20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions

Enrolled Agent EA

Track your progress as you read

Finished sections get a check mark.

1 Part 1, Chapter 1: Tax Return Basics & Filing Requirements

1.1 Form 1040 Overview & Structure 1.2 Form 1040-SR for Seniors 1.3 Who Must File (Income Thresholds) 1.4 Filing Deadlines & Extensions (Form 4868) 1.5 Penalties: Failure to File vs. Failure to Pay 1.6 Sources of Tax Information (W-2s, 1099s, K-1s) 1.7 Preparer Due Diligence Requirements 1.8 Amended Returns (Form 1040-X)

2 Part 1, Chapter 2: Filing Status & Dependents

2.1 Single & Married Filing Jointly 2.2 Married Filing Separately 2.3 Head of Household Requirements 2.4 Qualifying Surviving Spouse 2.5 Qualifying Child Test (5 Tests) 2.6 Qualifying Relative Test (4 Tests) 2.7 SSN, ITIN & Residency Status

3 Part 1, Chapter 3: Wages & Employee Compensation

3.1 W-2 Income & Withholding 3.2 Employee vs. Independent Contractor 3.3 1099-NEC, 1099-MISC & 1099-K Reporting 3.4 Fringe Benefits (Taxable vs. Non-Taxable) 3.5 Stock Options (ISO vs. NQSO) 3.6 Special Categories (Clergy, Military, Foreign)

4 Part 1, Chapter 4: Interest, Dividends & Other Income

4.1 Taxable vs. Tax-Exempt Interest 4.2 US Savings Bonds & OID 4.3 Ordinary vs. Qualified Dividends 4.4 Schedule B Requirements 4.5 Rental & Royalty Income Basics 4.6 Alimony, Gambling & Other Income 4.7 Cancelled Debt & Form 1099-C 4.8 Net Operating Loss (NOL)

5 Part 1, Chapter 5: Capital Gains & Property Transactions

5.1 Capital vs. Non-Capital Assets 5.2 Cost Basis Calculation 5.3 Inherited & Gifted Property Basis 5.4 Short-Term vs. Long-Term Gains 5.5 Capital Gains Tax Rates (0%, 15%, 20%) 5.6 Netting & the $3,000 Loss Limit 5.7 Wash Sales & Related Party Rules 5.8 Sale of Primary Residence (Section 121) 5.9 Installment Sales (Form 6252) 5.10 Like-Kind Exchanges (Section 1031)

6 Part 1, Chapter 6: Adjustments to Income

6.1 Educator Expenses & HSA Contributions 6.2 Self-Employment Tax Deduction 6.3 IRA Contributions (Traditional) 6.4 Student Loan Interest Deduction 6.5 Alimony Paid (Pre-2019 Divorces) 6.6 Other Adjustments & New OBBBA Deductions (Tips, Overtime, Auto Loan, Senior Bonus)

7 Part 1, Chapter 7: Deductions (Standard & Itemized)

7.1 Standard Deduction by Filing Status 7.2 Medical & Dental Expenses (7.5% Floor) 7.3 State & Local Taxes (SALT $40K Cap) 7.4 Mortgage Interest Deduction 7.5 Charitable Contributions 7.6 Casualty & Theft Losses 7.7 QBI Deduction (Section 199A)

8 Part 1, Chapter 8: Tax Calculation & Credits

8.1 Tax Tables & Rate Schedules 8.2 Alternative Minimum Tax (AMT) 8.3 Self-Employment Tax Calculation 8.4 Child Tax Credit & Additional CTC 8.5 Earned Income Tax Credit (EITC) 8.6 Education Credits (AOC & LLC) 8.7 Child & Dependent Care Credit 8.8 Other Credits (Saver's, Premium Tax)

9 Part 1, Chapter 9: Retirement Accounts & Social Security

9.1 Traditional vs. Roth IRA 9.2 401(k), 403(b) & TSP Basics 9.3 SEP-IRA & SIMPLE IRA 9.4 Required Minimum Distributions (RMDs) 9.5 Early Withdrawal Penalties & Exceptions 9.6 Social Security Taxation

