IRS Enrolled Agent Exam (SEE) — All Questions

Three individuals run a catering business as a general partnership and have filed no entity election. How is the business's 2025 income reported to the IRS?

• a.Each partner files a Schedule C reporting one-third of the business
• b.The partnership files Form 1065 and gives each partner a Schedule K-1✓
• c.The partnership files Form 1120-S and gives each partner a Schedule K-1
• d.The partnership files Form 1120 and pays tax at the 21% corporate rate

A partnership is a pass-through entity: it files the information return Form 1065 and issues each partner a Schedule K-1, and the partners pay the tax (IRC §701, §6031). Form 1120-S is only for a corporation that has elected S status, and Form 1120 applies only to an entity taxed as a C corporation. Separate Schedules C are available only to a spouse-owned qualified joint venture, not to three unrelated partners.

Which entity's profits are subject to double taxation?

• a.A limited liability partnership
• b.An S corporation
• c.A single-member LLC
• d.A C corporation✓

A C corporation pays entity-level tax at 21% on its profits, and shareholders are taxed again when after-tax profits are paid as dividends. S corporations, partnerships (including LLPs) and single-member LLCs that have not elected corporate status are pass-through or disregarded entities taxed once, at the owner level.

Under the accrual method of accounting, income is generally recognized when:

• a.When payment is actually or constructively received
• b.When all events fixing the right to it have occurred✓
• c.When the invoice's stated payment due date arrives
• d.When economic performance by the customer occurs

An accrual-method taxpayer includes income when all events have occurred that fix the right to receive it and the amount can be determined with reasonable accuracy (the all-events test, Reg. 1.451-1(a)); generally the earliest of when it is earned, due or received. Actual or constructive receipt is the cash-method rule, and economic performance is a test for accruing deductions, not income.

The standard system used to depreciate most tangible business property placed in service today is:

• a.MACRS, with prescribed classes, methods and conventions✓
• b.ACRS, using fixed statutory percentage tables
• c.ADS straight-line over each asset's class life
• d.Straight-line over the asset's actual useful life

The Modified Accelerated Cost Recovery System (MACRS, §168) applies to most tangible property placed in service after 1986, assigning each asset a recovery class, method and convention. ACRS applied only to property placed in service 1981-1986. ADS is an alternative MACRS system required only in specific cases (for example listed property used 50% or less for business) or by election.

Dana runs a bookkeeping practice as a sole proprietor with no employees and no entity election. Where does she report the practice's 2025 net profit?

• a.Schedule E attached to her Form 1040
• b.Schedule C attached to her Form 1040✓
• c.Schedule SE only, attached to her Form 1040
• d.Form 1065, with a Schedule K-1 issued to her

A sole proprietorship is not a separate taxpayer; the owner reports business profit or loss on Schedule C of Form 1040, and the profit then flows to Schedule SE to compute self-employment tax. Schedule SE computes the tax but does not report the profit, Schedule E is for rents, royalties and pass-through income, and Form 1065 requires two or more owners.

An employer's obligations for employee wages include:

• a.Withhold income tax; employees pay FICA on Schedule SE
• b.Withhold income tax and FICA, and withhold FUTA from wages
• c.Withhold income tax and FICA; the employee pays any FUTA due
• d.Withhold income tax and employee FICA, match FICA, and pay FUTA✓

An employer withholds federal income tax and the employee's 7.65% share of Social Security and Medicare, pays a matching employer share, and pays FUTA from its own funds; FUTA is never withheld from employee wages. Employees do not pay FICA through Schedule SE; that schedule is for self-employed individuals.

To be deductible under Section 162, a business expense generally must be:

• a.Reasonable in amount and paid in cash within the tax year
• b.Customary in the industry and backed by a written contract
• c.Indispensable to the business and paid in the current year
• d.Ordinary and necessary in carrying on the trade or business✓

Section 162(a) allows ordinary (common and accepted in the field) and necessary (helpful and appropriate) expenses paid or incurred in carrying on a trade or business. 'Necessary' does not mean indispensable, no written contract is required, and payment method does not matter; accrual-method taxpayers deduct when incurred, not when paid in cash.

