Free Enrolled Agent Part 2 Practice Test: Businesses

33 free, original practice questions for SEE Part 2: Businesses, grouped by the IRS content outline domains. Read each question, pick your answer, then open the worked explanation: it gives the rule, why the other options are wrong and the source. No sign-up needed.

Testing closes 28 Feb 2027 · 106 days left to sit this window

EA exam Part 2 facts

Checked against the IRS and PSI on 11 Nov 2026. Each line names its source.

Who runs it: The IRS sets the Special Enrollment Examination (SEE). PSI Services LLC has developed and delivered it since 1 Mar 2026, taking over from Prometric.Source: IRS "Enrolled agent news" (updated 29 Sep 2026), checked 11 Nov 2026
Format: Part 2: Businesses is one of three separate parts. Each part has 100 four-option multiple-choice questions (85 scored, 15 unscored experimental items you cannot tell apart) in 3 hours 30 min of testing, inside a 4-hour appointment. Three sections (questions 1-34, 35-67, 68-100) lock once you confirm them, with two optional 10-minute breaks.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026
What it covers: Business Entities and Considerations (30), Business Tax Preparation (37), Specialized Returns and Taxpayers (18): scored questions per content outline domain, out of 85.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026
Pass mark: A scaled score of 500 on a 200-800 scale, per part. A pass report shows no score; a fail report shows a scaled score of 200-499 and diagnostics. PSI does not publish how many correct answers 500 takes.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026
Fee: US$317 per part (US$66 IRS user fee plus US$251 PSI fee), paid by card when you schedule. Generally non-refundable; cancel or reschedule at least 48 hours ahead to keep it. After passing all three parts, enrollment on Form 23 costs US$140.Source: IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026; PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; Internal Revenue Bulletin 2026-21 (T.D. 10045, user fee), checked 11 Nov 2026
Testing window: No fixed exam dates: you book each part on any open slot in a testing window. The 2026-27 testing window is open from 1 Jul 2026 to 28 Feb 2027 for U.S. candidates. Testing pauses after 28 Feb 2027 while the exam is updated; the 2027-28 window is not announced yet.Source: IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026; PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026
Tax law tested: The 2026-27 window tests the Code, regulations, IRS forms, instructions and publications as amended through 31 Dec 2025; "current year" means 2025. Later legislation, court decisions and penalty amounts are ignored.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026
Syllabus version: The PSI content outlines for SEE Parts 1-3 printed in the candidate bulletin revised 9 Oct 2026, used for the 2026-27 window.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026
How to book: Get or renew a PTIN first. Then schedule with PSI online at test-takers.psigov.us/irs or by phone on (844) 645-2218, at least 24 hours ahead, at a PSI test center or by remote online proctoring in the U.S. Scheduling and testing for international candidates is temporarily delayed: scheduling was due to open on 1 Sep 2026 and testing on 2 Sep 2026, and the IRS has not set new dates (checked 11 Nov 2026). Once it starts it is remote-only with a proctor.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026
Retakes: Up to 4 attempts per part in each testing window. After a failed attempt, wait 24 hours before booking that part again.Source: PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026; IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026
Carryover: A passed part counts for 3 years from the day you pass it. Pass all three inside that time, then apply on Form 23 within 1 year of passing the last part.Source: IRS "Enrolled agents: Frequently asked questions" (updated 26 Oct 2026), checked 11 Nov 2026; PSI Candidate Information Bulletin for the IRS EA SEE (rev. 9 Oct 2026), checked 11 Nov 2026

Part 2 domains and their share of the 85 scored items (PSI content outline, as at 11 Nov 2026).
Domain	Scored items	On this page
Business Entities and Considerations	30 (35.3%)	12
Business Tax Preparation	37 (43.5%)	12
Specialized Returns and Taxpayers	18 (21.2%)	9

Business Entities and Considerations

30 of 85 scored items (35.3%)