10 Part 1, Chapter 10: Specialized Individual Returns

10.1 Estate Tax (Form 706) 10.2 Gift Tax (Form 709) 10.3 Foreign Income (Form 2555) 10.4 FBAR & FATCA Reporting 10.5 Farm Income (Schedule F) 10.6 Disaster Area Rules

11 Part 2, Chapter 11: Business Entity Types

11.1 Overview of Entity Types 11.2 State Law vs. Tax Classification 11.3 Entity Selection: Reasonable Comp & QBI 11.4 Form 8832 & Rev. Proc. 2009-41 11.5 LLC Deep Dive: Spouses & EINs 11.6 Changing Status: The 60-Month Rule

12 Part 2, Chapter 12: Starting a Business

12.1 Hobby vs. Business (Profit Motive) 12.2 Employer Identification Number (EIN) 12.3 Tax Year Selection 12.4 Recordkeeping Requirements 12.5 Statute of Limitations 12.6 Related Party Transactions 12.7 Start-Up Costs, Entity Choice & OBBBA Business Changes (2025)

13 Part 2, Chapter 13: Worker Classification & Payroll

13.1 Employee vs. Independent Contractor 13.2 Common Law Test (Behavioral, Financial, Relationship) 13.3 Statutory Employees & Non-Employees 13.4 Form 941 & Payroll Deposits 13.5 Trust Fund Recovery Penalty 13.6 FUTA & Unemployment Taxes

14 Part 2, Chapter 14: Accounting Methods & Income

14.1 Cash vs. Accrual Method 14.2 Hybrid Methods & Changes 14.3 Inventory & COGS 14.4 Gross Receipts & Income Recognition 14.5 Constructive Receipt 14.6 Form 1099 Reporting Requirements 14.7 §163(j) Business Interest Expense Limitation 14.8 §174 Research & Experimental Expenditures

15 Part 2, Chapter 15: Depreciation & Asset Treatment

15.1 MACRS Basics & Recovery Periods 15.2 Mid-Month, Mid-Quarter, Half-Year Conventions 15.3 Section 179 Expense Deduction 15.4 Bonus Depreciation 15.5 Listed Property Rules 15.6 Amortization of Intangibles 15.7 Depletion 15.8 Disposition of Business Assets

16 Part 2, Chapter 16: Business Deductions

16.1 Ordinary & Necessary Test 16.2 Business Travel Expenses 16.3 Business Meals (50% Limitation) 16.4 Business Use of Vehicle 16.5 Home Office Deduction 16.6 Business Interest Limitation (163(j)) 16.7 Business Bad Debts

17 Part 2, Chapter 17: Business Credits & Fringe Benefits

17.1 General Business Credit Overview 17.2 R&D Credit & Disabled Access Credit 17.3 Small Employer Health Insurance Credit 17.4 Fringe Benefit Rules 17.5 Cafeteria Plans (Section 125) 17.6 Achievement Awards & Other Benefits

18 Part 2, Chapter 18: Sole Proprietorships

18.1 Schedule C Overview 18.2 Calculating Net Profit/Loss 18.3 Self-Employment Tax (Schedule SE) 18.4 Estimated Tax Payments 18.5 Hobby Loss Rules

19 Part 2, Chapter 19: Partnerships

19.1 Partnership Formation 19.2 Partner's Basis Calculation 19.3 Form 1065 Overview 19.4 Schedule K-1 (Partner's Share) 19.5 Guaranteed Payments 19.6 Partnership Distributions 19.7 At-Risk & Passive Activity Rules 19.8 Partnership Termination & Liquidation

