SEE Part 2 business tax preparation explained
Business Tax Preparation is the largest domain on SEE Part 2: 37 of the 85 scored questions, about 44%. It covers the working content of a business return — income, cost of goods sold, deductions and credits, depreciation, asset basis and dispositions, reading financial records, reconciling books to tax — plus advising the business client on filing, deposits, records, entity choice and worker classification. Every dollar figure below is a 2025 figure checked against the 2025 IRS instructions or publications.
Business income
- Gross receipts and other income, including barter and cancellation of business debt.
- Cost of goods sold: inventory methods, what costs belong in inventory, and the uniform capitalization rules.
- At-risk limits on losses, and the net operating loss deduction. For corporations, NOLs arising after 2017 generally carry forward indefinitely and are limited to 80% of taxable income; only farming losses and certain insurance company losses can be carried back.
Deductions and credits
The outline lists these one by one, and each can carry a question:
| Topic | The rule to know for 2025 |
|---|---|
| Business meals | Generally 50% deductible |
| Business gifts | $25 per recipient per year |
| Vehicles | Standard mileage rate 70 cents per mile, or actual expenses; parking and tolls deductible on top |
| Start-up costs | Up to $5,000 deductible in the year the business begins, reduced dollar for dollar once costs exceed $50,000; the rest amortized over 180 months |
| Organizational costs | Same $5,000 / $50,000 / 180-month structure |
| Compensation | Reasonable, for services actually rendered; family employment and statutory employees have special rules |
| Taxes, interest, insurance, bad debts, rent | Deductible when business-related; penalties and fines are not |
| Home office | Regular and exclusive business use tests |
The qualified business income deduction is up to 20% of QBI. The simplified Form 8995 is available when 2025 taxable income before the deduction is no more than $197,300, or $394,600 married filing jointly. Above that, the specified service business, wage and property (UBIA) limitations come in.
General business credits named in the outline include the disabled access credit, the research credit, the small business health care credit and the foreign tax credit. Know what each is for and who can claim it.
Depreciation
This is where the 2025 legislation matters most, so learn the 2025 rules and nothing later.
| 2025 rule | |
|---|---|
| Section 179 maximum | $2,500,000, reduced by the cost of section 179 property placed in service above $4,000,000 |
| Section 179 income limit | Deduction cannot exceed taxable income from active trades or businesses |
| Special depreciation allowance | 100% for qualified property acquired and placed in service after January 19, 2025, with an election to use 40% instead for the first tax year ending after that date |
| Listed property | Must be used more than 50% for business to claim section 179 or the special allowance |
| Residential rental property | 27.5-year recovery period |
| Nonresidential real property | 39-year recovery period |
Also in scope: amortization, depletion, correcting depreciation errors (Form 3115), recapture on disposition, and the section 280F limits on passenger vehicles.
Business assets
- Basis of purchased, constructed and converted property.
- Dispositions and Form 4797.
- Like-kind exchanges — real property only since 2018, held for business or investment. Replacement property must be identified within 45 days and received within 180 days or by the return due date including extensions, whichever is earlier.
- Capitalization and repair regulations and their elections.
Financial records and reconciliation
Expect questions that give you an income statement or balance sheet and ask what they mean for the return. Know how ending balances roll to the next year, how depreciation links the two statements, and the reconciliation schedules:
- Schedule M-1 reconciles book income to taxable income. Federal income tax expense and the nondeductible half of meals are added back; tax-exempt interest is subtracted.
- Schedule M-2 analyses retained earnings (Form 1120) or partners’ capital (Form 1065).
- Schedule M-3 replaces M-1 for larger entities.
Accounting methods and Form 3115, K-1 pass-through items and loans to and from owners are also tested.
Advising the business taxpayer
- Information returns: for payments made in 2025, Form 1099-NEC is required for nonemployee compensation of $600 or more. The threshold rises to $2,000 only for payments made after 2025 — a trap for anyone studying from newer articles. Form 8300 is required for cash receipts over $10,000 in one transaction or related transactions.
- Employment and excise tax deposits and returns.
- Record-keeping: mileage logs and accountable plans.
- Worker classification: behavioural control, financial control and the relationship of the parties.
- Entity selection, commingling, the business life cycle, specified service businesses, ACA compliance, and timing deductions — section 179 versus bonus depreciation versus regular depreciation.
Sample questions
Question 1. A sole proprietor starts a business in 2025 and incurs $53,000 of start-up costs. What is the maximum amount of start-up costs she can deduct for 2025, before any amortization of the remainder?
- A. $5,000
- B. $0
- C. $2,000
- D. $53,000
Show answer
Answer: C
The $5,000 start-up deduction is reduced by the amount by which total start-up costs exceed $50,000. Costs exceed $50,000 by $3,000, so the immediate deduction is $5,000 minus $3,000, or $2,000. The remaining $51,000 is amortized over 180 months starting with the month the business begins. Start-up costs are never fully deductible in the first year.
Question 2. In a tax year beginning in 2025, a business places in service section 179 property costing $4,100,000. Before the business income limitation, what is its maximum section 179 deduction?
- A. $2,500,000
- B. $2,400,000
- C. $4,100,000
- D. $1,500,000
Show answer
Answer: B
For tax years beginning in 2025, the section 179 limit is $2,500,000, reduced dollar for dollar by the cost of section 179 property placed in service above $4,000,000. The excess is $100,000, so the limit is $2,400,000. The deduction is then further limited to taxable income from active trades or businesses.
Question 3. During 2025, a business paid $1,500 to an unincorporated independent contractor for services. Which information return is required for this payment?
- A. Form W-2
- B. Form 1099-MISC
- C. None, because the payment is below $2,000
- D. Form 1099-NEC
Show answer
Answer: D
For payments made in 2025, Form 1099-NEC is required when nonemployee compensation to a person reaches $600. The increase to $2,000 applies only to payments made after 2025, so it does not exempt this payment. Form W-2 is for employees, and Form 1099-MISC is for other types of payments such as rents.
What to practise
Take an invented small-business trial balance and prepare a Schedule C or Form 1120 from it: sort each account into income, cost of goods sold, deductible, partly deductible or nondeductible, then write the M-1. Add one asset and depreciate it three ways — section 179, the special allowance and MACRS. Then try the practice test.