Business Entities, Classification and Elections

Free study note: Business Entities, Classification and Elections

Question 1
A calendar-year corporation formed in 2024 wants S status starting January 1, 2025. March 15, 2025 fell on a Saturday. By what date must it have filed Form 2553 for the election to be timely?
- A December 31, 2025
- B April 15, 2025
- C March 17, 2025
- D January 31, 2025
Show the answer
Answer: C. March 17, 2025
To be effective for a tax year, Form 2553 must be filed no more than 2 months and 15 days after the beginning of that year (or at any time in the prior year). For a calendar year that is March 15; in 2025 March 15 fell on a Saturday, so the deadline moved to Monday, March 17, 2025. A late election can still get relief under Rev. Proc. 2013-30 within 3 years and 75 days. Source: IRC 1362(b)(1); Form 2553 instructions, When To Make the Election; IRC 7503. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Using the individual return due date for the S election.
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Question 2
Ana and her husband own and run a catering business together, are its only owners, did not form a state law entity, and file jointly. They want to avoid filing Form 1065. What can they do?
- A Report the income on Schedule E as rental income split between them
- B Elect qualified joint venture status and each file a Schedule C
- C Nothing; any business with two owners must file Form 1065
- D File one Schedule C in the husband's name only
Show the answer
Answer: B. Elect qualified joint venture status and each file a Schedule C
Spouses who are the only members of an unincorporated business they both materially participate in, and who file jointly, may elect to be a qualified joint venture. Each then reports his or her share of income and expenses on a separate Schedule C and Schedule SE, so each earns Social Security credit. A state law entity such as an LLC cannot use this election. Source: IRC 761(f); Pub. 334 (2025), Qualified Joint Venture. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Reporting a jointly owned business on one spouse's Schedule C.
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Question 3
An election on Form 8832 to change an entity's classification can take effect no earlier than:
- A 12 months before the form is filed
- B The first day of the tax year of filing
- C The date the IRS approves it
- D 75 days before the form is filed
Show the answer
Answer: D. 75 days before the form is filed
A Form 8832 election can be effective up to 75 days before the filing date and no more than 12 months after it. After a change in classification, another change generally cannot be made for 60 months. Late election relief is available under Rev. Proc. 2009-41 in some cases. Source: Treas. Reg. 301.7701-3(c)(1)(iii)-(iv); Form 8832 instructions. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Assuming an election can reach back to the start of any tax year.
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Partnerships

Free study note: Partnerships

Question 4
Ty owns 60% of a partnership. He sells the partnership a building he held as an investment at a $20,000 loss. What is the result?
- A The loss is a deductible capital loss
- B The loss is deferred until the partnership sells the building
- C The loss is a deductible ordinary loss
- D Disallowed, as he owns more than 50%
Show the answer
Answer: D. Disallowed, as he owns more than 50%
Under section 707(b)(1), no loss is allowed on a sale or exchange of property between a partnership and a partner who owns, directly or indirectly, more than 50% of the capital or profits interest. If the partnership later sells the property at a gain, it can reduce that gain by the disallowed loss. Ty owns 60%, so the loss is disallowed. Source: IRC 707(b)(1); Pub. 541 (12-2025), Transactions Between Partnership and Partners. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Allowing losses between a partnership and its controlling partner.
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Question 5
Jo contributed land with an adjusted basis of $30,000 and a fair market value of $50,000 to a partnership for a partnership interest. The land is not encumbered. What gain does Jo recognize?
- A $20,000, and her basis in the interest is $50,000
- B None, and her basis in the interest is $30,000
- C $20,000, and her basis in the interest is $30,000
- D None, and her basis in the interest is $50,000
Show the answer
Answer: B. None, and her basis in the interest is $30,000
Under section 721, no gain or loss is recognized on contributing property to a partnership in exchange for an interest. The partner's outside basis is the adjusted basis of the property contributed ($30,000), and the partnership takes the same $30,000 basis in the land. The built-in gain is allocated back to Jo under section 704(c) when recognized. Source: IRC 721(a), 722, 723; Pub. 541 (12-2025), Contribution of Property. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Using fair market value as the contributing partner's basis.
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Question 6
A person who receives a capital interest in a partnership in exchange for services generally:
- A Has a capital gain equal to the value of the interest
- B Has income only if the services were performed for a fee
- C Has no income until the partnership is liquidated
- D Has ordinary income equal to the interest's value
Show the answer
Answer: D. Has ordinary income equal to the interest's value
Section 721 nonrecognition covers contributions of property, not services. A partner who receives a capital interest for services has ordinary compensation income equal to the fair market value of the interest received (a profits interest may qualify for safe harbor treatment under Rev. Proc. 93-27). The partner's basis is the amount included in income. Source: Treas. Reg. 1.721-1(b)(1); IRC 83; Pub. 541 (12-2025), Contribution of Services. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating services as property eligible for section 721.
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C Corporations

