Enrolled Agent > EA - Part 2: Businesses > Unit 6: Other Business Deductions and Credits > Flashcards

Unit 6: Other Business Deductions and Credits Flashcards

Recognize special deductions and tax credits available to businesses. (72 cards)

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1
Q

What is the carryforward rule for net operating losses (NOLs) arising in tax year 2025 and beyond?

A

Net operating losses (NOLs) arising in tax year 2025 and beyond may normally only be carried forward to future tax years and cannot exceed more than 80% of taxable income.

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2
Q

What is the carryback period for farming businesses’ NOLs?

A

Farming businesses have a 2-year carryback period for NOLs. An election may be made to waive the carryback period, and only carry losses forward.

This election to waive the carryback is irrevocable once it is made.

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3
Q

Which entities are generally not allowed to have NOLs?

A

Partnerships and S corporations generally do not have NOLs, but partners and shareholders may have an NOL due to business losses passing through.

These losses can offsetother incomeon individual tax returns, subject to limitations.

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4
Q

What types of losses are not allowed when figuring an NOL?

A
  • Capital losses in excess of capital gains
  • The exclusion of gain from the sale of qualified small business stock
  • A net operating loss from another year
  • A self-employed taxpayer’s contribution to their own retirement plan

Income from other sources may eliminate or reduce a net operating loss for the year.

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5
Q

What is the annual limit for excess business losses of noncorporate taxpayers in 2025?

A

In 2025, excess business losses of noncorporate taxpayers are subject to an annual limit of $313,000 ($626,000 for married filing joint returns).

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6
Q

What is the Section 199A Qualified Business Income Deduction?

A

This allows a deduction for individuals, estates, and trusts of up to 20% of qualified business income, along with a special 20% deduction for certain investment income.

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7
Q

Which types of income are not included in Qualified Business Income (QBI)?

A
  • Employee wages
  • Capital gains
  • Interest and dividend income
  • Certain dividends and payments in lieu of dividends
  • Hobby income
  • Non-taxable income
  • Rental income where the owner is not engaged in a bona fide real estate trade or business
  • Any guaranteed payment from a partnership for services rendered
  • Payments received by a partner for services other than in a capacity as a partner
  • Reasonable compensation paid to an S corporation shareholder
  • Any income earned by a C Corporation
  • Amounts deducted under IRC section 224 for qualified tips
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8
Q

Does the Section 199A deduction apply to income earned by a C Corporation?

A

No

The deduction only applies to QBI generated from sole proprietorships, parternships, S Corps, estates or trusts.

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9
Q

What is the QBI deduction eligibility requirement regarding material participation under section 469?

A

Material participation under section 469 is not required for the QBI deduction.

Eligible taxpayers with income from a trade or business may be entitled to the QBI deduction regardless of their involvement in the trade or business.

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10
Q

What expenses are included in the determination of Qualified Business Income (QBI)?

A
  • Deductible portion of the self-employment tax
  • Deduction for self-employed health insurance
  • Contributions to qualified retirement plans
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11
Q

What happens if a taxpayer has a qualified business loss?

A

This results in no QBI deduction for the taxable year. The QBI loss carries over to subsequent years and reduces the section 199A deduction for QBI for those future years.

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12
Q

What information must partnerships and S corporations provide to partners or shareholders regarding QBI deduction?

A
  • Qualified wages
  • Unadjusted Basis Immediately after Acquisition (UBIA) of qualified property
  • Other necessary information for partners and shareholders to compute their deduction
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13
Q

What is the purpose of the IRS safe harbor rule for rental activities under QBI?

A

To allow a rental real estate activity to qualify as a “trade or business” for the purposes of the QBI deduction.

To meet the safe harbor, 250 or more hours of service must be provided per year to each rental real estate enterprise, in any three of the five consecutive taxable years.

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14
Q

What are the criteria for the QBI safe harbor provision for rental real estate activities?

A
  • Separate books and records for each rental enterprise
  • At least 250 hours of rental services performed per year
  • Sufficient, contemporaneous records maintained
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15
Q

What types of rental real estate activities are excluded from the QBI safe harbor provision?

