EA Exam Part 2 Study Guide: Businesses (2026)

The Special Enrollment Examination (SEE) Part 2 is widely considered the most challenging of the three EA exam sections. While Part 1 focuses on individuals and Part 3 on representation, Part 2 dives deep into the complex world of business taxation. From the nuances of partnership basis to the intricacies of MACRS depreciation and the permanent changes brought by the One Big Beautiful Bill Act (OBBBA), there is a lot of ground to cover.

However, there is a silver lining: Part 2 consistently boasts the highest pass rate of the three sections (reaching 71% in the 2024-2025 cycle). This is largely because candidates who reach Part 2 have already cleared the hurdle of Part 1 and are generally better prepared for the rigors of the exam. This guide provides a comprehensive roadmap to mastering the business domain and passing Part 2 on your first attempt.

Part 2 Exam Format and Breakdown

The Part 2 exam consists of 100 multiple-choice questions. Of these, 85 are scored and 15 are experimental questions that do not affect your final score (though you won't know which is which). You have 3.5 hours to complete the exam.

Domain 1: Business Entities and Considerations (~33%)

This domain tests your understanding of the different legal forms a business can take and the tax implications of each. You must be able to distinguish between flow-through entities and those taxed at the corporate level.

Entity Types and Formation

Choosing the right entity is the first step for any business. For the EA exam, you must know the default tax treatment and how to "check the box" for different entities.

• Sole Proprietorship: The simplest form. Reported on Schedule C. The owner is the business for tax purposes.
• Partnerships (Form 1065): Requires at least two partners. It is a "flow-through" entity, meaning the partnership itself pays no tax; instead, income and losses flow to partners via Schedule K-1.
• C Corporations (Form 1120): A separate legal and tax entity. Subject to "double taxation"—once at the corporate level (21%) and again when dividends are paid to shareholders.
• S Corporations (Form 1120-S): A corporation that elects flow-through status. It avoids double taxation but has strict eligibility requirements.
• LLCs: A legal structure that can be taxed as a sole proprietorship (if single-member), partnership (if multi-member), or corporation (if elected).

Partnership Basis and Allocations

Partnership taxation is a heavy hitter. You must master the calculation of Outside Basis.

Basis Increases: Cash contributions, adjusted basis of property contributed, share of partnership ordinary income, share of tax-exempt income, and increases in partnership liabilities.

Basis Decreases: Cash distributions, adjusted basis of property distributed (limited to partner's basis), share of partnership ordinary loss, share of non-deductible expenses, and decreases in partnership liabilities.

• Guaranteed Payments: Payments made to a partner for services or use of capital without regard to partnership income. They are deductible by the partnership and ordinary income to the partner.
• Loss Limitations: Partners can only deduct losses to the extent of their Tax Basis, then their At-Risk Basis, and finally subject to Passive Activity Loss rules.

Partnership Distributions and Liquidations

Distributions from a partnership are generally tax-free to the partner unless the cash distributed exceeds the partner's outside basis.

• Current Distributions: The partner's basis is reduced by the cash and the adjusted basis of the property received. The basis of the property in the partner's hands is the same as it was in the partnership's hands (carryover basis), but it cannot exceed the partner's remaining outside basis.
• Liquidating Distributions: The partner's entire outside basis must be allocated to the assets received. If only cash is received and it is less than the basis, a capital loss is recognized. If property is received, the partner's remaining basis is "pushed" into the property (substituted basis).

C Corporation Distributions and E&P

When a C Corp makes a distribution, the tax treatment depends on the corporation's Earnings and Profits (E&P).

• Dividend: Distributions are dividends to the extent of current and accumulated E&P.
• Return of Capital: Distributions in excess of E&P reduce the shareholder's stock basis (tax-free).
• Capital Gain: Distributions in excess of both E&P and basis are treated as capital gains.
• Property Distributions: The corporation recognizes gain (but not loss) as if the property were sold for its fair market value. The shareholder's dividend amount is the FMV of the property.

S Corps are a favorite topic for the IRS. To qualify, a corporation must:

• Be a domestic corporation.
• Have only allowable shareholders (individuals, certain trusts, and estates; no partnerships or C corps).
• Have no more than 100 shareholders (spouses and their families count as one).
• Have only one class of stock (differences in voting rights are allowed).

S Corp Basis Ordering: Unlike partnerships, S corp basis is adjusted in a specific order: (1) Increases for income, (2) Decreases for distributions, (3) Decreases for non-deductible expenses, and (4) Decreases for losses. This is critical because distributions are tax-free if they don't exceed basis after income adjustments but before loss adjustments.

Domain 2: Business Tax Preparation (~46%)

This is the largest domain, covering income, expenses, and the technicalities of asset management.

Accounting Methods and Periods

Most businesses use the Cash Method (income when received, expenses when paid) or the Accrual Method (income when earned, expenses when incurred). Under the "All Events Test," income is earned when all events have occurred that fix the right to receive it and the amount can be determined with reasonable accuracy.

