Enrolled Agent > EA - Part 2: Businesses > Unit 1: Business Entities and Requirements > Flashcards

Unit 1: Business Entities and Requirements Flashcards

Understand types of business entities and their IRS filing rules. (72 cards)

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1
Q

What is a sole proprietorship?

A

An unincorporated business owned and controlled by one person.

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2
Q

How are income and expenses from a sole proprietorship reported?

A

On Schedule C, Profit or Loss from Business, of Form 1040.

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3
Q

What form must a self-employed individual with net earnings of $400 or more file?

A

Schedule SE, Self-Employment Tax, with Form 1040.

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4
Q

What annual tax form do partnerships file?

A

Form 1065, U.S. Return of Partnership Income.

The partnership itself does not pay income tax. Profits and losses “pass-through” to its partners.

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5
Q

How do partners report their share of a partnership’s profits or losses?

A

Each partner reports their share on their personal tax return, as shown on Schedule K-1 from the partnership.They are reported on the partners’ personal returns.

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6
Q

What distinguishes a general partnership from a limited partnership?

A
  • General partnerships have all partners jointly and severally liable.
  • Limited partnerships have at least one limited partner who is not personally liable beyond their investment.

A limited partnership allows an investor (the limited partner) to own an intrest in a business without assuming personal liability or risk beyond the amount of their investment in the partnership.

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7
Q

What is a Limited Liability Partnership?

(LLP)

A

An entity formed under state law used for specific professional services, providing limited liability protection to each partner.

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8
Q

What is a qualified joint venture?

(QJV)

A

A business owned and operated by spouses as co-owners, allowing them to avoid filing a partnership return.

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9
Q

What tax forms do spouses in a qualified joint venture file?

A

Separate Schedules C and separate Schedules SE

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10
Q

Can spousal owners of an LLC qualify for a qualified joint venture?

A

Yes, if the spouses are in a community property state and hold the LLC as community property; otherwise, generally no.

Spousal owners of an LLC generally do not qualify.

However, married couples in community property states may report the business on two Schedules C instead of Form 1065 if the LLC is held as community property.

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11
Q

What is the Centralized Partnership Audit Regime?

(CPAR)

A

A regime under which a partnership is responsible for paying tax, interest, and penalties resulting from an audit that finds underreported taxable income.

Introduced as part of the Bipartisan Budget Act of 2015, CPAR aims to streamline the audit process for partnerships.

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12
Q

Under what conditions can a partnership elect out of the Centralized Partnership Audit Regime?

A
  • Must have 100 or fewer partners during the year.
  • Only have ‘eligible’ partners, including individuals, C Corporations, S corporations, and estates of deceased partners.
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13
Q

What authority does a partnership representative have under CPAR?

A

To make decisions for the partnership during the course of an audit, with decisions being binding on the partnership and all its partners.

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14
Q

What are the key characteristics of a C corporation?

A
  • An entity separate from its shareholders and must elect a board of directors repsonsible for oversight of the company
  • Can have an unlimited number of shareholders. (foreign or domestic)
  • Required to file Form 1120 for its annual tax return
  • Subject to double taxation
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15
Q

What tax rate are C corporations currently subject to?

A

21% flat rate

The Tax Cuts and Jobs Act eliminated graduated rates for C Corporations, setting a flat rate of 21%.

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16
Q

What is an S corporation?

A

A corporation that elects to pass income, losses, deductions, and credits through to its shareholders for federal tax purposes, generally avoiding corporate-level income tax.

The S corporation itself may be responsible for income tax on certain built-in gains and passive investment income.

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17
Q

What are the requirements for a corporation to qualify as an S corporation?

A
  • Must be a domestic corporation with 100 or fewer permitted shareholders
  • Have only one class of stock
  • Not be an ineligible type of corporation
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18
Q

How can a limited liability company (LLC) be classified for federal tax purposes?

A
  • As a disregarded entity
  • As a partnership
  • As a corporation, if elected

An LLC is a type of business entity formed under state law by filing articles of organization.

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19
Q

What is the primary tax form for farming businesses operating as sole proprietorships?

A

Schedule F, Profit or Loss from Farming, of Form 1040

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20
Q

What form must most tax-exempt organizations file annually to report income and losses?

A

Form 990, Return of Organization Exempt from Income Tax

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21
Q

What is Form 8832, Entity Classification Election used for?

A

It allows eligible business entities to elect how they will be classified for federal tax purposes—such as a corporation, partnership, or disregarded entity—or to change their existing classification, subject to IRS rules on timing and eligibility.

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22
Q

What is the default classification for a single-member LLC for tax purposes?

A

A disregarded entity

A single-member LLC is not considered separate from its owner for income tax purposes unless it files Form 8832 to elect to be taxed as a corporation.

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23
Q

In general, when can an election to change an LLC’s tax classification take effect?

