Objectives in this domain

Determine business gross income, cost of goods sold, and the proper treatment of cash versus accrual accounting methods and constructive receipt.
Section 2.1medium
Apply the ordinary-and-necessary deduction standard and key business credits, including the 50% meals limitation, business interest limitation, and the general business credit.
Section 2.2medium
Compute depreciation and gain or loss on business assets, including MACRS, Section 179 expensing, bonus depreciation, and Section 1245 and 1250 depreciation recapture.
Section 2.3hard
Reconcile book income to taxable income using Schedule M-1 and Schedule M-3 and interpret the balance sheet on Schedule L.
Section 2.4hard
Advise a business on recordkeeping, worker classification, estimated tax and employment tax obligations, and the penalties for noncompliance.
Section 2.5medium

Sample question from this domain

Free sampleBusiness Tax Preparationhard

Marlowe Fabrication LLC, a calendar-year business, buys and places in service a single new metal lathe (7-year MACRS property) for 100,000 dollars on 3 March 2024. It is the only asset bought that year, so the mid-quarter convention does not apply. The firm elects out of both Section 179 and bonus depreciation and uses the standard 200 percent declining balance method with the half-year convention. What is its first-year MACRS depreciation deduction on the lathe?

A14,290 dollars, using the 14.29 percent first-year rate that the MACRS table sets for 7-year recovery property under the half-year convention. Correct
B20,000 dollars, using the 20.00 percent first-year rate that applies to 5-year recovery property under the half-year convention.
C7,145 dollars, by taking the 14.29 percent 7-year rate and then halving it again because the asset was held for only part of the year.
D28,580 dollars, by applying the 200 percent declining balance rate of two divided by seven to the full 100,000 dollar basis with no convention adjustment.

First-year MACRS on 7-year property under the half-year convention uses the 14.29 percent table rate, which already incorporates the half year. MACRS percentage tables combine the 200 percent declining balance method, the recovery period and the applicable convention into a single rate. For 7-year property under the half-year convention the first-year rate is 14.29 percent, so the deduction is 100,000 multiplied by 0.1429, or 14,290 dollars. The half year is already baked into the table rate, so no further halving is correct.

Why A is correct: A metal lathe is 7-year MACRS property, and the half-year-convention table gives a 14.29 percent first-year rate, so 100,000 multiplied by 14.29 percent equals 14,290 dollars.

Why B is wrong: Applying the 5-year first-year rate of 20 percent is a common slip when the recovery period is misread, but a metal lathe is 7-year property, so the correct first-year rate is 14.29 percent, not 20 percent.

Why C is wrong: Halving the table percentage is tempting if the candidate thinks the half-year convention must be applied on top of the rate, but the published 14.29 percent rate already builds in the half-year convention, so applying a second half is double-counting.

Why D is wrong: Computing two divided by seven of basis (28.58 percent) looks like the declining balance method, but it ignores the half-year convention that halves the first-year deduction, which the 14.29 percent table rate already reflects.

Other domains in this exam

Business Entities and Considerations35% of the exam
Specialized Returns and Taxpayers21% of the exam

See also the SEE-2 cert hub, the study guide, and the cheat sheet.