A
  • Triple-net leases (NNN leases): where the tenant is responsible for property taxes, insurance, and maintenance.
  • Properties used as a personal residence by the taxpayer during the year.
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16
Q

What is the special QBI-related deduction available for REIT dividends and PTP income?

A

Eligible taxpayers may deduct up to 20% of their combined qualified REIT dividends and qualified PTP income.

(REIT = Real Estate Investment Trust; PTP = Publicly Traded Partnership)

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17
Q

What is the 199A deduction limitation threshold for Married Filing Jointly in 2025?

A

$394,600 to $494,600

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18
Q

Under what condition is the QBI deduction generally allowed without limitations?

A

When a taxpayer’s pre-QBI deduction taxable income falls below certain thresholds.

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19
Q

What are the two limitations that may apply to the QBI deduction for taxpayers above the income thresholds?

A
  • Specified Service Trade or Business (SSTB) Limitation
  • Wage and Property Limitation
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20
Q

What businesses are classified under the Specified Service Trade or Business (SSTB) limitation?

A

Businesses in fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.

An SSTB specifically excludes architecture and engineering.

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21
Q

What are excluded from the SSTB classification?

A

Architecture and engineering services.

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22
Q

What is the wage and property limitation for the QBI deduction?

A

The QBI deduction is limited to the greater of:

  • 50% of qualified W-2 wages paid by the business, OR
  • 25% of qualified W-2 wages plus 2.5% of the UBIA (Unadjusted Basis Immediately After Acquisition) of all qualified property.

This limitation applies only when the taxpayer’s taxable income exceeds the QBI threshold.

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23
Q

What does UBIA stand for in the context of the QBI deduction?

A

Unadjusted Basis Immediately after Acquisition

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24
Q

What is the purpose of the General Business Credit (GBC)?

A

It combines numerous business-related credits into a single, nonrefundable credit that reduces income tax liability dollar-for-dollar. Any unused credit may be carried back 1 year or carried forward up to 20 years.

(It cannot be used to offset employment taxes.)

Each business credit is first claimed on a separate form; the credits are then aggregated and reported on Form 3800, General Business Credit.

