IRS Enrolled Agent SEE Part 2 (Businesses) Glossary
25 essential terms and definitions for IRS Enrolled Agent SEE Part 2 (Businesses). Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
The accumulated earnings tax is a 20% additional tax on C corporation earnings retained beyond the reasonable needs of the business. It is meant to discourage retaining profits solely to avoid shareholder-level dividend taxation.
The at-risk rules limit a taxpayer's deductible loss from an activity to the amount the taxpayer has at risk in that activity. At-risk amounts generally include cash, adjusted basis of contributed property, and recourse liabilities for which the taxpayer is personally liable.
The built-in gain tax applies when an S corporation that was formerly a C corporation disposes of assets with built-in appreciation within five years of conversion. It is imposed at the corporate level at the highest corporate rate.
A C corporation is a business entity taxed under Subchapter C as a separate person. The corporation pays tax on its earnings; shareholders pay again on dividends, producing the classic double-taxation result.
The Modified Accelerated Cost Recovery System is the default depreciation system for most tangible property placed in service after 1986. Property is categorized by class life, with prescribed recovery periods and conventions (half-year, mid-quarter, mid-month).
A distribution from an S corporation is generally not taxable to the extent of the shareholder's stock basis, then taxed as capital gain. Distributions of AAA (accumulated adjustments account) ordering rules apply when the S corporation has accumulated E&P from C-corp years.
The dividends-received deduction allows a C corporation to deduct a percentage of dividends received from other domestic corporations: 50% for less-than-20% ownership, 65% for 20% to 80%, and 100% for 80% or more (qualifying affiliated group).
E&P is a corporate-level account that tracks economic earnings available for dividend distribution. Distributions are taxed as dividends to the extent of E&P; distributions in excess of E&P reduce stock basis and are then capital gain.
An estate is the income-tax filing entity for a decedent's estate during administration. It files Form 1041, and undistributed income is taxed to the estate at compressed brackets; distributed income is carried out to beneficiaries via DNI.
Fiduciary income tax is the income tax filed by estates and trusts on Form 1041. Distributions to beneficiaries carry out distributable net income (DNI), which is taxed to the beneficiaries; income retained is taxed to the entity at compressed rates.
Form 1065 is the information return filed by partnerships and multi-member LLCs taxed as partnerships. It reports income, deductions, and partner allocations on Schedule K-1, which each partner uses on their individual return.
Form 1120 is the federal corporate income tax return filed by C corporations. It reports income, deductions, tax credits, and the entity-level tax liability.
Form 1120S is the federal information return filed by S corporations. The corporation reports income, deductions, and shareholder allocations on Schedule K-1, with shareholders reporting their pro-rata shares on individual returns.
The GST tax is a federal transfer tax on gifts and bequests to skip persons (typically grandchildren or more remote descendants). It is applied in addition to estate or gift tax to prevent multi-generation tax avoidance.
Inside basis is the partnership's basis in its assets. It can differ from outside basis (a partner's basis in the partnership interest) and the Section 754 election allows the partnership to adjust inside basis to match outside basis on certain transfers.
Outside basis is a partner's basis in their partnership interest. It is adjusted for contributions, distributions, share of income and losses, and share of partnership liabilities.
A partnership is a pass-through entity in which two or more persons carry on a trade or business. Income, deductions, and credits flow through to partners on Schedule K-1; the partnership itself generally pays no entity-level tax.
The passive activity loss rules disallow passive losses against non-passive income. Suspended losses carry forward and free up when the activity is disposed of in a fully taxable transaction to an unrelated party.
Section 351 permits a tax-free contribution of property to a C or S corporation in exchange for stock, provided the transferors are in control (80% or more) of the corporation immediately after the exchange.
A qualified dividend is taxed at long-term capital gain rates rather than at ordinary income rates. The corporation paying the dividend and the recipient's holding period must satisfy the qualification rules.
A qualified retirement plan is an employer-sponsored plan that meets ERISA and tax-code requirements for favorable tax treatment. The category includes defined-benefit pensions, 401(k) plans, profit-sharing plans, and ESOPs.
Reasonable compensation is the wage a closely held business must pay to an owner-employee for services rendered. Inadequate compensation in S corporations risks payroll-tax adjustments; excessive compensation in C corporations risks IRS recharacterization as a disguised dividend.
An S corporation is a small business corporation that has elected pass-through taxation under Subchapter S. It must meet eligibility limits including 100-shareholder cap, single class of stock, and shareholder restrictions (US individuals and certain trusts).
Self-employment tax is the combined Social Security and Medicare tax on net earnings from self-employment paid by sole proprietors and general partners. The rate is 15.3% on earnings up to the Social Security wage base; one-half is deductible above-the-line.
A trust is an entity that holds assets for beneficiaries under terms set by the grantor. It files Form 1041 and either retains income (taxed at compressed brackets) or carries it out to beneficiaries via DNI distributions.
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