Free study note: C Corporations

Question 7
Pat owned 60 of a corporation's 100 shares. The corporation redeemed 30 of his shares, leaving him 30 of 70 outstanding. No attribution applies. How is the redemption treated?
- A As a dividend, because he still remains a shareholder afterward
- B As a dividend, since he still owns over 40%
- C As an exchange, because it is substantially disproportionate
- D As a complete termination of his interest
Show the answer
Answer: C. As an exchange, because it is substantially disproportionate
A redemption is a sale under section 302(b)(2) if afterward the shareholder owns less than 50% of the voting stock and his percentage is less than 80% of his percentage before. Pat goes from 60% to 30/70 = 42.9%, which is below 50% and below 48% (80% of 60%), so it is substantially disproportionate and taxed as an exchange. Source: IRC 302(b)(2); Pub. 542 (Rev. 01-2024), Redemption of stock. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating every partial redemption as a dividend.
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Question 8
A closely held C corporation paid its sole shareholder-officer a $900,000 salary for part-time work worth about $150,000. On examination, the IRS is likely to:
- A Allow the whole salary as a deduction
- B Treat the excess as a nondeductible dividend
- C Reclassify the excess as a loan to the officer
- D Treat the excess as tax-free to the officer
Show the answer
Answer: B. Treat the excess as a nondeductible dividend
Compensation is deductible only if reasonable for services actually rendered. Payments that exceed reasonable compensation to a shareholder-employee of a C corporation are typically recharacterized as constructive dividends, not deductible by the corporation and still taxable to the shareholder. Source: IRC 162(a)(1); Treas. Reg. 1.162-7; Pub. 542 (Rev. 01-2024). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Assuming any salary paid to an owner is deductible.
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Question 9
For a transfer of property to a corporation to be tax-free under section 351, the transferors must control the corporation immediately afterward, meaning they own at least:
- A 80% of the voting power and 80% of each other class of stock
- B 100% of every class of stock outstanding after the transfer
- C More than 50% of the voting stock and 50% of the value
- D 50% of the value of all stock
Show the answer
Answer: A. 80% of the voting power and 80% of each other class of stock
Control for section 351 means owning at least 80% of the total combined voting power of all classes of voting stock and at least 80% of the total number of shares of all other classes, measured immediately after the exchange and counting all transferors of property together. Persons who contribute only services are not counted as transferors. Source: IRC 351(a), 368(c); Pub. 542 (Rev. 01-2024), Property Exchanged for Stock. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Using a 50% control test.
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S Corporations