20 Part 2, Chapter 20: C Corporations

20.1 Form 1120 Overview 20.2 Corporate Tax Rate (21%) & CAMT 20.3 Accumulated Earnings Tax 20.4 Dividends Received Deduction 20.5 Earnings & Profits (E&P) 20.6 Corporate Distributions, Dividends & Stock Redemptions 20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions 20.8 Corporate Liquidation

21 Part 2, Chapter 21: S Corporations

21.1 S Election Requirements (Form 2553) 21.2 Form 1120-S Overview 21.3 Shareholder Basis Calculation 21.4 Reasonable Compensation 21.5 S Corporation Distributions 21.6 Built-In Gains Tax & Termination

22 Part 2, Chapter 22: Specialized Business Returns

22.1 Trusts & Estates (Form 1041) 22.2 Simple vs. Complex Trusts 22.3 Distributable Net Income (DNI) 22.4 Tax-Exempt Organizations (Form 990) 22.5 Retirement Plans (Form 5500) 22.6 Qualified Retirement Plans Overview 22.7 Farm Taxation 22.8 Rental Real Estate Activities

23 Part 3, Chapter 23: Practice Before the IRS

23.1 What is Practice Before the IRS? 23.2 Who Can Practice (Full Rights) 23.3 Limited Practice Rights (AFSP, Unenrolled) 23.4 Special Relationships (Family, Employees) 23.5 PTIN Requirements 23.6 Circular 230 Overview 23.7 Office of Professional Responsibility (OPR)

24 Part 3, Chapter 24: Becoming & Maintaining EA Status

24.1 Two Paths to EA (Exam vs. IRS Experience) 24.2 Application Process (Form 23) 24.3 Background & Compliance Checks 24.4 Renewal Requirements (Form 8554) 24.5 Continuing Education Requirements 24.6 Inactive Status & Termination

25 Part 3, Chapter 25: Practitioner Duties (Circular 230)

25.1 Due Diligence Requirements 25.2 Knowledge of Client's Omission 25.3 Conflict of Interest Rules 25.4 Fee Requirements (Contingent, Unconscionable) 25.5 Advertising & Solicitation Rules 25.6 Tax Return Position Standards 25.7 Written Advice Standards 25.8 Sanctions & Penalties for Violations

26 Part 3, Chapter 26: Power of Attorney & Authorization

26.1 Form 2848 (Power of Attorney) 26.2 CAF (Centralized Authorization File) 26.3 Form 8821 (Tax Information Authorization) 26.4 Third-Party Designee 26.5 Signing Returns for Taxpayers 26.6 Client Confidentiality & Privilege 26.7 Representing Clients in Audits (Examination) 26.8 Appealing IRS Decisions 26.9 Collection Representation

27 Part 3, Chapter 27: Legal Authority & Research

27.1 Hierarchy of Tax Authority 27.2 Internal Revenue Code 27.3 Treasury Regulations 27.4 Revenue Rulings & Procedures 27.5 Court Cases & Precedent 27.6 Statutes of Limitations

28 Part 3, Chapter 28: Specific Representation Issues

28.1 Trust Fund Recovery Penalty (TFRP) 28.2 Innocent Spouse Relief (Form 8857) 28.3 Injured Spouse Allocation (Form 8379) 28.4 Penalty Abatement (FTA & Reasonable Cause) 28.5 Taxpayer Advocate Service (TAS) 28.6 Freedom of Information Act (FOIA)

29 Part 3, Chapter 29: Final Review & Exam Strategy

29.1 Exam Structure & Logistics (2026-2027) 29.2 The "Clock" of Representation (Master Deadlines) 29.3 Ethics vs. Law (Sanctions & Penalties) 29.4 Final Mock Review & Exam Strategy

30 Part 3, Chapter 30: Filing Process & E-File

30.1 E-File Requirements (The "More Than 10 Returns" Rule) 30.2 ERO Responsibilities 30.3 EFIN & Application Process 30.4 Form 8879 (Signature Authorization) 30.5 Record Retention & Data Security (WISP) 30.6 Preparer Penalties (Filing Specific)

20.7 §351 Transfers, §1032, §1202 QSBS & Other Corporate Provisions

Key Takeaways Explain This Topic AI

§351 allows tax-free incorporation when transferors collectively control 80%+ of the corporation immediately after the exchange.