A single-member LLC that has not elected to be taxed as a corporation is treated for federal income tax purposes as:

• a.An S corporation, filing Form 1120-S by March 15
• b.A partnership, filing Form 1065 by March 15
• c.A disregarded entity; the owner reports it on Schedule C✓
• d.A C corporation, filing Form 1120 by April 15

Under the check-the-box regulations, a domestic single-member LLC with no election is disregarded as separate from its owner, so an individual owner reports its activity on Schedule C (Reg. 301.7701-3(b)(1)(ii)). It is a C corporation only if it elects on Form 8832, an S corporation only if it then elects on Form 2553, and it cannot be a partnership because it has only one member.

Two individuals form an LLC in 2025 and file no Form 8832. For federal income tax purposes the LLC is, by default:

• a.A C corporation
• b.An S corporation
• c.A partnership✓
• d.A disregarded entity

A domestic eligible entity with two or more members defaults to partnership classification and files Form 1065 (Reg. 301.7701-3(b)(1)(i)). Disregarded status is the default only for a single-member entity; corporate treatment requires a Form 8832 election, and S status additionally requires Form 2553.

Which requirement must be met for a corporation to qualify as an S corporation?

• a.It may have up to 150 shareholders if all are U.S. citizens
• b.It may have a corporate shareholder owning less than 50%
• c.It may have a nonresident alien shareholder with IRS consent
• d.It must be a domestic corporation with one class of stock✓

Section 1361(b) requires a domestic eligible corporation with no more than 100 shareholders (family members may elect to count as one), only permitted shareholders (individuals other than nonresident aliens, estates and certain trusts and exempt organizations), and one class of stock. No consent procedure admits a nonresident alien, and a corporation of any ownership percentage is an ineligible shareholder.

A calendar-year C corporation with three shareholders wants S status for all of 2026. Which action makes a timely, valid election without needing late-election relief?

• a.Form 2553 signed by an officer only, by the 15th day of the 3rd month
• b.Form 2553 signed by all shareholders, by the 15th day of the 4th month
• c.Form 8832 signed by all shareholders, by the 15th day of the 3rd month
• d.Form 2553 signed by all shareholders, by the 15th day of the 3rd month✓

An S election is made on Form 2553 and must be consented to by every shareholder (§1362(a)(2)). To be effective for the current year it must be filed no later than 2 months and 15 days after the year begins, the 15th day of the 3rd month (§1362(b)(1)(B)). An officer's signature alone is not enough, Form 8832 elects entity classification but not S status, and a filing in the 4th month is effective only for the following year unless Rev. Proc. 2013-30 relief applies.

Which of the following is NOT an eligible S corporation shareholder?

• a.A 501(c)(3) public charity
• b.An electing small business trust
• c.A domestic LLC taxed as a partnership✓
• d.A resident alien individual

Partnerships (including LLCs taxed as partnerships) and corporations may not own S stock (§1361(b)(1)(B)). Resident aliens, estates, electing small business trusts, qualified subchapter S trusts and §501(c)(3) organizations are all permitted shareholders; the charity is the most common wrong answer because exempt organizations feel ineligible, but §1361(c)(6) expressly allows them.

A key nontax advantage that corporations and LLCs generally provide over a sole proprietorship is:

• a.Owners can deduct personal expenses paid by the entity
• b.Business losses can offset owners' wages without limit
• c.Owners avoid self-employment tax on all business profits
• d.Owners are generally shielded from business debts✓

Limited liability is a state-law, nontax benefit: owners' personal assets are generally protected from the entity's debts. None of the tax statements is true: LLC members taxed as partners generally owe SE tax, losses remain subject to basis, at-risk, passive and §461(l) limits, and personal expenses are never deductible.