Start-up and Organizational Costs: Under Section 195 and 248, a business can elect to deduct up to $5,000 of start-up and $5,000 of organizational costs in the first year. This $5,000 is reduced dollar-for-dollar if total costs exceed $50,000. Remaining costs are amortized over 180 months (15 years).

Depreciation and Amortization

MACRS (Modified Accelerated Cost Recovery System) is the standard. You must know the conventions:

• Half-Year Convention: The default for personal property. Assets are treated as placed in service in the middle of the year.
• Mid-Quarter Convention: Required if more than 40% of personal property is placed in service in the last quarter of the year.
• Mid-Month Convention: Used for real property (buildings).

Section 179 vs. Bonus: Section 179 is an election to expense assets immediately. Under OBBBA, the limit is $2.5 million. Bonus depreciation is now 100% permanent for qualified property. Remember: Section 179 is limited by business income; Bonus is not.

Business Expenses and Credits

To be deductible, a business expense must be "ordinary and necessary" (Section 162).

• Meals: Under OBBBA, business meals are 100% deductible for 2025 and 2026. They revert to 50% in 2027. Entertainment remains 0% deductible.
• Home Office: Must be used "regularly and exclusively" as a principal place of business.
• QBI Deduction (§199A): A 20% deduction for qualified business income from flow-through entities. OBBBA made this permanent.

Domain 3: Specialized Returns and Taxpayers (~21%)

This domain covers trusts, estates, and exempt organizations.

Trusts and Estates (Form 1041)

Trusts and estates are separate taxable entities. They use Distributable Net Income (DNI) to ensure that income is only taxed once—either to the entity or the beneficiary.

• Simple Trust: Must distribute all income, no charitable gifts, $300 exemption.
• Complex Trust: Can accumulate income, can give to charity, $100 exemption.
• Estate: Created upon death, $600 exemption, can choose a fiscal year.

Exempt Organizations (Form 990)

Most non-profits must file Form 990 annually. Small orgs (receipts ≤ $50,000) can file the 990-N "e-Postcard."

UBIT: Unrelated Business Income Tax applies if the org earns more than $1,000 from a business unrelated to its mission. This prevents non-profits from having an unfair advantage over taxable businesses.

OBBBA Changes Affecting Part 2

The One Big Beautiful Bill Act (OBBBA) is the most significant tax legislation in years. For Part 2, you must know these specific dollar amounts and rules:

Study Strategy: Basis, Basis, Basis

The #1 piece of advice for Part 2 is to master Basis. It affects everything from how much loss a partner can deduct to whether a corporate distribution is a tax-free return of capital or a taxable dividend.

Common Difficulty Areas

• Depreciation Recapture: Distinguishing between Section 1245 (personal property) and Section 1250 (real property) recapture. Remember that Section 1245 recaptures all depreciation as ordinary income, while Section 1250 generally only recaptures the excess over straight-line.
• Schedule M-1: Reconciling "Book Income" to "Taxable Income." Remember: Federal income tax paid is a book expense but not a tax deduction (permanent difference). Tax-exempt interest is book income but not tax income.
• Worker Classification: The IRS uses a multi-factor test focusing on behavioral control, financial control, and the relationship of the parties. Misclassifying an employee as an independent contractor can lead to significant back taxes and penalties (the Trust Fund Recovery Penalty).
• Like-Kind Exchanges (§1031): Since TCJA, these are only available for real property not held primarily for sale. You must know how to calculate the basis of the new property: Basis of old property + Gain recognized + Boot paid - Boot received.

A 4-Week Part 2 Study Plan

If you are working full-time, we recommend a 4-week intensive study period for Part 2.

• Week 1: Entity Fundamentals. Focus on Domain 1. Master the differences between Partnerships, S Corps, and C Corps. Practice Section 351 and Section 721 formation questions until they are second nature.
• Week 2: The Core of Business Tax. Dive into Domain 2. This is "Depreciation Week." Memorize the MACRS tables, Section 179 limits ($2.5M), and the 100% bonus depreciation rules. Start practicing Schedule C and Form 1120-S income/expense questions.
• Week 3: Basis and Dispositions. Spend the entire week on Basis (Outside/Inside, Stock/Debt) and Section 1231/1245/1250 recapture. This is where most candidates lose points. If you can master the "ordering rules" for S corp distributions, you are ahead of the curve.
• Week 4: Specialized Topics and Review. Cover Domain 3 (Trusts, Estates, Exempt Orgs, Retirement Plans). Spend the last 3 days taking full-length mock exams to build your stamina for the 3.5-hour testing window.

Conclusion

EA Exam Part 2 is a marathon, not a sprint. By focusing on the high-weight domains and mastering the technicalities of basis and depreciation, you can join the 71% of candidates who successfully clear this hurdle. The business world is complex, but the tax rules follow a logic that, once understood, becomes second nature.

Ready to start practicing? Check out our Free EA Practice Questions or dive into our other study guides for Part 1 and Part 3.