Free study note: S Corporations

Question 10
An S corporation paid $12,000 of health insurance premiums in 2025 for Ann, a 40% shareholder-employee. How is the $12,000 handled?
- A In box 1 wages, but not in Social Security or Medicare wages
- B Included in box 1 and also in Social Security and Medicare wages
- C Excluded from her wages as a tax-free employee fringe benefit
- D Reported as a distribution on her Schedule K-1
Show the answer
Answer: A. In box 1 wages, but not in Social Security or Medicare wages
Health insurance premiums paid by an S corporation for a more-than-2% shareholder-employee are deductible by the corporation as wages and included in the shareholder's box 1 wages, but are not subject to Social Security, Medicare or FUTA if paid under a plan for employees. The shareholder may then claim the self-employed health insurance deduction if eligible. Source: IRC 1372; Notice 2008-1; Form 1120-S instructions (2025), More-than-2% shareholders. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating the premiums as a tax-free fringe benefit for a 2% shareholder.
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Question 11
Raj's S corporation stock basis was $20,000 on January 1, 2025. His K-1 shows ordinary income of $15,000, tax-exempt interest of $2,000 and nondeductible expenses of $1,000; he received $25,000 of distributions. What is his stock basis at year end?
- A $9,000
- B $11,000
- C $12,000
- D $36,000
Show the answer
Answer: B. $11,000
Basis rises for ordinary income ($15,000) and tax-exempt income ($2,000), then falls for distributions ($25,000) and nondeductible expenses ($1,000): $20,000 + $17,000 - $25,000 - $1,000 = $11,000. Why not the others: $9,000 is what you get if you ignored tax-exempt income. $12,000 is what you get if you ignored nondeductible expenses. $36,000 is what you get if you ignored the distributions. Source: IRC 1367(a); Form 7203 instructions (2025). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Leaving tax-exempt income out of basis.
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Question 12
Kay's S corporation stock basis at the start of 2025 is $10,000; she has no debt basis. For 2025 her share of ordinary loss is $8,000 and she received a $6,000 distribution. How much of the loss is allowed in 2025?
- A $0
- B $2,000
- C $4,000
- D $8,000
Show the answer
Answer: C. $4,000
Distributions reduce basis before losses: $10,000 - $6,000 = $4,000 remains for the loss. Kay deducts $4,000; the other $4,000 is suspended. Because the distribution did not exceed basis, it is tax-free. Why not the others: $8,000 is what you get if you took the loss before the distribution. $2,000 is what you get if you allowed only the basis left after loss-first ordering. $0 is what you get if you suspended the whole loss. Source: IRC 1366(d)(1), 1368(d); Treas. Reg. 1.1367-1(f). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Applying losses before distributions, which would make part of the distribution taxable.
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Business Tax Preparation

37 of 85 scored items (43.5%)

Business Income and Deductions

Free study note: Business Income and Deductions

Question 13
Lu uses 400 square feet of her home regularly and exclusively as her principal place of business and elects the simplified method for 2025. Her business has ample income. What is her home office deduction?
- A $500
- B $1,200
- C $1,500
- D $2,000
Show the answer
Answer: C. $1,500
The simplified method allows $5 per square foot of qualifying space, up to 300 square feet: $5 x 300 = $1,500. No depreciation is claimed, and mortgage interest and taxes stay deductible on Schedule A. Why not the others: $2,000 is what you get if you applied $5 to all square footage. $1,200 is what you get if you used $4 per square foot. $500 is what you get if you capped the space at 100 square feet. Source: Rev. Proc. 2013-13; Pub. 587 (2025), Simplified Amount. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Ignoring the 300-square-foot cap.
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Question 14
Tim runs his bookkeeping business from his dining room table, which his family also uses for meals. Can he deduct a home office?
- A Yes, because it is his principal place of business for the work
- B No, the use is not exclusive
- C Yes, but only under the simplified method
- D Yes, if the business has a profit
Show the answer
Answer: B. No, the use is not exclusive
A home office deduction requires that the specific area be used regularly and exclusively for business (with exceptions for storage of inventory and day care). A dining table shared with family meals fails the exclusive use test, whichever method is used. Source: IRC 280A(c)(1); Pub. 587 (2025), Exclusive Use. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Allowing a home office for shared living space.
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Question 15
On December 1, 2025, a cash-method business paid $12,000 for 12 months of office rent starting that day. Applying the 12-month rule of the capitalization regulations, how much can it deduct for 2025?
- A $0
- B $1,000
- C $6,000
- D $12,000
Show the answer
Answer: D. $12,000
Under the 12-month rule, a cash-method taxpayer may deduct a prepaid expense in the year paid if the benefit does not extend beyond the earlier of 12 months after the benefit begins or the end of the following tax year. Rent for December 2025 through November 2026 qualifies, so the full $12,000 is deductible in 2025. Source: Treas. Reg. 1.263(a)-4(f); Pub. 334 (2025), Prepaid expense. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Prorating prepayments that fit the 12-month rule.
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Depreciation, Basis and Dispositions