A
  • An election cannot take effect more than 75 days prior to filing or later than 12 months after filing.
  • A business cannot change its election again within five years unless the previous election was for a newly formed entity effective on the date of formation.
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24
Q

How long must a business keep records for tax purposes?

A
  • At least three years from the later of the tax return due date or filing date.
  • Employment tax records must be kept for at least four years.
  • Records related to the basis of property must be kept until the statute of limitations expires for the year the property is disposed of.
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25
What is the purpose of an **Employer Identification Number**? | (EIN)
To uniquely identify a business entity for federal tax purposes, such as filing returns, paying taxes, and reporting employment and other business activities. ## Footnote An EIN is required if the business pays employees, operates as certain types of entities, files specific tax returns, withholds taxes for nonresident aliens, or establishes a pension, profit-sharing, or retirement plan.
26
When is a **new EIN** required for a business?
* When a sole proprietor or partnership incorporates * When a partnership becomes a sole proprietorship * When a sole proprietor files for bankruptcy * When a partnership is terminated and a new one is started * When a business establishes a pension, profit-sharing, or retirement plan
27
What financial statements are commonly used for **tax reporting**?
* Income Statement (Profit and Loss Statement) * Balance Sheet
28
What is **Form W-2** used for?
To report wages paid and taxes withheld for each employee. ## Footnote A business must complete and file Forms W-2 with the Social Security Administration by January 31st. Form W-2 must be given to each employee by January 31 of the following year.
29
What is the threshold for reporting nonemployee compensation on **Form 1099-NEC**?
$600 or more paid during the year to independent contractors.
30
What transactions must be reported on **Form 1099-MISC**?
* Payments of $600 or more for rents, prizes, and awards * Royalties over $10 * Gross proceeds paid to an attorney's office of $600 or more
31
What is the reporting threshold for **Form 1099-K for third-party network transactions?**
More than $20,000 in aggregate payments for goods and services and more than 200 such transactions during the year.
32
When is **Form 1099-INT** required?
When a business pays interest of $600 or more to a single individual taxpayer in a year. ## Footnote For banks and similiar institutions, the reporting requirement threshold is $10 or more per year.
33
In a trade or business, when must a cash payment be reported to the IRS on a special form?
When more than $10,000 in cash is received in a single transaction or related transactions, it must be reported by filing **Form 8300, *Report of Cash Payments Over $10,000 Received in a Trade or Business.*** ## Footnote Businesses must file Form 8300 within 15 days of receiving the cash and provide a statement to the customer by January 31 of the following year.
34
What is the purpose of requesting a **worker classification determination** from the IRS using Form SS-8?
To have the IRS decide whether a worker should be classified as an employee or an independent contractor for federal employment taxes and income tax withholding when the classification is unclear. ## Footnote Either the business or the worker can file Form SS-8 if the classification of a worker as an employee or independent contractor is unclear.
35
What are the **three primary characteristics** the IRS evaluates to determine worker classification?
* Behavioral Control * Financial Control * Type of Relationship ## Footnote These characteristics help determine if a worker is an employee or an independent contractor.
36
How are **statutory employees** reported for tax purposes?
Wages are reported on Form W-2, but income and allowable expenses are reported on Schedule C. ## Footnote Statutory employees do not pay self-employment tax because Social Security and Medicare taxes are withheld by their employer.
37
Name examples of **statutory employees**:
* Certain commissioned truck drivers (if they distribute meat, vegetables, bakery items or drinks (other than milk) or pick-up or deliver laundry or dry cleaning * Full-time life insurance salespeople * Full-time traveling salesperson who represent a business and submits orders on behalf of the business from various supplierts,retailers, contractors, or businesses such as hotels and restaurants
38
Who are considered **statutory nonemployees**?
* Direct sellers * Licensed real estate agents * Certain companion sitters ## Footnote Statutory nonemployees are treated as self-employed for federal tax purposes if they meet specific conditions related to payment and contract terms.
39
What is the **backup withholding rate** for 2025?
24% ## Footnote U.S. source income received by a foreign person (a nonresident alien) is subject to a withholding rate of 30% unless a lower tax treaty rate applies.
40
How are a child’s wages handled when working for a parent’s business?
* **Social Security & Medicare:** Not subject to these taxes if the child is under 18 and works for a parent’s sole proprietorship or a partnership where each partner is a parent. * **FUTA:** Not subject to FUTA if the child is under 21 in the same type of business. ## Footnote The exemption does not apply if the business is organized as a C Corporation or an S corporation.
41
What is the **FUTA tax rate** and who pays it?
6% on the first $7,000 of each employee's wages, paid by the employer. ## Footnote Employers may receive a maximum credit of up to 5.4% for unemployment tax paid to the state.