A partnership is considered to terminate for tax purposes when:

• a.No partner continues any part of its business in a partnership✓
• b.It converts to an LLC taxed as a partnership under state law
• c.Interests totaling 50% or more are sold within 12 months
• d.A general partner dies or withdraws from the partnership

Since 2018 a partnership terminates only when no part of any business, financial operation or venture continues to be carried on by any of its partners in a partnership (§708(b)(1)). The sale of 50% or more of the interests within 12 months was the pre-2018 'technical termination' rule, repealed by the TCJA. A partner's death or withdrawal and a state-law conversion to an LLC taxed as a partnership do not by themselves end the partnership.

A business owned by two spouses in a non-community-property state who materially participate and elect qualified joint venture treatment will:

• a.Be treated as a disregarded entity owned by the couple jointly
• b.Report all income on one Schedule C under the managing spouse
• c.File Form 1065 and issue each spouse a Schedule K-1
• d.Each file a Schedule C for their share and each pay SE tax✓

Under §761(f), spouses who are the only owners of an unincorporated business, both materially participate and file jointly may elect qualified joint venture status: each reports his or her share on a separate Schedule C and pays SE tax on it, earning separate Social Security credit. The point of the election is to avoid Form 1065, and reporting everything under one spouse leaves the other without SE credit.

The default federal tax classification of a newly formed corporation organized under a state's general corporation law is:

• a.S corporation
• b.Disregarded entity
• c.C corporation✓
• d.Partnership

An entity incorporated under a state corporation statute is a per se corporation (Reg. 301.7701-2(b)(1)) and is a C corporation filing Form 1120 unless it makes a valid S election on Form 2553. It cannot choose partnership or disregarded status because check-the-box elections are available only to eligible entities that are not per se corporations.

Which statement about an S corporation's separately stated items on Schedule K-1 is correct?

• a.Only items that would produce a net loss are stated separately on the K-1
• b.All income and deduction items are netted into one ordinary income figure
• c.Capital gains and §179 expense are stated apart from ordinary income✓
• d.Separately stated items are first taxed at the corporate level at 21%

Items whose treatment depends on the shareholder's own situation, such as capital gains and losses, §1231 items, §179 expense, charitable contributions and investment interest, are stated separately on Schedule K-1 so each shareholder applies his or her own limits and rates (§1366(a)(1)). An S corporation generally pays no entity-level income tax, and separate statement applies to income items as well as losses.

An election to change an entity's default classification is made on:

• a.Form 2553, Election by a Small Business Corporation
• b.Form 3115, Application for Change in Accounting Method
• c.Form 8832, Entity Classification Election✓
• d.Form 1128, Application To Adopt, Change, or Retain a Tax Year

An eligible entity changes its default classification (for example, an LLC electing to be taxed as a corporation) on Form 8832. Form 2553 elects S corporation status, Form 1128 changes a tax year, and Form 3115 changes an accounting method; none of them changes entity classification.

Which of the following business expenses is generally fully deductible under Section 162?

• a.Dues paid to a trade group, earmarked for lobbying Congress
• b.A fine paid to a state agency for an environmental violation
• c.A kickback paid to a purchasing agent, illegal under state law
• d.Reasonable wages paid to employees for services rendered✓

Reasonable compensation for services actually rendered is deductible under §162(a)(1). A fine paid to a government for violating a law is barred by §162(f), lobbying costs (including the lobbying share of trade dues) by §162(e), and illegal bribes and kickbacks by §162(c).

In 2025 a consultant pays $300 for a restaurant dinner with a client at which business is discussed, and $200 for tickets to a baseball game with the same client. Both costs are separately invoiced. How much may the consultant deduct?