Free study note: Depreciation, Basis and Dispositions

Question 16
Dan's business car was used 70% for business in 2024 but only 40% in 2025. What happens in 2025?
- A He may keep using MACRS because use was over 50% in 2024
- B Switch to ADS and recapture the excess depreciation
- C He must recapture all depreciation ever claimed
- D He simply claims 40% of the regular MACRS deduction for 2025
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Answer: B. Switch to ADS and recapture the excess depreciation
Listed property must be used more than 50% for qualified business use to use MACRS and section 179. When business use drops to 50% or less, the taxpayer must use ADS straight line from then on and include in income the excess of depreciation claimed (including section 179 and bonus) over what ADS would have allowed for prior years. Source: IRC 280F(b); Pub. 946 (2025), chapter 5, Recapture of Excess Depreciation. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Continuing accelerated depreciation after business use falls to 50% or less.
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Question 17
In 2025 a calendar-year business placed in service $4,150,000 of machinery qualifying for section 179, its only section 179 property. What is its maximum section 179 deduction before the business income limit?
- A $0
- B $120,000
- C $230,000
- D $2,350,000
Show the answer
Answer: D. $2,350,000
For 2025 the $2,500,000 limit is reduced dollar for dollar by section 179 property placed in service over $4,000,000: $4,150,000 - $4,000,000 = $150,000, leaving $2,350,000. The rest of the cost can be depreciated, including 100% bonus if acquired after January 19, 2025. Why not the others: $230,000 is what you get if you used the pre-OBBBA 2025 limits of $1,250,000 and $3,130,000. $120,000 is what you get if you used the 2024 limits of $1,220,000 and $3,050,000. $0 is what you get if you reduced the limit by the whole cost placed in service. Source: IRC 179(b)(1)-(2) as amended by P.L. 119-21; Pub. 946 (2025), Dollar Limits. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Applying the 2024 limits after the One Big Beautiful Bill Act increase.
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Question 18
A calendar-year business placed 7-year property in service in 2025: $20,000 in February and $80,000 in November. It elected out of bonus and section 179. What is its 2025 MACRS depreciation?
- A $2,856
- B $5,714
- C $7,856
- D $14,290
Show the answer
Answer: C. $7,856
$80,000 of $100,000 (80%) was placed in service in the last quarter, over 40%, so the mid-quarter convention applies to all personal property for the year. Table A-5 rates for 7-year property: 25.00% for first quarter and 3.57% for fourth quarter: $5,000 + $2,856 = $7,856. Why not the others: $14,290 is what you get if you used the half-year convention for both assets. $5,714 is what you get if you applied mid-quarter only to the fourth-quarter asset. $2,856 is what you get if you ignored the first-quarter asset. Source: IRC 168(d)(3); Pub. 946 (2025), Table A-2 and Table A-5. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Applying the mid-quarter convention only to the fourth-quarter asset.
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Employment Taxes, Worker Status and Reporting

