ENROLLED AGENT EXAM PREP PART 2 2026
EXAM PREPARATION PACK KEY CIRCULAR 230
ETHICS TAX PRACTICE AND REPRESENTATION
RULES WITH SAMPLE QUESTIONS
◉ Are event tickets deductible as business gift expense. Answer: Yes
if the amount per individual donee per year is limited to $25. Also,
adequate records must be maintained.
◉ If your bank goes bankrupt, how can the taxpayer deduct the
amount?. Answer: As a short term capital loss or ordinary loss (if not
a 1% or more owner in the bank)
◉ Job requires relocation and comes with probationary period.
Answer: the job is indefinite. Thus, the taxpayer may not deduct any
expenses for traveling during the probationary period.
◉ Where is the tax home of a taxpayer who works permanently in a
location away from his/her principal residence?. Answer: While
traveling, this taxpayer is not considered to be away from home. they
are considered a transient, and their tax home is wherever they
work.
,◉ The standard mileage rate may be used if you own five or more
cars that are used for business as long as you alternate using (use at
different times) the cars for business. (T/F). Answer: True. If you
own five or more cars that are used for business at the same time,
you cannot use the standard mileage rate for the business use of any
car. However, you are not using cars at the same time if you use the
cars at different times for business purposes.
◉ On January 1, Year 1, John made a loan of $6,000 to his neighbor.
The loan was evidenced by a written promise to repay the principal
within 3 years and was to bear interest at a rate of 6% per annum.
John's neighbor paid only interest for the first year, and he made no
payments in Year 2 or Year 3. Then his financial condition
deteriorated. In Year 2, John learned that he would probably be able
to recover only $3,000 of the loan. The loan was not made in the
course of John's business. John can deduct $3,000 of the loan on his
Year 2 tax return.. Answer: A partially worthless nonbusiness debt is
not deductible (Reg. 1.166-5), and a wholly worthless nonbusiness
debt is treated as a loss from the sale or exchange of a capital asset
held for 1 year or less, i.e., a short-term capital loss [Sec. 166(d)].
Here, John has a partially worthless nonbusiness debt. Therefore, it
is not deductible.
◉ Ms. X lives with her family in San Francisco, but works in Los
Angeles. While in Los Angeles, Ms. X stays in a hotel and eats in
restaurants during the week. She returns to San Francisco every
weekend. Ms. X can deduct her expenses for travel, meals, and
lodging while in Los Angeles.
,True.. Answer: False.
Travel expenses are deductible only when the taxpayer is away from
home for a temporary period. Since Ms. X permanently works in Los
Angeles, this is the location of her tax home for purposes of
determining travel expenses. Travel expenses to San Francisco are
not deductible since Ms. X's absence from her tax home does not
relate to her trade or business.
◉ Ed incurred a loss on deposits when his bank became insolvent
(bankrupt) and can take a personal casualty loss deduction for the
loss amount.. Answer: False.
If the individual treats the nonbusiness account loss as a personal
casualty loss, no deduction is allowed after 2017. Alternatively, the
individual can elect to treat the loss as a nonbusiness ordinary loss
arising from a transaction entered into for profit. If no election is
made, the default classification for the nonbusiness bad debt is a
short-term capital loss subject to a $3,000 annual limit.
◉ Minimum use rental tests. Answer: Rental use -- Pass if rented for
more than 14 days.
Personal use -- Pass if personal use is less <=14 days or if personal
use is less than 10% of total days rented.
If only the rental use test is passed, deductions are limited to profit.
If both tests are passed, a loss is allowed.
, ◉ Mrs. W rented a portion of her personal residence to Ms. E, a
college student. In allocating the expenses between the rented
portion and the personal portion of the residence she used, it is not
necessary for Mrs. W to allocate taxes and mortgage interest..
Answer: False. A taxpayer who rents a portion of a personal
residence must allocate all expenses, including taxes and interest,
between the rented and personal portions of the residence, because
Sec. 62(a)(4) requires expenses attributable to rented property to be
deducted for adjusted gross income. The remainder of the interest
and taxes is deductible from adjusted gross income under Sec. 63.
◉ Can unpaid alimony or child support be deducted as a
nonbusiness bad debt?. Answer: No. Cannot be a bad debt unless it
becomes completely worthless.
◉ What percentage of meals can transportation workers deduct?.
Answer: 80% if they are subject to Department of Transportation
hours and service rules
◉ What types of bad debts can be deducted if they are only partially
worthless?. Answer: Only business bad debts can be deducted to the
extent that they are worthless and specifically written off. However,
nonbusiness bad debts can only be written off if they are entirely
worthless.
◉ How is a loss on deposit treated if a bank becomes insolvent?.
