Gleim EA Review Part 2 Updates 2013 Edition, 1st Printing March 2013

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1 Page 1 of 9 Gleim EA Review Part 2 Updates 2013 Edition, 1st Printing March 2013 NOTE: Text that should be deleted from the outline is displayed with a line through the text. New text is shown with a blue background. The IRS announced changes to the Exam Content Outlines for all 3 parts of the EA exam at the very late date of February 27, We have updated our materials to reflect those changes so we can ensure your success on the EA exam. The first section contains the new content outlines along with cross-references to where in the Gleim material each item is covered. After that, we show any adjustments (additions, deletions, etc.) to our material that need to be made. Introduction Preparing for and Taking the IRS Enrolled Agent Examination Pages 3-5, Exam Content Outlines with Gleim Cross-References: The revised Exam Content Outlines along with the cross-references to the relevant Gleim subunits are below. Section 1: Businesses (45 items) a. Business Entities 1) Types of business entities and their filing requirements: a) Sole proprietorships 1.1 b) Partnerships 1.1, 8.1, 8.2, 9.1 c) Corporations 1.1, 11.1, 11.2, 11.5 d) S corporations 1.1, 17.1 e) Farmers 1.3, 2.3 f) LLCs 1.1, 11.1 g) Tax-exempt entities and associations 20 2) Elections for type of entity ) Employer identification number 1.1 4) Accounting periods (tax year) 1.4 5) Accounting methods 1.2, 1.3 b. Partnerships 1) Partnership income, expenses, distributions, and flow-through (e.g., self employment income) 2.2, 9 2) Family partnerships 8.1 3) Partner s dealings with partnership (e.g., exchange of property, guaranteed payments, contribution of property to partnership) 8.3, 9.3 4) Basis of partner s interest 9.1 5) Disposition of partner s interest ) Partnership formation (e.g., partnership agreement, general vs. limited partners, capital contributions) 1.1, 8.1, 8.3 7) Dissolution of partnership (e.g., sale, death of partner) 9.1, ) Filing requirements and due dates 8.2 9) Services rendered in return for partnership interest ) Debt discharge 8.3

2 Page 2 of 9 c. Corporations in General 1) Filing requirements and due dates ) Earnings and profits ) Shareholder dividends, distributions, and recognition requirements ) Special deductions and credits (e.g., dividends received deductions, charitable deduction) ) Liquidations and stock redemptions 16 6) Accumulated earnings ) Estimated tax payments 11.8 d. Forming a Corporation 1) Services rendered to a corporation in return for stock ) IRC Section 351 exchange ) Transfer and/or receipt of money or property in addition to corporate stock ) Mortgaged property transferred ) Controlled groups 11.2, ) Closely held corporations 1.1 7) Personal service corporations (e.g., 35% rate) 11.3 e. S Corporations 1) Requirements to qualify ) S corp income, expenses and separately stated items ) Treatment of distributions (e.g., reasonable compensation) ) Shareholder s basis (e.g., loan basis, distributions and losses in excess of basis) ) Revocation, termination and reinstatement ) Debt discharge ) Non-cash distributions ) Election procedure 17.1 Section 2: Business Financial Information (40 items) a. Business Income 1) Gross business income 2.1 2) Cost of goods sold (e.g., inventory practices, expenditures included, uniform capitalization rules) 3.2, 5.3, 5.4 3) Net income, net operating losses, and loss limitations including passive activity and at risk limitations 7.3, 7.4, 9.1, 13.3, ) Gain or loss on disposition of depreciable property 2.1, 2.5, 2.6, 5.1, 5.2, 6, ) Cancellation of business debt 4.4 b. Business Expenses, Deductions and Credits 1) Employees pay (e.g., deductibility of compensation, fringe benefits, rules of family employment, statutory employee, necessary and reasonable) 3.1, 4.7 2) Reporting requirements for contractors and employees (e.g., W-2, W-4, Form 1099) 3.1 3) Business rental deduction 3.4 4) Depreciation, amortization, IRC section 179, and depletion 4.6, ) Business bad debts 4.4 6) Business travel, entertainment, and gift expenses 4.1, 4.2, 4.5, ) Interest expense 3.3 8) Insurance expense 4.3 9) Taxes (e.g., deductibility of taxes, assessments, and penalties; proper treatment of sales taxes paid) 2.4, 3.5, 7.5, , 13.1, 15.4, ) Employment taxes ) Federal excise tax ) Casualties, thefts, and condemnations 7.3, ) IRC section 199 deduction (domestic production activities) ) Eligibility and deductibility of general business credits (e.g., disabled access credit, investment credit) 7.1, ) Alternative minimum tax net operating loss deduction ) Home office 4.7