Free study note: Employment Taxes, Worker Status and Reporting

Question 19
A monthly schedule depositor accumulates $105,000 of employment taxes on Wednesday, May 14, 2025. What must it do?
- A Deposit by the following Wednesday as a semiweekly depositor
- B Deposit with its Form 941 by the end of July
- C Deposit by Thursday, May 15, then deposit semiweekly
- D Deposit by June 15 under its monthly schedule
Show the answer
Answer: C. Deposit by Thursday, May 15, then deposit semiweekly
If an employer accumulates $100,000 or more of taxes on any day during a deposit period, it must deposit by the next business day, regardless of its schedule. A monthly depositor that hits the $100,000 threshold becomes a semiweekly depositor for the rest of the year and the following year. Source: Treas. Reg. 31.6302-1(c)(3); Pub. 15 (2025 and 2026 editions), $100,000 Next-Day Deposit Rule. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Following the monthly schedule after accumulating $100,000.
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Question 20
An employer reimburses travel expenses only when employees submit receipts within 60 days, and requires any advance excess to be returned within 120 days. How are the reimbursements treated?
- A Reported as nonemployee compensation on Form 1099-NEC
- B Included in wages subject to withholding
- C Excluded from wages under an accountable plan
- D Excluded only if each trip costs under $75 in total
Show the answer
Answer: C. Excluded from wages under an accountable plan
An accountable plan requires a business connection, adequate substantiation within a reasonable time (safe harbor: 60 days) and return of excess amounts within a reasonable time (safe harbor: 120 days). Reimbursements under such a plan are not wages. Payments under a nonaccountable plan are wages subject to withholding. Source: Treas. Reg. 1.62-2(c)-(g); Pub. 463 (2025), chapter 6. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating all expense reimbursements as wages.
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Question 21
An employer is a monthly schedule depositor for 2025 if its total Form 941 taxes during the lookback period were:
- A Less than $2,500
- B More than $50,000
- C $100,000 or less
- D $50,000 or less
Show the answer
Answer: D. $50,000 or less
For Form 941 filers, the deposit schedule depends on total taxes reported in the lookback period (July 1 two years earlier through June 30 of the prior year; July 1, 2023 to June 30, 2024 for 2025). $50,000 or less makes the employer a monthly depositor; more than $50,000, a semiweekly depositor. Accumulating $100,000 on any day triggers a next-day deposit. Source: Treas. Reg. 31.6302-1(b); Pub. 15 (2025 and 2026 editions), section 11. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Confusing the $50,000 lookback test with the $100,000 next-day rule.
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QBI, Credits, NOLs and Accounting Methods

Free study note: QBI, Credits, NOLs and Accounting Methods

Question 22
An accrual-method C corporation accrued a $50,000 bonus to its 60% shareholder (a cash-method individual) at the end of 2025 and paid it on February 10, 2026. When can the corporation deduct it?
- A In 2025, because it was paid within 2½ months of year end
- B In 2025, because the all events test was met
- C In 2026, when the shareholder includes it in income
- D Never, because it is a constructive dividend
Show the answer
Answer: C. In 2026, when the shareholder includes it in income
Section 267(a)(2) defers an accrual-method payer's deduction for amounts owed to a related cash-method payee (including a shareholder owning more than 50%) until the payee includes the amount in income. The 2½-month rule does not override this. The corporation deducts the bonus in 2026, assuming it is reasonable compensation. Source: IRC 267(a)(2), 267(b)(2); Pub. 538 (2025). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Applying the 2½-month rule to payments to a controlling shareholder.
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Question 23
A sole proprietor nets $150,000 a year and wants to reduce self-employment and payroll taxes legitimately. Which structure can do that?
- A An S corporation paying her a reasonable salary
- B A partnership with her spouse as a 1% partner
- C An S corporation paying her distributions but no salary
- D A single-member LLC with no entity election
Show the answer
Answer: A. An S corporation paying her a reasonable salary
An S corporation shareholder-employee pays FICA only on reasonable wages; remaining profit passes through without self-employment or FICA tax. A single-member LLC without an election is still a sole proprietorship. Paying no salary invites the IRS to recharacterize distributions as wages, and a token partner does not change a general partner's self-employment tax on her share. Source: IRC 1402(a), 3121(a), 1366; Rev. Rul. 74-44; Form 2553 instructions. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Assuming forming an LLC or skipping salary changes self-employment tax.
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Question 24
An S corporation with no C corporation history pays its sole shareholder's personal credit card bills from the business account, with no plan to repay. How are the payments best treated?
- A As loans that are ignored for tax purposes
- B As distributions that reduce her stock basis
- C As deductible business expenses of the corporation
- D As guaranteed payments reported on her K-1
Show the answer
Answer: B. As distributions that reduce her stock basis
Personal expenses are never deductible by the business (section 262). Paid for the shareholder without a bona fide loan, they are distributions under section 1368, reducing stock basis (tax-free to the extent of basis for an S corporation without E&P), and must be watched for the one-class-of-stock and reasonable compensation rules. Guaranteed payments exist only in partnerships. Source: IRC 262, 1368; Treas. Reg. 1.1361-1(l)(2); Form 1120-S instructions (2025), Schedule M-2. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Deducting personal expenses because the business account paid them.
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Specialized Returns and Taxpayers