• a.$150✓
• b.$250
• c.$300
• d.$400

Business meals are 50% deductible (§274(n)): 50% × $300 = $150. Entertainment such as sports tickets is fully disallowed by §274(a) even when business-related, so the tickets add nothing. $250 wrongly applies the 50% rule to the tickets, $300 applies the 100% restaurant-meal rule that expired after 2022, and $400 combines both errors.

Business entertainment expenses, such as taking a client to a sporting event, are:

• a.Deductible in full if the client signs a contract
• b.Deductible as advertising, up to $25 per client each year
• c.50% deductible if a business discussion occurs that day
• d.Not deductible, even if directly related to the business✓

Since 2018 §274(a)(1) disallows any deduction for activities generally considered entertainment, amusement or recreation, even if directly related to or associated with the business. The old 'associated with' 50% rule for entertainment was repealed, a resulting contract does not change the result, and the $25 per-recipient cap applies to business gifts, not entertainment.

A cash-method, calendar-year business pays $36,000 on July 1, 2025, for a 36-month liability policy that begins that day. How much of the premium may it deduct for 2025?

• a.$12,000
• b.$36,000
• c.$0
• d.$6,000✓

A prepaid expense whose benefit extends beyond the earlier of 12 months or the end of the next tax year must be capitalized and deducted ratably, even by a cash-method taxpayer (Reg. 1.263(a)-4(f)). The premium covers 36 months at $1,000 a month, and 6 months fall in 2025, so the deduction is $6,000. Deducting $36,000 misapplies the 12-month rule to a 36-month benefit; $12,000 treats it as a 12-month allowance; nothing waits until the policy expires.

A new business pays $53,000 of start-up costs and begins operating on July 1, 2025. What is its maximum 2025 deduction for start-up costs, including amortization?

• a.$1,767
• b.$6,600
• c.$2,000
• d.$3,700✓

The first-year deduction is $5,000 reduced by the costs above $50,000: $5,000 − $3,000 = $2,000. The remaining $51,000 is amortized over 180 months starting in July: $51,000 ÷ 180 × 6 = $1,700. Total $3,700. $6,600 ignores the $50,000 phase-out; $2,000 omits the amortization; $1,767 amortizes all $53,000 with no first-year deduction.

A retailer's 2025 records show gross receipts of $300,000, beginning inventory of $40,000, purchases of $150,000 and ending inventory of $55,000. What is its gross profit?

• a.$135,000
• b.$110,000
• c.$165,000✓
• d.$150,000

Cost of goods sold = beginning inventory + purchases − ending inventory = $40,000 + $150,000 − $55,000 = $135,000. Gross profit = $300,000 − $135,000 = $165,000. $135,000 is the COGS figure, not gross profit; $150,000 subtracts purchases alone; $110,000 ignores the ending inventory still on hand.

A self-employed graphic designer uses a spare bedroom for her business. In which situation does the room qualify for a home office deduction?

• a.Used exclusively for business on one or two days each month
• b.Used regularly as a family office that also holds her client files
• c.Used for business most days and as a guest room on weekends
• d.Used only for her business and is her principal place of business✓

Section 280A(c)(1) requires the space to be used both regularly and exclusively for the business, and to be the principal place of business (or a place to meet clients, or a separate structure). A guest room on weekends fails exclusive use, occasional use fails regular use, and a shared family office fails exclusive use regardless of how much business work happens there.

A manufacturer's average annual gross receipts for 2022-2024 were $40 million. Under the uniform capitalization rules of §263A, for 2025 it must:

• a.Capitalize direct costs only and deduct indirect costs as incurred
• b.Capitalize only the costs of goods it resells, not goods it produces
• c.Capitalize direct costs and allocable indirect costs into inventory✓
• d.Deduct production costs currently under the small business exception

Section 263A requires producers and resellers to capitalize direct costs and an allocable share of indirect costs (such as factory overhead and purchasing costs) into inventory. The small business exception applies only if average annual gross receipts for the prior 3 years do not exceed $31,000,000 for 2025 (§263A(i), §448(c)); $40 million exceeds it. UNICAP covers produced property as well as property acquired for resale.