42
Who is **responsible** for paying FUTA tax?
FUTA tax is paid only by the employer, never by the employee.
43
On which **form** is FUTA tax reported?
Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
44
What is the **Additional Medicare Tax rate** and when does it apply?
0.9% and applies to earned income exceeding certain thresholds based on filing status. ## Footnote Thresholds: $250,000 for MFJ, $125,000 for MFS, $200,000 for Single, HOH, or QSS.
45
# True or False: Employers must withhold the Additional Medicare Tax only if an employee's wages exceed $200,000.
True ## Footnote Employers must withhold regardless of the employee's filing status or other employment.
46
Can self-employed taxpayers deduct the **Additional Medicare Tax**?
No, self-employed taxpayers cannot deduct the 0.9% Additional Medicare Tax as an adjustment to income or as a business expense.
47
Who may be assessed the **Trust Fund Recovery Penalty**? | (TFRP)
Any responsible person who willfully fails to collect or pay withheld taxes. ## Footnote This includes anyone with authority over financial decisions, not just executives.
48
What constitutes willfulness for the **Trust Fund Recovery Penalty**?
It means being **aware of unpaid taxes** and **intentionally disregarding** the law or being plainly indifferent to its requirements. ## Footnote No evil intent or bad motive is required.
49
What is the **late filing penalty** for a **partnership** return?
$255 per month, per partner, for up to 12 months. ## Footnote This penalty applies to returns required to be filed in 2026 for the 2025 tax year.
50
What is the **purpose of Schedule K-1** in a partnership?
To show each **partner's share** of the partnership's income, deductions, and credits. ## Footnote Schedule K-1 must be furnished to each partner after filing Form 1065.
51
What **special tax considerations** do farmers have?
* Different schedule for paying estimated taxes. * Ability to postpone gain or income in certain cases. * Higher percentage of mileage expenses deduction. * Special tax considerations when disaster strikes. ## Footnote OBBBA introduced a major tax benefit specifically for farmers. For sales or exchanges occurring in taxable years beginning after July 4, 2025, taxpayers who sell qualified farmland property to a "qualified farmer" may elect to defer their capital gains and pay the resulting net income tax liability ratably over a four-year installment period. Since most farmers are calendar year taxpayers, they will benefit from this change in 2026.
52
What is required for a nonprofit to obtain **tax-exempt status**?
Most charitable organizations file Form 1023. | (Application for Recognition of Exemption)
53
What is the **late filing penalty** for **S corporation** tax returns in 2026?
$255 per month, per shareholder, for up to 12 months.
54
How is a **single-member LLC** owned by a corporation or partnership treated for tax purposes?
It is included on the entity’s tax return as if it were a division of the corporation or partnership.
55
What form does a multi-member LLC file to elect to be treated as a **corporation**?
Form 8832
56
# True or False: A **single-member LLC** can be classified as a partnership.
False
57
When is a business required to apply for an **EIN**?
* The business pays employees. * The entity operates as a corporation, exempt organization, trust, estate, or partnership. * The business files employment, excise, or alcohol, tobacco, and firearms tax returns. * The business withholds taxes paid to a nonresident alien. * The business establishes a pension, profit-sharing, or retirement plan.
58
What is the **purpose of Form W-2**?
To show the **wages paid** and **taxes withheld** for the year for each employee.
59
When must a business file **Form 8300**?
When a business receives a cash payment of **more than $10,000** from one transaction or related transactions.
60
When must a business file **Form 8300** after receiving a cash payment over $10,000?
Within **15 days after** receiving the cash.
61
What must a business provide to each customer named on **Form 8300**?
A written statement by January 31 of the following year.
62
True or False: Sales of personal-use property in a private sale are subject to **Form 8300 reporting**.
False
63
What form can be filed with the IRS to determine a worker's **status** if unclear?
**Form SS-8** (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding)
64
What form is used to report compensation for **statutory nonemployees**?
Form 1099-NEC | (Nonemployee Compensation)
65
Are wages paid to a child under 18 by a sole proprietorship subject to **Social Security and Medicare taxes**?
No
66
What is the **FUTA tax rate** on the first $7,000 of each employee's wages?
0.06
67
At what income threshold does the **Additional Medicare Tax** apply for married filing jointly?
$250,000
68
How should a business determine **withholding amounts** from employee wages?
Using Form W-4 | (Employee’s Withholding Certificate)
69
What is the threshold for withholding the **Additional Medicare Tax** for employees?
$200,000 ## Footnote Employers must withhold the Additional Medicare Tax on wages exceeding this threshold regardless of the employee's filing status.
70
# True or False: There is an employer's share of the **Additional Medicare Tax**.
False ## Footnote The Additional Medicare Tax is only withheld from the employee's wages.
71
# Fill in the blanks: A sole proprietorship is _\_\_\_\_ \_\_\_\_\_ upon the death of the owner.
automatically dissolved
72
Which business entity is subject to **double taxation**?
C Corporation ## Footnote C Corporations are taxed at the entity level, and dividends paid to owners are also taxable to them.
EA - Part 2: Businesses
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