18 of 85 scored items (21.2%)

Trusts and Estates (Form 1041)

Free study note: Trusts and Estates (Form 1041)

Question 25
A trust is a simple trust for a tax year if its terms require it to distribute all income currently and it:
- A Has only one beneficiary named in the governing instrument
- B Makes no charitable gifts and distributes no corpus that year
- C Can be revoked by the grantor at any time during the tax year
- D Has gross income of less than $600 for the trust's whole tax year
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Answer: B. Makes no charitable gifts and distributes no corpus that year
A simple trust must distribute all of its income currently, has no provision for charitable contributions and distributes no corpus during the year. Any other trust is complex for that year. A simple trust gets a $300 exemption; a complex trust gets $100. A revocable trust is generally a grantor trust. Source: IRC 651, 661; Treas. Reg. 1.651(a)-1; Form 1041 instructions (2025). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Classifying a trust as simple based on the number of beneficiaries.
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Question 26
On Form 1041, a decedent's estate is allowed an exemption of:
- A $100
- B $200
- C $300
- D $600
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Answer: D. $600
A decedent's estate deducts a $600 exemption. A trust required to distribute all income currently gets $300, other trusts $100, and a qualified disability trust $5,100 for 2025. Source: IRC 642(b); Form 1041 instructions (2025), Line 21. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Mixing up the estate and trust exemption amounts.
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Question 27
Distributable net income (DNI) serves to:
- A Cap the distribution deduction and what beneficiaries include
- B Set the trustee's annual fee under the trust instrument
- C Determine the amount of each of the trust's estimated tax payments
- D Measure the trust's accounting income under state law
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Answer: A. Cap the distribution deduction and what beneficiaries include
DNI limits the distribution deduction the trust may take and the amount taxable to beneficiaries, and it fixes the character of what they receive (for example tax-exempt interest keeps its character). Fiduciary accounting income under the governing instrument and state law is a different concept. Source: IRC 643(a), 651(b), 661(c); Form 1041 instructions (2025), Schedule B. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Confusing DNI with fiduciary accounting income.
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Exempt Organizations and Retirement Plans

Free study note: Exempt Organizations and Retirement Plans

Question 28
An organization that fails to file a required Form 990, 990-EZ or 990-N for how many consecutive years automatically loses its tax-exempt status?
- A 1
- B 2
- C 3
- D 5
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Answer: C. 3
Under section 6033(j), an organization that fails to file a required annual return or notice for 3 consecutive years automatically loses its exemption as of the filing due date of the third return. It must reapply (for example on Form 1023) to regain exempt status. Source: IRC 6033(j); Form 990 instructions (2025), Automatic revocation. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Assuming the IRS must send a warning before revocation.
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Question 29
An exempt organization must file Form 990-T if its gross income from an unrelated trade or business for the year is at least:
- A $1,000
- B $5,000
- C $25,000
- D $50,000
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Answer: A. $1,000
An exempt organization with gross unrelated business income of $1,000 or more must file Form 990-T. In figuring unrelated business taxable income, a specific deduction of $1,000 is allowed. UBTI of corporations is taxed at the 21% corporate rate; trusts use trust rates. Source: IRC 511, 512(b)(12); Treas. Reg. 1.6012-2(e); Pub. 598. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Using the 990-N gross receipts threshold.
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Question 30
All of the following are generally excluded from unrelated business income EXCEPT:
- A A cafeteria run for the convenience of its own staff
- B Net income from a regularly operated public parking lot
- C A thrift shop that sells only donated goods to the public
- D A gift shop business run entirely by unpaid volunteers for the charity
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Answer: B. Net income from a regularly operated public parking lot
Unrelated business income is income from a trade or business regularly carried on that is not substantially related to the exempt purpose. Statutory exceptions cover businesses conducted substantially by volunteers, for the convenience of members, students or employees, and selling donated merchandise. A public parking lot operated regularly is generally unrelated business income. Source: IRC 513(a); Pub. 598, Excluded trade or business activities. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating any income of a charity as exempt.
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Farmers and Rental Real Estate