3 Page 3 of 9 c. Business Assets 1) Basis of assets 5.1, 5.2 2) Disposition of depreciable property 2.5, 2.6 3) Like kind exchange 2.5 d. Analysis of Financial Records 1) What type of business (e.g., service, retail, manufacturer, farm) 1.1 2) Income statement 8.2, ) Balance sheet (e.g., proofing beginning and ending balances) 8.2, ) Method of accounting (e.g., accrual, cash, hybrid) 1.2, 1.3 5) Depreciation and amortization 6 6) Depreciation recovery (e.g., recapture, Sec. 280F) 6.5 7) Pass-through activity (e.g., K-1, separately stated items, non-deductible expenses) 9.1, ) Reconciliation of tax versus books (e.g., M-1, M-2, M-3) 11.5, ) Related party activity 9.3, ) Loans to and from owners 9.3 e. Advising the Business Taxpayer 1) Filing obligations (e.g., extended returns) 8.2, 9.1, 11.5, 17.1, ) Deposit obligations (e.g., employment tax, excise tax) 3.1 3) Reporting obligations for businesses (e.g., 1099 series, 1031 exchanges, Form 8300) 2.5, 3.1, ) Record-keeping requirements (e.g., mileage log, accountable plans) 4.2 5) Related party transactions 9.3, ) Selection of business entity (e.g., benefits and detriments) 1.1 7) Comingling (e.g., personal usage of business accounts, separation of business and personal accounts) 4.2 8) Advice on accounting methods and procedures (e.g., explanation of requirements) 1.2 9) Transfer elections in or out of the business (e.g., contributed property, distributions) 8.3, 9.2, 10, 12, 15.2, 16 10) Life cycle of the business (e.g., formation, dissolution) 8.2, 10, 12, 16 11) Type of industry (e.g., personal service corporation) ) Worker classification 3.1 Section 3: Specialized Returns and Taxpayers (15 items) a. Trust and Estate Income Tax 1) Trust types (e.g., grantor, irrevocable, tax shelters) ) Distributable net income and accounting income ) Exclusions and deductions ) Fraudulent trusts ) Income in respect of a decedent ) Income (e.g., allocations) ) Separately stated items ) Filing requirements 18.2, 18.3 b. Exempt Organizations 1) Qualifying for and maintaining tax-exempt status (e.g., 501(c)) ) Filing requirements (e.g., 1023, 1024, 990 series) ) Unrelated business taxable income (UBTI) 20.1 c. Retirement Plans 1) Employer and employee contributions ) Reporting requirements ) Plans for self-employed persons (e.g., SEP and SIMPLE) ) Prohibited transactions ) Qualified and non-qualified plans 19 6) Non-discrimination rules 19.1 d. Farmers 1) Farm inventory 2.3 2) Depreciation for farmers 2.3, 6 3) Various disaster-area provisions 2.3, 7.3 4) Disposition of farm assets 2.3 5) Farm income (e.g., self-raised livestock, crop insurance proceeds) 2.3 6) Farm tax computation (e.g., Schedule J, Schedule SE, estimated tax) 2.3

4 Study Unit 1 Accounting Methods and Periods Page 14; Subunit 1.1; 4.c., 5., and 6.: Item 4.c. was deleted, and old item 4.d. was renumbered as 4.c. New items 5. and 6. have been inserted (see below), and old items 5. through 8. have been renumbered as items 7. through 10. Limited Liability Companies Page 4 of 9 5. A domestic entity that is not specifically classified as a corporation is classified as a partnership (if it has two or more members), or is disregarded as an entity separate from its owners (if it has only one owner) [Reg (b)(1)]. a. LLCs are the only business entities that allow 1) Complete pass-through tax advantages and the operational flexibility of a partnership, 2) Corporation-style limited liability under state law, 3) No restrictions on the number or types of members, and 4) LLCs have management participation by all members. Members are the owners or shareholders of the LLC. b. Most states follow Federal taxation of LLCs. Texas and Tennessee tax LLCs as corporations. Michigan has a unified business tax on all forms of business. c. There is no uniform LLC agreement among states; an LLC doing business out of state may have to live with unacceptable uncertainty as to its legal status. Every state and the District of Columbia permit a single-member LLC. Single-Member Limited Liability Company (SMLLC) 6. Profit or loss from a SMLLC owned by an individual is simply reported on Schedule C of the member s Form 1040 along with Schedule SE. SMLLC owned by an individual and used to conduct a rental real estate operation reports its income or loss on Schedule E. a. Profit or loss from a SMLLC owned by a legal entity is reported on the member s return as an unincorporated branch or division of the member.