Bad debts of an accrual-method business:

• a.Deductible through an annual addition to a reserve for bad debts
• b.Deductible when a receivable already in income becomes worthless✓
• c.Deductible once the invoice is 90 days past due and written off
• d.Deductible only when the customer files for bankruptcy protection

An accrual-method business deducts a business bad debt under §166 when a receivable it previously included in income becomes wholly or partially worthless (specific charge-off). The reserve method was repealed for most taxpayers in 1986, and neither bankruptcy nor a fixed aging period is required; worthlessness is a facts-and-circumstances test.

Interest paid on a loan used in a business is:

• a.Deductible on Schedule A, subject to the investment interest limit
• b.Deductible as a business expense, subject to §163(j) for larger businesses✓
• c.Deductible only up to 30% of the business's gross receipts for the year
• d.Deductible only if the lender is a bank or other financial institution

Interest on debt allocable to a trade or business is deductible under §163(a), but §163(j) limits it to business interest income plus 30% of adjusted taxable income for taxpayers above the $31,000,000 gross receipts test. For tax years beginning after 2024, ATI again adds back depreciation, amortization and depletion. The 30% applies to ATI, not gross receipts; the lender's identity is irrelevant; Schedule A investment interest applies to investment, not business, debt.

A self-employed taxpayer uses the standard mileage rate for a business car in 2025. Which cost may she deduct in addition to the standard mileage amount?

• a.Insurance on the business-use share
• b.Business parking fees and tolls✓
• c.Gasoline and oil for business trips
• d.Depreciation on the business-use share

The standard mileage rate replaces the actual costs of operating the car, including depreciation, fuel, oil, insurance, repairs and registration. Business parking fees and tolls are deductible separately, as is the business share of car-loan interest for a self-employed person. Claiming depreciation or insurance on top of the rate double-counts costs the rate already covers.

In 2025 a company places in service $4,300,000 of equipment that qualifies for §179 and has ample business income. What is its maximum §179 deduction for 2025?

• a.$80,000
• b.$2,500,000
• c.$300,000
• d.$2,200,000✓

For tax years beginning in 2025 the §179 limit is $2,500,000, reduced dollar for dollar by the cost of §179 property placed in service above $4,000,000 (OBBBA §70306; Rev. Proc. 2025-32 §3.02). $4,300,000 − $4,000,000 = $300,000 reduction, so $2,500,000 − $300,000 = $2,200,000. $2,500,000 ignores the phase-out, $300,000 confuses the reduction with the deduction, and $80,000 uses the superseded pre-OBBBA 2025 limits.

A sole proprietor with no wages or other business income has $60,000 of 2025 net business income before §179. She places $100,000 of equipment in service and elects §179 for all of it. What is the result?

• a.$60,000 deductible; $40,000 is depreciated under MACRS
• b.$100,000 deductible, creating a $40,000 business loss
• c.$60,000 deductible in 2025; the $40,000 excess is lost
• d.$60,000 deductible in 2025; $40,000 carries forward✓

The §179 deduction cannot exceed taxable income from the active conduct of trades or businesses (§179(b)(3)); the amount disallowed by this limit carries forward to later years. So $60,000 is deducted and $40,000 carries forward. Unlike bonus depreciation, §179 cannot create a loss, the excess is not lost, and the elected amount reduces basis, so it is not also depreciated.

If property on which a Section 179 deduction was claimed drops to 50% or less business use before the end of its recovery period, the taxpayer must:

• a.Switch to ADS prospectively with no recapture required
• b.Report the excess §179 benefit as §1231 capital gain
• c.Recapture the excess §179 benefit as ordinary income✓
• d.Amend the year the property was placed in service

If business use of §179 property falls to 50% or less before the end of its recovery period, the excess of the §179 deduction over the depreciation that would have been allowed is recaptured as ordinary income in that year (§179(d)(10); Form 4797 Part IV). The recapture is not §1231 gain, no prior return is amended, and switching methods going forward does not avoid it.