Free study note: Farmers and Rental Real Estate

Question 31
Because of a drought in an area designated for federal assistance, a cash-method rancher sold twice her usual number of cattle held for sale. She does not plan to replace them. What relief is available?
- A Deferring gain only if she buys replacements within 2 years
- B Excluding the gain on the extra animals from income permanently
- C Postponing the gain on the extra animals to the next year
- D Treating the sales as an involuntary conversion of all her cattle
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Answer: C. Postponing the gain on the extra animals to the next year
Under section 451(g), a cash-method farmer whose principal business is farming may elect to report income from the additional livestock sold because of a weather-related condition in the year after the sale, if the area is designated for federal assistance. Replacement is not required. The section 1033(e) rule for draft, breeding or dairy livestock does require replacement. Source: IRC 451(g), 1033(e); Pub. 225 (2025), Table 3-2. Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Requiring replacement for the one-year postponement rule.
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Question 32
Ed, a retired farmer, rents his farmland to a tenant for a share of the crops and does not materially participate in operating the farm. How does he report the rent?
- A As a capital gain on Schedule D
- B On Schedule C, subject to self-employment tax
- C On Schedule F, subject to self-employment tax on the rent
- D On Form 4835, not subject to self-employment tax
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Answer: D. On Form 4835, not subject to self-employment tax
A landowner who receives crop-share rents and does not materially participate in operating or managing the farm reports the income on Form 4835 (carried to Schedule E) and does not owe self-employment tax on it. A landlord who materially participates reports on Schedule F and owes self-employment tax. Source: IRC 1402(a)(1); Pub. 225 (2025), Rents (Including Crop Shares). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Treating all crop-share rent as Schedule F income.
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Question 33
Mara works 1,200 hours a year as a self-employed real estate broker (all her personal services) and 600 hours managing her 3 rentals, and elects to aggregate them. How are her rental losses treated?
- A As passive losses with no allowance because her income is high
- B As capital losses limited to $3,000
- C As passive losses limited to $25,000
- D As nonpassive losses deductible against her other income
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Answer: D. As nonpassive losses deductible against her other income
As a real estate agent she performs more than half of her services and over 750 hours in real property trades or businesses in which she materially participates, so she is a real estate professional. With the election to treat all rentals as one activity and 600 hours of participation (over 500), the rental activity is nonpassive and losses are fully deductible, subject to basis, at-risk and excess business loss limits. Source: IRC 469(c)(7); Treas. Reg. 1.469-9(g); Pub. 925 (2025). Tax year: 2025 (law as of 31 Dec 2025).
Common mistake: Applying the $25,000 allowance to a qualifying real estate professional.
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Frequently asked questions

How many questions are on EA exam Part 2?

100 multiple-choice questions in 3 hours 30 min: 85 scored and 15 unscored experimental items you cannot tell apart, in three sections that lock once you confirm them.

What is tested on SEE Part 2?

SEE Part 2: Businesses. The scored items are split across 3 content outline domains: Business Entities and Considerations (30), Business Tax Preparation (37), Specialized Returns and Taxpayers (18). The largest is Business Tax Preparation at 43.5% of the score.

What score do I need to pass Part 2?

500 on a 200-800 scaled score. PSI does not publish how many correct answers that takes, so practice scores are only a guide.

Which tax year does Part 2 test?

In the 2026-27 testing window, law as amended through 31 Dec 2025, so "the current year" in a question means 2025. Every question on this page is written for 2025 law and its explanation names the source.

Are these questions from the actual Part 2 exam?

No. Live SEE questions are confidential. These are original questions written to the IRS content outline, in the same four-option style. The full Enrolled Agent Ready bank has 500+ Part 2 questions and full 100-question timed exams.

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Original practice questions mapped to the public IRS SEE content outlines, not taken from the exam. Not affiliated with or endorsed by the IRS or PSI.