically give the organization exclusion from federal income tax. To qualify as exempt from federal income tax, the organization must meet requirements established in the Internal Revenue Code. Exempt organizations should also be aware of unrelated business taxable income (UBTI).

Enrolled Agents should be familiar with the following regarding exempt organizations:

Filing Requirements:

  • Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code
  • Form 1024, Application for Recognition of Exemption Under Section 501(a)
  • Annual 990, Return of Organization Exempt From Income Tax Qualifications for tax-exempt status – for 501(c)(3) and other Section 501(c) organizations

Retirement Plans
An employer may offer certain benefit plans to employees at no or a relatively low cost to the employees. Employer-sponsored retirement savings plans are useful for the employees because it provides an automatic method of saving, provides certain tax incentives and may allow employees to grow wealth with matching employer contributions. Examples of employer-sponsored retirement savings plans are 401(k)s and some types of IRAs. IRS Publication 560 "Retirement Plans for Small Businesses" provides basic information on the various types of plans. Enrolled Agents should know the following regarding retirement plans:

Farmers
A farmer is someone who is engaged in the agriculture industry through growing field crops, orchards and vineyards or raising farm animals, including poultry and livestock. Farmers often qualify for various subsidies, incentives and tax deductions under the U.S. policy. IRS Publication 225 "Farmer's Tax Guide" provides comprehensive information regarding a variety of topics related to farming, including farm income, expenses and inventories. Because farming is treated differently than other industries, it is important for Enrolled Agents to understand the specific farming-related topics including:

  • Farm inventory
  • Depreciation, depletion and amortization – Special Depreciation Allowance
  • Disaster-area provisions
  • Disposition of farm assets
  • Farm income - self-raised livestock, crop insurance proceeds
  • Farm tax computation - Schedule J, Schedule SE, estimated tax
Practices And Procedures


Related Articles
  1. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
  2. Taxes

    5 Steps To Forming A Tax-Exempt Nonprofit Corporation

    Before you tackle this challenge, know the challenges of forming and operating an official nonprofit organization.
  3. Taxes

    What IRS Form 990 Tells About a Nonprofit

    Want a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
  4. Retirement

    Pick The Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  5. Taxes

    8 States With Estate Taxes

    Understand the difference between the federal estate tax and state-specific estate taxes. Learn about some of the worst states with estate taxes.
  6. Estate Planning

    Why It's So Important to Update Your Estate Plan

    As rules and exemptions tied to the estate tax change, so should your estate plan. Here's why updating it is so important.
  7. Retirement

    How To Set Up A Trust Fund In Australia

    No, they're not just for the super-rich. But you need to know the rules.
  8. Financial Advisors

    Estate Planning and Elderly and Passed Clients

    By keeping up with new estate tax rules, financial advisors can help elderly clients save big on tax costs.
  9. Retirement

    Get A Step Up With Credit Shelter Trusts

    Don't let unexpected taxes eat away at your inheritance or burden your heirs.
  10. Financial Advisors

    Passing an IRA to a Trust: The Good and Bad

    Creating a trust is a common estate planning tactic, but naming a beneficiary to an IRA to a trust may have unintended consequences.
RELATED TERMS
  1. IRS Publication 501

    A document published by the Internal Revenue Service that covers ...
  2. Insurance Trust

    An irrevocable trust set up with a life insurance policy as the ...
  3. Alimony Substitution Trust

    A trust agreement in which a divorced person agrees to pay spousal ...
  4. A-B Trust

    A trust created by a married couple with the objective of minimizing ...
  5. Not For Profit

    A not for profit organization is a type of organization that ...
  6. Tax-Exempt Interest

    Interest income that is not subject to federal income tax. Tax-exempt ...
RELATED FAQS
  1. Do nonprofit organizations pay taxes?

    Section 501 of the Internal Revenue Service (IRS) tax code exempts qualified nonprofit organizations from federal taxes. ... Read Answer >>
  2. How are trust fund earnings taxed?

    Trust fund earnings that are distributed are paid by the beneficiary. The trust pays taxes on retained earnings and principal ... Read Answer >>
  3. Do beneficiaries of a trust pay taxes?

    Learn how interest income from a trust is taxed, and understand when this money is taxable to the trust and when it is taxable ... Read Answer >>
  4. Can a corporation deduct dividend payments to shareholders before taxes are calculated?

    Corporations may not legally deduct the dividend payments before taxes but there is another approach - a corporate structure ... Read Answer >>
  5. How do I list the beneficiaries of my life insurance policies if I have a trust? ...

    Because most states protect life insurance policies from creditors, most buyer questions come from the confusion created ... Read Answer >>
  6. Will I have to pay taxes every year when I receive the $25,000 from my trust fund?

    My inheritance is in the form of a trust fund that distributes $25,000 per year for 10 years. ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center