Under MACRS, most nonresidential real property is depreciated using the straight-line method over a recovery period of:

• a.27.5 years
• b.15 years
• c.39 years✓
• d.7 years

MACRS recovers nonresidential real property (commercial buildings) over 39 years, straight-line, mid-month convention. 27.5 years applies to residential rental property, and 15 and 7 years are personal-property or land-improvement classes.

The MACRS half-year convention generally treats property placed in service during the year as if it were placed in service:

• a.On December 31
• b.On the actual date, day by day
• c.At the midpoint of the year✓
• d.On January 1

Under the half-year convention, personal property is treated as placed in service (and disposed of) at the midpoint of the tax year, allowing a half-year of depreciation in the first and last years. If more than 40% of personal property is placed in service in the last quarter, the mid-quarter convention applies instead.

Which type of property is NOT eligible for MACRS depreciation?

• a.Office furniture
• b.A commercial building's structure
• c.A delivery truck used in business
• d.Land✓

Land is not depreciable because it does not wear out or become obsolete. Depreciable property must be used in a trade or business or held for the production of income and have a determinable useful life; the building on the land can be depreciated, but the land cannot.

The most common MACRS recovery periods for automobiles and computers, and for office furniture, are respectively:

• a.15-year and 20-year
• b.3-year and 10-year
• c.5-year and 7-year✓
• d.27.5-year and 39-year

Under MACRS, automobiles and computers fall in the 5-year class, while office furniture and fixtures are in the 7-year class. These classes generally use the 200% declining balance method, switching to straight-line to maximize the deduction.

Depreciation is claimed and computed on:

• a.Form 8829
• b.Form 4797
• c.Form 4562✓
• d.Form 3115

Form 4562, Depreciation and Amortization, claims depreciation, the §179 election, amortization and listed-property information. Form 4797 reports sales of business property, Form 3115 requests an accounting-method change, and Form 8829 computes the home office deduction.

Intangible assets such as acquired goodwill and going-concern value (Section 197 intangibles) are:

• a.Not recoverable until the business is sold
• b.Amortized over 10 years, like foreign R&E
• c.Depreciated under MACRS over 5 years
• d.Amortized ratably over 15 years✓

Section 197 requires acquired goodwill, going-concern value, covenants not to compete and similar intangibles to be amortized straight-line over 15 years (180 months) starting with the month of acquisition. They are not MACRS property, the 15-year period is not optional, and the pre-1993 rule that goodwill was recoverable only on sale no longer applies.

'Listed property,' such as certain vehicles, is subject to special rules that:

• a.Business use must exceed 50% to claim §179 or accelerated MACRS✓
• b.Personal use is disregarded if a contemporaneous log is kept
• c.Business use must be at least 75% to claim any depreciation
• d.Only straight-line may be used, whatever the business use

Listed property (such as passenger automobiles) qualifies for §179, bonus depreciation and accelerated MACRS only if qualified business use exceeds 50% (§280F(b)). At 50% or less, ADS straight-line is required and prior excess depreciation is recaptured. A log substantiates business use but does not make personal use disappear, and straight-line is mandatory only below the 50% line.

When a business changes its method of accounting for depreciation, it generally must:

• a.File Form 3115 and compute a §481(a) adjustment✓
• b.Adopt the new method on the current return, with no filing
• c.File amended returns for all open tax years
• d.Attach a statement electing the change to Form 4562

Changing from an impermissible to a permissible depreciation method is a change in accounting method: the taxpayer files Form 3115 and takes a §481(a) adjustment for the cumulative difference. Amended returns fix mathematical or posting errors, not method changes, and a method cannot be switched unilaterally.