Business Income, COGS and Ordinary Expenses
This topic covers gross receipts, other income, cost of goods sold, inventory, uniform capitalization, net income or loss, at-risk limits, cancellation of business debt, compensation, fringe benefits, family employment, rental, travel, meals, gifts, interest, insurance, taxes, casualties, thefts, and condemnations.
How to study for EA Part 2
Build every answer around entity classification, filing obligation, owner basis, income and deduction character, payroll duties, accounting records, and specialized taxpayer rules.
Core concepts
Concept 1
Business Income, COGS and Ordinary Expenses questions test whether an enrolled agent candidate can apply business tax rules to entity, return, owner, and recordkeeping facts.
Exam cue: Identify the entity, tax year, owner role, form, accounting method, record source, and whether the issue is income, deduction, credit, basis, payroll, or advice.
Concept 2
The best answer usually identifies the business form, tax year, filing obligation, income or deduction character, owner-level consequence, and penalty exposure before calculating.
Exam cue: Check basis, distributions, depreciation, employment tax deposits, QBI limits, method changes, due dates, penalties, and information reporting.
Concept 3
Eliminate answers that ignore entity classification, basis, payroll deposits, accounting method, book-tax reconciliation, or specialized taxpayer filing requirements.
Exam cue: Tie the result to the correct business return, schedule, K-1, payroll form, book-tax reconciliation, owner basis, or specialized taxpayer return.
Risk pitfalls and guardrails
Solving as if every business were a sole proprietorship instead of respecting entity classification and owner-level rules.
Guardrail: Use a 15-second safety pause before finalizing your action.
Calculating a deduction or credit without checking basis, at-risk limits, passive limits, depreciation elections, or payroll compliance.
Guardrail: Use a 15-second safety pause before finalizing your action.
Missing specialized taxpayers such as trusts, estates, exempt organizations, retirement plans, farmers, and rental real estate.
Guardrail: Use a 15-second safety pause before finalizing your action.
Memory anchors
Gross Receipts
Gross receipts include sales and service income before allowable offsets and deductions.
COGS
Cost of goods sold removes inventory cost from gross receipts under inventory accounting rules.
UNICAP
Uniform capitalization rules can require certain costs to be capitalized into inventory or property.
Ordinary Necessary
A business expense generally must be ordinary, necessary, paid or incurred, and connected to the business.
Compensation
Officer and employee compensation must be reasonable and properly classified to be deductible.
Fringe Benefit
Fringe benefit taxation depends on statutory exclusions, employee status, and substantiation.
Travel Meals
Travel, meals, and gift deductions require business purpose and documentation and may be limited.
Business Interest
Business interest may be deductible subject to limitations and tracing rules.
Business Casualty
Casualty and condemnation treatment depends on business property, basis, insurance, and timing.
Cancellation of Debt
Business cancellation of debt can create income unless an exclusion or attribute reduction applies.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
A cash-method consultant completes work in December 2025 and receives the client's check in January 2026. The check was not available earlier. When is the income generally recognized?
A cash-method business receives a check on December 30 but leaves it unopened until January. The check was unrestricted and available. When is it generally income?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
What is Pass Harbor?
Completely free exam prep for 317 U.S. exams.
- Practice questions
- Flashcards
- Study guides
- Mock exams
- No registration
- No paywall
- Start instantly
“No more expensive exam prep. Quality study tools should be accessible to everyone.”