Boot (cash or other property) triggers gain recognition equal to the lesser of realized gain or boot received.

§1032 — a corporation never recognizes gain or loss on the issuance of its own stock for cash or property.

§1202 QSBS (pre-OBBBA, stock acquired on or before 7/4/2025): up to greater of $10M or 10× basis excluded; 5-year holding required; issuer gross-asset cap $50M.

§1202 QSBS (post-OBBBA, stock acquired AFTER 7/4/2025): up to greater of $15M (indexed) or 10× basis; tiered holding period — 50% at 3 yrs, 75% at 4 yrs, 100% at 5 yrs; issuer gross-asset cap $75M.

§1244 — ordinary loss (not capital) on small-business-stock losses up to $50K Single / $100K MFJ (unchanged by OBBBA).

§163(j) business interest limit: 30% of ATI; OBBBA permanently restored the EBITDA-basis ATI add-back for depreciation/amortization starting 2025; small-business exception applies when 3-year average gross receipts ≤ $31M for 2025.

§174 R&E: OBBBA fully restored immediate expensing for domestic R&E starting 2025; foreign R&E still 15-year amortization; a one-time election allows taxpayers to deduct or 2-year amortize unamortized 2022-2024 amounts.

Corporate NOL: 80% of taxable income limit (TCJA, made permanent by OBBBA); no carryback (special 2-year carryback for farming, special insurance rules); indefinite carryforward.

Corporate capital losses: deductible only against capital gains; carry back 3 years, forward 5 years (different from individuals).

Corporate charitable contributions: 10% of taxable income limit; 5-year carryforward of excess.

Last updated: October 2026

Why This Matters for the Exam

Section 351 is the gateway to tax-free incorporation, but the EA exam also tests several related corporate provisions — most notably the OBBBA-expanded §1202 QSBS regime , the OBBBA-restored EBITDA-basis §163(j) ATI , and the OBBBA-restored §174 immediate expensing for domestic R&E . Expect multiple questions on these post-OBBBA changes.

§351: The Basic Rule

Section 351: No gain or loss is recognized when:

Requirement Detail
Property transferred To a corporation
In exchange for Stock of the corporation
Control Transferors have 80%+ control "immediately after"
80% Control Defined

Control Requirement Threshold
Voting stock 80% or more
Each class of nonvoting 80% or more
Immediately after Right after the exchange
"Property" Definition

Qualifies as Property Does NOT Qualify
Cash Services
Tangible property Future services
Intangible property Promissory notes by transferor
Accounts receivable
Installment obligations

Key Point: Services do not count for the 80% control test. If someone contributes only services, their stock is ignored when calculating if property transferors have 80% control.

Boot: Triggering Gain

Boot = Non-stock consideration received (cash or other property).

Boot Received Effect
Cash Gain recognized
Other property Gain recognized
Assumption of liability Usually not boot (see exceptions)
Gain Recognition with Boot

Formula Calculation
Realized gain FMV received - Adjusted basis given
Recognized gain Lesser of realized gain OR boot received
Loss Not recognized even with boot
Boot Example

Item Amount
Property basis $20,000
Property FMV $100,000
Stock received (FMV) $90,000
Cash received (boot) $10,000
Realized gain $100,000 - $20,000 = $80,000
Recognized gain Lesser of $80,000 or $10,000 = $10,000
Liability Assumption

Rule Treatment
General rule Liability assumed is NOT boot
Exception (§357(c)) If liabilities assumed > total basis of property transferred, the excess is gain
Tax avoidance (§357(b)) If principal purpose is tax avoidance = boot
Shareholder's Basis in Stock

Formula Calculation
Basis of property transferred $X
+ Gain recognized +$Y
Boot received -$Z
Liabilities assumed -$L
= Stock basis
Corporation's Basis in Property

Rule Calculation
Carryover basis Same as transferor's basis
+ Gain recognized by transferor Increase basis
= Corporation's basis
§1032 — Stock Issuance by the Corporation

Independently of §351, a corporation never recognizes gain or loss on the issuance of its own stock in exchange for money or property. This applies to original issuance, treasury-stock transactions, and stock issued in §351 transfers. §1032 is unchanged.

