EA Part 2 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Check-the-box election

Form 8832 lets an eligible entity choose classification as a corporation or partnership; a single-member LLC defaults to disregarded unless it elects corporate status.

S corporation shareholder limit

An S corporation may have no more than 100 shareholders, counting family members as one, and only eligible individuals, estates, and certain trusts may hold stock.

Outside basis

A partner's basis in the partnership interest, increased by contributions, income, and liability shares and decreased by distributions, losses, and liability decreases; losses are limited to this basis.

AAA account

The accumulated adjustments account tracks an S corporation's cumulative undistributed post-1982 earnings; distributions in excess of AAA and basis are taxable gain.

Reasonable compensation

S corporation shareholder-employees must receive wages for services before taking distributions; reasonable wages are subject to payroll taxes while remaining profit is not.

Section 754 election

A partnership election allowing an inside basis adjustment to partnership property when an interest is transferred or property is distributed, aligning inside and outside basis.

Partnership return due date

Form 1065 for a calendar-year partnership is due March 15; a six-month extension is available on Form 7004, but the extension does not extend the payment of tax.

Form 1120-S due date

Calendar-year S corporation returns are due March 15; C corporation returns are due the 15th day of the fourth month after the tax year ends.

Schedule M-1

A reconciliation schedule on Form 1065 or Form 1120 that adjusts net income per books to income per return by listing nontaxable income and nondeductible expenses.

Schedule M-3

A detailed book-tax reconciliation required for corporations with total assets of $10 million or more, expanding on the categories reported on Schedule M-1.

Failure-to-file penalty

The penalty is 5% of unpaid tax per month or part of a month, up to 25%; the failure-to-pay penalty is 0.5% per month, with combined limits.

Corporate estimated tax

Corporations expecting a tax liability of $500 or more must make quarterly estimated payments using Form 1120-W, generally due the 15th day of months 4, 6, 9, and 12.

E-file mandate

Specified return preparers filing 10 or more returns of certain types must file electronically; Form 8508 requests a hardship waiver from the requirement.

Form 1099-NEC

Reports nonemployee compensation of $600 or more paid in a trade or business; copies are due to recipients and the IRS by January 31.

Distributable net income

DNI caps the trust or estate distribution deduction and the amount beneficiaries must include in income; it generally equals taxable income with adjustments for exempt income and capital gains.

Grantor trust taxation

A grantor trust is disregarded for income tax; the grantor reports the trust's income, deductions, and credits on the grantor's individual return using the trust's identifying number.

Unrelated business income

Gross income from a regularly carried on trade or business not substantially related to the exempt purpose, less allowable deductions, reported on Form 990-T.

Private foundation return

Private foundations file Form 990-PF annually and are subject to excise tax on net investment income plus minimum distribution requirements for charitable purposes.

Form 1041 estimated tax

Trusts and estates must pay estimated tax when the entity's tax liability is $1,000 or more, using the same quarterly due dates as calendar-year individuals.

Estate tax return

Form 706 is due nine months after the decedent's death; a timely portability election preserves the deceased spousal unused exclusion for the surviving spouse.

Cash method recognition

Income is recognized when actually or constructively received and expenses when paid, subject to economic performance, capitalization, and inventory rules.

Accrual method all-events test

Income accrues when all events fixing the right to receive occur and the amount is determinable; expenses accrue when all events establish the liability and economic performance occurs.

Section 448 limitation

C corporations and partnerships with C corporation partners must use the accrual method unless average annual gross receipts are $31 million or less, as indexed.

UNICAP rules

Section 263A requires capitalizing direct costs and allocable indirect costs to inventory; small business taxpayers meeting the gross receipts test are exempt.

LIFO conformity rule

A taxpayer using LIFO for tax must also use LIFO for financial reporting; Form 970 is filed to adopt LIFO, and the method requires a written inventory policy.

Section 481(a) adjustment

When an accounting method changes, the cumulative effect of the change is taken into account as an adjustment, often spread over several years, requested on Form 3115.

Section 179 expensing

For 2024, up to $1,220,000 of qualifying property may be expensed, phased out dollar for dollar when qualifying property placed in service exceeds $3,050,000.

Bonus depreciation rate

Qualified property placed in service in 2024 receives 60% bonus depreciation, 40% in 2025, and 20% in 2026 under the current phase-down schedule.

Section 199A deduction

Up to 20% of qualified business income for pass-through owners, limited above the threshold by W-2 wages and the unadjusted basis of qualified property.

Section 163(j) limit

Business interest expense is deductible up to 30% of adjusted taxable income plus business interest income, subject to an exemption for small businesses meeting the gross receipts test.

Section 1245 recapture

Gain on sale of depreciable personal property is ordinary income to the extent of depreciation taken; remaining gain is treated under Section 1231.

Startup cost deduction

Section 195 allows up to $5,000 of startup costs to be deducted, reduced by costs exceeding $50,000, with the remainder amortized over 180 months.