Answer: This can be treated as a personal casualty loss (non
EXAM PREPARATION PACK KEY CIRCULAR 230
ETHICS TAX PRACTICE AND REPRESENTATION
RULES WITH SAMPLE QUESTIONS
◉ Are event tickets deductible as business gift expense. Answer: Yes
if the amount per individual donee per year is limited to $25. Also,
adequate records must be maintained.
◉ If your bank goes bankrupt, how can the taxpayer deduct the
amount?. Answer: As a short term capital loss or ordinary loss (if not
a 1% or more owner in the bank)
◉ Job requires relocation and comes with probationary period.
Answer: the job is indefinite. Thus, the taxpayer may not deduct any
expenses for traveling during the probationary period.
◉ Where is the tax home of a taxpayer who works permanently in a
location away from his/her principal residence?. Answer: While
traveling, this taxpayer is not considered to be away from home. they
are considered a transient, and their tax home is wherever they
work.
,◉ The standard mileage rate may be used if you own five or more
cars that are used for business as long as you alternate using (use at
different times) the cars for business. (T/F). Answer: True. If you
own five or more cars that are used for business at the same time,
you cannot use the standard mileage rate for the business use of any
car. However, you are not using cars at the same time if you use the
cars at different times for business purposes.
◉ On January 1, Year 1, John made a loan of $6,000 to his neighbor.
The loan was evidenced by a written promise to repay the principal
within 3 years and was to bear interest at a rate of 6% per annum.
John's neighbor paid only interest for the first year, and he made no
payments in Year 2 or Year 3. Then his financial condition
deteriorated. In Year 2, John learned that he would probably be able
to recover only $3,000 of the loan. The loan was not made in the
course of John's business. John can deduct $3,000 of the loan on his
Year 2 tax return.. Answer: A partially worthless nonbusiness debt is
not deductible (Reg. 1.166-5), and a wholly worthless nonbusiness
debt is treated as a loss from the sale or exchange of a capital asset
held for 1 year or less, i.e., a short-term capital loss [Sec. 166(d)].
Here, John has a partially worthless nonbusiness debt. Therefore, it
is not deductible.
◉ Ms. X lives with her family in San Francisco, but works in Los
Angeles. While in Los Angeles, Ms. X stays in a hotel and eats in
restaurants during the week. She returns to San Francisco every
weekend. Ms. X can deduct her expenses for travel, meals, and
lodging while in Los Angeles.
,True.. Answer: False.
Travel expenses are deductible only when the taxpayer is away from
home for a temporary period. Since Ms. X permanently works in Los
Angeles, this is the location of her tax home for purposes of
determining travel expenses. Travel expenses to San Francisco are
not deductible since Ms. X's absence from her tax home does not
relate to her trade or business.
◉ Ed incurred a loss on deposits when his bank became insolvent
(bankrupt) and can take a personal casualty loss deduction for the
loss amount.. Answer: False.
If the individual treats the nonbusiness account loss as a personal
casualty loss, no deduction is allowed after 2017. Alternatively, the
individual can elect to treat the loss as a nonbusiness ordinary loss
arising from a transaction entered into for profit. If no election is
made, the default classification for the nonbusiness bad debt is a
short-term capital loss subject to a $3,000 annual limit.
◉ Minimum use rental tests. Answer: Rental use -- Pass if rented for
more than 14 days.
Personal use -- Pass if personal use is less <=14 days or if personal
use is less than 10% of total days rented.
If only the rental use test is passed, deductions are limited to profit.
If both tests are passed, a loss is allowed.
, ◉ Mrs. W rented a portion of her personal residence to Ms. E, a
college student. In allocating the expenses between the rented
portion and the personal portion of the residence she used, it is not
necessary for Mrs. W to allocate taxes and mortgage interest..
Answer: False. A taxpayer who rents a portion of a personal
residence must allocate all expenses, including taxes and interest,
between the rented and personal portions of the residence, because
Sec. 62(a)(4) requires expenses attributable to rented property to be
deducted for adjusted gross income. The remainder of the interest
and taxes is deductible from adjusted gross income under Sec. 63.
◉ Can unpaid alimony or child support be deducted as a
nonbusiness bad debt?. Answer: No. Cannot be a bad debt unless it
becomes completely worthless.
◉ What percentage of meals can transportation workers deduct?.
Answer: 80% if they are subject to Department of Transportation
hours and service rules
◉ What types of bad debts can be deducted if they are only partially
worthless?. Answer: Only business bad debts can be deducted to the
extent that they are worthless and specifically written off. However,
nonbusiness bad debts can only be written off if they are entirely
worthless.
◉ How is a loss on deposit treated if a bank becomes insolvent?.
Answer: This can be treated as a personal casualty loss (non