§1202 — Qualified Small Business Stock (QSBS) — OBBBA EXPANSION

This is the biggest 2025 testable change in the C-corporation chapter. OBBBA significantly expanded §1202 for stock acquired after July 4, 2025 . Both regimes coexist for years to come because of the rolling holding period.

Pre-OBBBA regime (stock acquired on or before July 4, 2025)

Element Rule
Per-issuer gain exclusion Greater of $10M or 10× basis
Holding period 5 years (100% exclusion for stock issued after 9/27/2010)
Older acquisitions 50% (issued 8/11/1993-2/17/2009) or 75% (2/18/2009-9/27/2010) exclusion
Issuer aggregate gross-asset cap $50,000,000 (at issuance)
AMT preference 100% exclusion for QSBS issued after 9/27/2010 (no AMT add-back)
Corporate-form requirement Domestic C corporation
Active business 80% of assets used in qualifying trade or business

Excluded businesses Financial services, professional services (health, law, engineering, accounting, etc.), farming, mining, hospitality

Post-OBBBA regime (stock acquired AFTER July 4, 2025)

Element Rule
Per-issuer gain exclusion Greater of $15M (indexed for inflation) or 10× basis
Tiered holding period 50% exclusion at 3-year hold; 75% at 4-year hold; 100% at 5-year hold
Issuer aggregate gross-asset cap $75,000,000 (at issuance)
AMT preference 100% exclusion remains (no AMT add-back at 100% level)
Corporate-form requirement Domestic C corporation (unchanged)
Active business 80% of assets used in qualifying trade or business (unchanged)
Excluded businesses Same exclusion list as pre-OBBBA

Both regimes co-exist — taxpayers may hold pre-7/4/2025 and post-7/4/2025 §1202 stock simultaneously, and each tranche follows its own rules. The exam may test either regime or ask you to distinguish them by acquisition date.

§1244 — Ordinary Loss on Small Business Stock

Element Rule (unchanged for 2025)
Loss treatment Ordinary (not capital) loss on sale or worthlessness
Annual limit $50,000 Single; $100,000 MFJ
Issuer requirement Aggregate capital + paid-in surplus ≤ $1,000,000 at time of issuance
Stock type Common or preferred; must be originally issued to the loss-claiming shareholder
§163(j) — Business Interest Limitation — OBBBA EBITDA-Basis ATI Restored

Element Rule for 2025 (post-OBBBA)
Limit Deductible business interest expense = business interest income + 30% of ATI + floor-plan interest

ATI definition EBITDA-basis — depreciation, amortization, and depletion are ADDED BACK in computing ATI (OBBBA permanently restored this starting 2025)

Prior 2022-2024 rule EBIT-basis (no depreciation/amortization add-back) — less favorable; this old rule is GONE for 2025

Small business exception Average annual gross receipts test: ≤ $31,000,000 for 2025 (no §163(j) limit)
Disallowed interest Carried forward indefinitely

Real property/farming election Real-property trade or business and farming may elect out (must use ADS depreciation)

The EBITDA-basis ATI is more favorable to taxpayers than the 2022-2024 EBIT-basis ATI because depreciation/amortization add-backs increase ATI, increasing the deductible interest limit. The exam will likely test recognition that 2025 returns use the EBITDA basis again.