5 Study Unit 2 Income and Property Transactions Page 5 of 9 Page 35, Subunit 2.3, 5. and 6.: New items 5. and 6. have been inserted (see below), and old items 5. through 7. have been renumbered as items 7. through 9. Capitalization and Depreciation 5. If the taxpayer produced real or tangible personal property or acquired property for resale, certain expenses must be included in inventory costs or capitalized. These expenses include the direct costs of the property and the share of any indirect costs allocable to that property. a. However, these rules generally do not apply to expenses of 1) Producing any plant that has a preproductive period of 2 years or less, 2) Raising animals, or 3) Replanting certain crops if they were lost or damaged by reason of freezing temperatures, disease, drought, pests, or casualty. b. A farmer can deduct depreciation of buildings, improvements, cars and trucks, machinery, and other farm equipment of a permanent nature. Do not deduct depreciation on a home, furniture or other personal items, land, livestock bought or raised for resale, or other property in inventory. A farmer can also elect under Section 179 to expense a portion of the cost of certain property bought during the year for use in a farming business. Section 1231 Gains 6. Schedule F does not include gains and losses from sales or other dispositions of farm land (Section 1231 property), depreciable farm equipment (Section 1245 property), and buildings and structures (Section 1250 property). Study Unit 3 Business Expenses Page 58, Subunit 3.1, 10.: A new item 10. has been inserted (see below), and the old item 10. has been renumbered as item 11. Form Each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related transactions. Transactions are considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.

6 Study Unit 4 Other Deductions Page 6 of 9 Pages 88 and 102, Subunits 7 and 8 and Question 41.: A new Subunit 4.7 has been inserted (see below), and the old Subunit 4.7 has been renumbered as Subunit 4.8. New material has been inserted at the beginning of the newly renumbered Subunit 4.8 (see below). New Question 41 has been inserted (see below), and old Question 41 has been renumbered as BUSINESS USE OF HOME 1. Expenses incurred for the use of a person s home for business purposes are deductible only if strict requirements are met. a. The portion of the home must be used exclusively and regularly as 1) The principal place of business for any trade or business of the taxpayer; 2) A place of business that is used by patients, clients, or customers in the normal course of the taxpayer s trade or business; or 3) A separate structure that is not attached to the dwelling unit that is used in the taxpayer s trade or business. b. If the taxpayer is an employee, the business use of the home must also be for the convenience of the employer. Exclusive-Use Test 2. Any personal use of the business portion of the home by anyone results in complete disallowance of the deductions. There are two exceptions to the exclusive-use test: a. Retail/wholesale. A retailer or wholesaler whose sole location of his/her business is his/her home need not meet the exclusive-use test. 1) The ordinary and necessary business expenses allocable to an identifiable space used regularly for inventory or product sample storage by a taxpayer in the active pursuit of his/her trade or business are deductible. b. Day care. If the business portion of a home is used to offer qualifying day care, the exclusive-use test need not be met. Multiple Locations 3. If the taxpayer has more than one business location, the primary factor in determining whether a home office is a taxpayer s principal place of business is the relative importance of the activities performed at each business location. a. If the primary location cannot be determined by the relative importance test, then the amount of time spent at each location will be used. Principal Place of Business 4. A home office qualifies as a principal place of business if used by the taxpayer to conduct administrative or management activities of the taxpayer s trade or business and there is no other fixed location where the taxpayer conducts such activities. Limitation 5. A taxpayer s deduction of otherwise nondeductible expenses, e.g., insurance, utilities, and depreciation (with depreciation taken last), is limited to a. Gross income derived from the use; minus b. Deductions related to the home, allowed regardless of business or personal use, e.g., interest or taxes; and c. Deductions allocable to the trade or business for which the home office is used that are not home office expenses, e.g., employee compensation.