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25
What does the **Investment Credit** consist of?
* Rehabilitation credit * Energy credit * Qualifying advanced coal project credit * Qualifying gasification project credit * Qualifying advanced energy project credit * Advanced Manufacturing Investment Credit * Clean Electricity Investment Credit ## Footnote The Investment Credit is the sum of multiple credits, claimed on Form 3468, and is available to businesses that engage in specific types of projects on their property.
26
What is the **Work Opportunity Tax Credit** (WOTC) designed to do?
Incentivize hiring from targeted groups that face significant employment barriers. ## Footnote The WOTC credit is calculated on Form 5884 and transferred to Form 3800, General Business Credit.
27
Who qualifies an employer for the **Work Opportunity Tax Credit** (WOTC)?
* Qualified TANF (temporary assistance for needy families) recipients * Qualified veterans * Ex-felons * Designated community residents * Vocational rehabilitation referrals * Summer youth employees * SNAP recipients (food stamps) * SSI recipients (supplemental security income) * Long-term family assistance recipients * Qualified long-term unemployment recipients
28
What is the **Disabled Access Credit**?
A nonrefundable tax credit for eligible small businesses that incur expenses to comply with the Americans with Disabilities Act (ADA) by providing access to persons with disabilities. ## Footnote The credit equals 50% of eligible expenses up to $5,000 per year and is claimed on Form 8826.
29
What is the **FICA Tip Credit**?
A business credit available to employers in the food and beverage industry, and beginning in 2025 certain beauty and personal care businesses where tipping is customary, for the employer’s share of Social Security and Medicare (FICA) taxes paid on employees’ tip income. ## Footnote The credit allows businesses to recover part of the payroll taxes they are required to pay on tips that employees report as income.
30
What is **SSTB De minimis** rule #1 and rule #2
* **Rule 1**: ≤ 10% of its gross receipts are from SSTB activities * **Rule 2**: ≤ 5% of its gross receipts are from SSTB activities ## Footnote These exceptions mean the business is not considered an SSTB, avoiding related limitations.
31
What is the credit for Social Security and Medicare taxes on **employee tips**?
A credit for the employer’s portion of Social Security and Medicare taxes paid on tips received by employees of restaurants where tipping is customary.
32
What requirements must employers meet to qualify for the credit on **employee tips**?
* Have employees who received tips from customers for serving food or beverages. * Have paid employer Social Security and Medicare taxes on these tips. ## Footnote The credit is claimed on IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
33
What is the **Employer Credit** for Paid Family and Medical Leave based on?
It is based on a percentage of wages paid to qualifying employees during periods of family and medical leave under a written policy.
34
What are the requirements for an employer's policy to qualify for the **Family and Medical Leave credit**?
* Provide at least two weeks of paid family and medical leave annually to all qualifying full-time employees (prorated for part-time employees). * Require a rate of payment of at least 50% of the employee’s normal wages.
35
How is the Credit for **Small Employer Health Insurance Premiums** calculated?
Up to 50% of the employer’s contribution toward employees’ premium costs (35% for tax-exempt employers). ## Footnote The Credit for Small Employer Health Insurance Premiums is designed to encourage small employers to offer health insurance to their employees.
36
What are the **eligibility criteria** for the Credit for Small Employer Health Insurance Premiums?
* Fewer than 25 full-time equivalent employees. * Average annual wages of qualifying employees must be less than $65,000 in 2024. * Employer must pay at least 50% of the employees’ premium costs. * Coverage must be offered through the SHOP Marketplace.
37
What is the **R&D credit**?
A tax credit available to businesses that invest in qualified research and development activities. ## Footnote This includes but are are not limited to, developing new software, improving manufacturing processes and testing product prototypes.
38
What percentage of **research expenses** qualify for the R&D credit?
* 65% of expenses for qualified research activities performed by a contractor. * 100% of expenses if the qualified research is conducted by the business itself.
39
What is the Employer-Provided Child Care Facilities and Services Credit?
Employers may claim a credit equal to: * 25% of qualified child care facility expenditures, plus * 10% of qualified child care resource and referral expenditures paid or incurred during the year. ## Footnote The maximum credit is $150,000 per tax year.
40
What is the maximum credit amount for **Small Employer Pension Plan Startup Costs**?
The lesser of $5,000 or $250 for each employee who is not a highly compensated employee, with a minimum of $500.
41
What is the **Foreign Tax Credit** for Corporations?
A business credit that allows U.S. corporations to reduce their U.S. income tax liability by claiming a credit for income taxes paid or accrued to foreign countries or U.S. possessions. ## Footnote The credit is claim on Form 1118, Foreign Tax Credit - Corporations and submitted with the corporate return.
42
What is the **Small Employer Pension Plan Startup Costs Credit**?
A business credit that helps small employers offset the administrative costs of establishing a new qualified retirement plan. * Employers with 50 or fewer employees can receive a credit covering 100% of eligible startup costs (up to $5,000 per year). * Employers with 51–100 employees may claim a credit for 50% of eligible startup costs (also capped at $5,000 per year). ## Footnote The credit is available for up to 3 years.