§174 — R&E Expenditures — OBBBA Fully Restored Immediate Expensing for Domestic R&E

Element Rule for 2025 (post-OBBBA)
Domestic R&E Fully restored to immediate expensing starting 2025
Foreign R&E Still required to be capitalized and amortized over 15 years

Catch-up for 2022-2024 capitalized R&E OBBBA permits a one-time election to either (a) immediately deduct unamortized 2022-2024 domestic R&E or (b) amortize the remaining balance over 2 years

Software development Treated as §174 R&E (same domestic vs foreign split applies)

Pre-OBBBA (2022-2024): All R&E required 5-year (domestic) or 15-year (foreign) capitalization. OBBBA reversed the 5-year domestic capitalization starting 2025.

Corporate Net Operating Loss (NOL) — TCJA Rules Made Permanent by OBBBA

Element Rule for 2025
Usage limit 80% of taxable income (computed before the NOL)
Carryback Generally NONE
Special carrybacks 2 years for farming losses; 2 years for certain insurance company NOLs
Carryforward Indefinite
Pre-2018 NOLs Followed prior rules (2-year carryback / 20-year forward) and are not subject to the 80% limit
Corporate Capital Losses

Element Rule (different from individuals)
Allowed against ONLY capital gains (no $3,000 ordinary-income offset)
Carryback 3 years
Carryforward 5 years
Character on carryover Short-term (regardless of original character)
Corporate Charitable Contributions

Element Rule for 2025

Annual limit 10% of taxable income (computed without the charitable deduction, DRD, NOL carryback, and capital loss carryback)

Carryforward 5 years
Accrual-method corps May deduct contributions authorized by year-end and paid within 2½ months after year-end
§269 — Acquisitions to Evade Tax

If the principal purpose of acquiring control of a corporation (or acquiring its assets with a carryover basis) is to evade or avoid federal income tax by securing a tax benefit otherwise unavailable, the IRS may disallow the benefit. This is a frequent companion to §382 limitations on NOL utilization following ownership changes.

Real-World Scenarios (TY 2025)

Scenario 1 — §351: Two individuals form a corporation in 2025. A contributes property (basis $50,000, FMV $80,000) for 70% of the stock and $5,000 cash. B contributes cash of $30,000 for 30% of the stock.

Control test: A and B together own 100% → 80% control met.

A's realized gain: $85,000 received - $50,000 basis = $35,000.

A's recognized gain: Lesser of $35,000 or $5,000 = $5,000.

A's stock basis: $50,000 - $5,000 (boot) + $5,000 (gain) = $50,000.

Scenario 2 — §1202 QSBS post-OBBBA: Investor buys $1,000,000 of QSBS in a domestic C corp on October 1, 2025 (after the OBBBA cut-off). Issuer's gross assets at issuance were $60,000,000 (≤ $75M cap met). Investor sells on October 2, 2028 (3-year hold) for $4,000,000.

Gain: $3,000,000.

Holding-period tier: 3 years → 50% exclusion.

Excluded gain: $1,500,000.

Taxable gain: $1,500,000 (long-term capital gain).

If held to 2030 (5 years): 100% exclusion; entire $3M excluded.

On the Exam

Question types to practice across these provisions:

§351 Control: "What percentage ownership is required?"
Boot: "How much gain is recognized?"
§1202 QSBS — Post-OBBBA tiered holding: "Stock acquired Aug 2025, held 4 years — what exclusion?" (75%)

§163(j) ATI: "Are depreciation and amortization added back in computing ATI for 2025?" (Yes — OBBBA restored EBITDA basis.)

§174: "Are domestic R&E costs deductible immediately in 2025?" (Yes — OBBBA restored.)

NOL/cap loss/charitable: Recall the 80% limit / 3-back-5-forward / 10% TI cap.

The key is to remember: 80% control for §351. Boot = lesser of realized gain or boot. §1202 post-7/4/2025 = $15M cap, tiered 50/75/100% at 3/4/5 yrs, $75M issuer cap. §163(j) ATI = EBITDA basis again. §174 domestic R&E = immediate expensing again.