7 Carryover 6. Any currently disallowed amount is deductible in succeeding years, subject to the same limitations. 4.8 STATUTORY EMPLOYEES/NONEMPLOYEES Worker Classification Page 7 of 9 1. It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Generally, employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Employers do not generally have to withhold or pay any taxes on payments to independent contractors. Before an employer can determine how to treat payments made for services, the employer must first know the business relationship that exists between the employer and the person performing the services. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Common Law Rules 2. Facts that provide evidence of the degree of control and independence fall into three categories: a. Behavioral: Does the company control or have the right to control what the worker does and how the worker does the job? b. Financial: Are the business aspects of the worker s job controlled by the employer (e.g., how the worker is paid, whether expenses are reimbursed, who provides tools/supplies)? c. Type of Relationship: Are there written contracts or employee-type benefits (e.g., pension plan, insurance, vacation pay)? Will the relationship continue, and is the work performed a key aspect of the business? 3. Employers must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no magic or set number of factors that makes the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another. a. The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and, finally, to document each of the factors used in coming up with the determination. b. If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filed with the IRS. The form may be filed by either the employer or the worker. The IRS will review the facts and circumstances and officially determine the worker s status. It can take at least 6 months to get a determination, but an employer who continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8.

8 Page 8 of 9 Employment Tax Obligations 4. Once a determination is made (whether by the employer or by the IRS), the next step is filing the appropriate forms and paying the associated taxes. Misclassification of Employees/Consequences of Treating an Employee as an Independent Contractor 5. If an employer classifies an employee as an independent contractor and there is no reasonable basis for doing so, the employer may be held liable for employment taxes for that worker. Relief Provisions 6. If an employer has a reasonable basis for not treating a worker as an employee, the employer may be relieved from having to pay employment taxes for that worker. To get this relief, the employer must file all required federal information returns on a basis consistent with the employer s treatment of the worker. The employer must not have treated any worker holding a substantially similar position as an employee for any period beginning after Misclassified Workers Can File Social Security Tax Form 7. Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee s share of uncollected Social Security and Medicare taxes due on their compensation. Voluntary Classification Settlement Program 8. The Voluntary Classification Settlement Program (VCSP) is a new optional program that provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods for employment tax purposes with partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat their workers (or a class or group of workers) as employees. To participate in this new voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in the VSCP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. 41. Which of the following is a true statement about the exclusive-use test for business use of a home? A. Generally, any personal use of the business portion of the home by anyone results in complete disallowance of the deductions. B. A retailer whose sole location of the business is the retailer s home must meet the exclusiveuse test. C. If the business portion of a home is used to offer qualifying day care, the exclusive-use test must be met. D. A wholesaler whose sole location of the business is the wholesaler s home must meet the exclusive-use test. Answer (A) is correct. REQUIRED: The true statement about the exclusive-use test. DISCUSSION: Any personal use of the business portion of the home by anyone results in complete disallowance of the deductions. There are two exceptions to the exclusive-use test: 1. A retailer or wholesaler whose sole location of the business is the retailer s/wholesaler s home need not meet the exclusive-use test. 2. If the business portion of a home is used to offer qualifying day care, the exclusive-use test need not be met. Answer (B) is incorrect. Retailers with no other location are exempt from the test. Answer (C) is incorrect. Use by a qualifying day care is exempt from the test. Answer (D) is incorrect. Wholesalers with no other location are exempt from the test.

9 Study Unit 8 Contributions to a Partnership Page 9 of 9 Page 178, Subunit 8.2, 2.a.: The discussion of the partnership tax return extension period has been expanded. Return Due Date 2. Generally, the return is due by the 15th day of the 4th month following the close of the tax year. a. The extension period is 5 months. An application for an extension of a partnership tax return is filed on Form The extension is for 5 months after the original due date of the return. Study Unit 17 S Corporations Pages 363 and 365, Subunit 17.2, 11. and 21.: New items 11. and 21. have been inserted (see below), and old items 11. through 19. and old item 20. have been renumbered as items 12. through 20. and item 22., respectively. Debt Discharge 11. Ordinarily, a taxpayer realizes income when indebtedness is forgiven or otherwise canceled. However, if the discharge of debt occurs in a bankruptcy case, when the taxpayer is insolvent, or when the discharge of indebtedness is with respect to qualified real property business indebtedness, the income realized upon the discharge is excluded from income, and the amount excluded is applied to reduce the tax attributes of the taxpayer, including any net operating loss (NOL) of the taxpayer. a. Income from the discharge of indebtedness of an S corporation that is excluded from the S corporation s income is not taken into account as an item of income by any shareholder. As a result, it does not increase the basis of any shareholder s stock in the corporation. 21. An S corporation s tax return is due by the 15th day of the 3rd month after the end of the corporation s tax year. An application for an extension of an S corporation tax return is filed on Form The extension is for 6 months after the original due of the return.