Section 3: 10–20%T9
Choice of Entity and Formation Planning
Exam Insight
Choosing the right entity drives the lifetime tax cost of a business, and the AICPA tests whether you can compare single-layer pass-through taxation against C corporation double taxation while applying the permanent 21 percent rate, the section 199A QBI deduction, self-employment and payroll tax exposure, and tax-free formation under sections 351 and 721. Getting the entity wrong can cost owners a second layer of tax or the loss of section 1202 QSBS benefits.
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What AICPA Wants You to Know
- 1Compare the tax cost of C corporations, S corporations, partnerships/LLCs, and sole proprietorships under single versus double taxation.
- 2Determine QBI section 199A eligibility and the 2025 taxable income thresholds for each pass-through entity.
- 3Analyze self-employment and payroll tax exposure across entity types and identify loss-utilization differences.
- 4Apply the section 351 (corporate) and section 721 (partnership) tax-free formation rules, including the 80 percent control requirement.
- 5Evaluate exit and sale planning, including the section 1202 qualified small business stock gain exclusion available only to C corporations.
- 6Explain how partnership liabilities increase a partner's outside basis, a feature unique to partnerships.