43
Which **form** can individuals use to apply for a **tentative refund** from NOL carryback?
* Form 1045, Application for Tentative Refund * Form 1040-X (for each carryback year) * Form 1139 (for C corp)
44
What causes a **net operating loss** (NOL) for individuals, estates, or trusts?
* A trade or business that results in an overall loss * Casualty or theft losses * Losses from rental property * Moving expenses * Farming losses
45
How is the **Section 199A** deduction limited?
The total deduction **cannot exceed 20%** of taxable income reduced by net capital gain. ## Footnote Along with a special 20% deduction for qualified REIT dividends and qualified publicly traded partnership (PTP) income.
46
What is the definition of qualifying wages for the **QBI deduction**?
* Taxable wages the business has paid to its employees * Any amounts paid into a tax-deferred retirement plan
47
What criteria must **qualified property** meet for the QBI deduction?
* Held by the business and available for use at the close of the taxable year * Has a remaining depreciable period
48
# True or False: **Land and intangible assets** are included in the definition of qualified property for the QBI deduction.
False
49
How long can unused **General Business Credits** be carried forward?
Up to **20 years**
50
What is the **CHIPS credit**?
A **tax credit** for advanced manufacturing facilities for semiconductors or semiconductor manufacturing equipment.
51
What does the **Clean Electricity Investment Credit** apply to?
**Qualified clean electricity facilities** and energy storage technology placed in service after 2024.
52
Which properties are generally ineligible for the **Investment Credit**?
* Used outside the United States * Used by a governmental unit or foreign entity * Used by a tax-exempt organization * Used for lodging or in the furnishing of lodging * Certain MACRS business property expensed under section 179 * Any property already expensed under section 179 * Owned by a prohibited foreign entity or foreign-influenced entity (effective after July 4, 2025)
53
What form is used to figure the **Work Opportunity Tax Credit**?
**Form 5884**, Work Opportunity Credit.
54
By what date must employees begin work to qualify for the **Work Opportunity Tax Credit**?
On or before **December 31, 2025**.
55
What is the maximum amount of the **Disabled Access Credit**?
$5,000 per year
56
What are the eligibility requirements for the **Disabled Access Credit**?
* Gross receipts of $1 million or less * No more than 30 full-time employees during the preceding tax year ## Footnote Credit is claimed on Form 8826, Disabled Access Credit
57
What are the eligibility criteria for a **qualifying employee** under the **Credit for Paid Family and Medical Leave**?
* Employed by the employer for at least one year. * Compensation for the preceding year does not exceed 60% of the compensation threshold for a highly compensated employee.
58
What is the maximum credit percentage for the **Credit for Paid Family and Medical Leave**?
* 12.5% if FMLA payments are 50% of normal wages * 25% if FMLA payments are 100% of normal wages
59
What is the **Credit for Small Employer Health Insurance Premiums**?
A credit designed to **encourage small employers** to offer health insurance to their employees. ## Footnote The maximum credit is up to 50% of the employer’s contribution toward the employees’ health insurance premiums (35% for tax-exempt employers).
60
How long can unused **Research and Development Credits** be carried forward?
Up to 20 years.
61
What is the maximum credit for **Employer-Provided Child Care Facilities and Services**?
$150,000 per tax year ## Footnote The credit is claimed on Form 8882, Credit for Employer-Provided Childcare Facilities and Services.
62
Which form is used to claim the **Credit for Small Employer Pension Plan Startup Costs**?
Form 8881 ## Footnote The credit is part of the general business credit and may be carried back or forward to other tax years.
63
What are **eligible startup costs** for the Credit for Small Employer Pension Plan Startup Costs?
Necessary costs to set up and administer the plan and educate employees about their new plan.
64
For how many years can the **Credit for Small Employer Pension Plan Startup Costs** be claimed?
Up to 3 years.
65
Which employees are **ineligible for the additional credit** for employer contributions under the Credit for Small Employer Pension Plan Startup Costs?
Employees with wages exceeding $105,000.
66
Which form is used by U.S. corporations to claim the **Foreign Tax Credit**?
**Form 1118**, Foreign Tax Credit – Corporations.
67
What types of **foreign taxes** generally qualify for the Foreign Tax Credit?
* Income tax * War profits tax * Excess profits taxes * Taxes paid in lieu of income taxes
68
Can a corporation claim the **Foreign Tax Credit** for foreign sales taxes like VAT?
No ## Footnote Foreign sales taxes generally do not qualify for the credit.
69
What is the **carryback and carryforward rule** for excess foreign taxes under the Foreign Tax Credit?
* Carried back 1 year * Carried forward 10 years
70
What is the impact of choosing the **Foreign Tax Credit** over a deduction for foreign taxes?
The Foreign Tax Credit is usually more **advantageous** because it directly reduces the U.S. tax liability on a **dollar-for-dollar basis**.
71
Under what condition is a corporation not allowed to claim a **Foreign Tax Credit**?
If the foreign taxes were paid to a foreign country that the corporation does not **legally owe**.
72
What is a **new restriction** under the One Big Beautiful Bill Act for taxes paid or accrued after June 28, 2025?
No credit is allowed for **10% of foreign income taxes** paid or accrued with respect to distributions of previously taxed **GILTI**.
EA - Part 2: Businesses
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