IRS Special Enrollment Examination (SEE) New 2026
Latest Version with All the 100 Questions for Part 2,
100% Correct Answers and Rationale
SECTION A: BUSINESS ENTITIES AND CONSIDERATIONS (Questions 1-10)
Question 1
A sole proprietor has gross income of $150,000 and business expenses of $60,000. What is their
net self-employment income?
a) $60,000
b) $90,000
c) $150,000
d) $210,000
Correct Answer: b) $90,000
Rationale: Net self-employment income = Gross income - business expenses. This amount
($90,000) is subject to self-employment tax and reported on Schedule C (Profit or Loss from
Business) .
Question 2
Which of the following is NOT a factor in determining whether a worker is an employee or
independent contractor?
a) Behavioral control
b) Financial control
c) Type of relationship
d) Number of hours worked per week
Correct Answer: d) Number of hours worked per week
Rationale: The IRS uses common law rules considering behavioral control (who directs work),
financial control (who bears business costs), and the type of relationship (contracts, benefits).
Hours worked alone is not a determining factor .
Question 3
A business that operates as a sole proprietorship must obtain which identifying number?
a) Only a Social Security Number (SSN)
b) An Employer Identification Number (EIN) if they have employees or meet other requirements
c) Always an EIN regardless of circumstances
d) A Preparer Tax Identification Number (PTIN)
Correct Answer: b) An Employer Identification Number (EIN) if they have employees or meet
other requirements
Rationale: Sole proprietors without employees may use their SSN for tax purposes. An EIN is
required if the business has employees, files excise tax returns, or has a Keogh plan .
Question 4
A business with $50,000 in gross receipts and $65,000 in total expenses has a net operating loss.
How is this NOL treated?
,a) It can only be carried back 2 years
b) It can be carried forward indefinitely under current law
c) It expires after 5 years
d) It cannot be used to offset any income
Correct Answer: b) It can be carried forward indefinitely under current law
Rationale: Under the Tax Cuts and Jobs Act, NOLs arising in tax years beginning after
December 31, 2017, can be carried forward indefinitely. The carryback provision was generally
eliminated for most taxpayers .
Question 5
A taxpayer operates a business as a hobby rather than a for-profit activity. Which statement is
correct regarding hobby losses?
a) Expenses are deductible in full against hobby income
b) Expenses are deductible only up to the amount of hobby income
c) No expenses are deductible
d) All expenses are deductible as business expenses
Correct Answer: b) Expenses are deductible only up to the amount of hobby income
Rationale: For hobby activities (not engaged in for profit), expenses are deductible as itemized
deductions (subject to the 2% floor, which is suspended) but only to the extent of hobby income.
Expenses cannot create a loss .
Question 6
Which accounting method is generally required for businesses with average annual gross receipts
exceeding $25 million?
a) Cash method
b) Accrual method
c) Hybrid method
d) Any method the taxpayer chooses
Correct Answer: b) Accrual method
Rationale: Under IRC Section 448, C corporations, partnerships with a C corporation partner,
and tax shelters cannot use the cash method. For 2025, the gross receipts test is $30 million
(adjusted for inflation). Businesses above this threshold generally must use the accrual method .
Question 7
A business changes its accounting method from cash to accrual. Which form must be filed?
a) Form 3115
b) Form 1128
c) Form 8716
d) Form 2553
Correct Answer: a) Form 3115
Rationale: Form 3115 (Application for Change in Accounting Method) is used to request a
change in accounting method. The change requires IRS consent and is filed with the taxpayer's
timely filed return, with a copy sent to the IRS in Ogden, Utah .
Question 8
A sole proprietor has net earnings from self-employment of $80,000. What is the amount subject
, to self-employment tax?
a) $80,000
b) $73,880
c) $76,200
d) $85,000
Correct Answer: b) $73,880
Rationale: Self-employment tax is calculated on 92.35% of net earnings from self-employment.
$80,000 × 0.9235 = $73,880. This amount is multiplied by 15.3% (12.4% Social Security + 2.9%
Medicare) to determine the self-employment tax .
Question 9
Which of the following is NOT a requirement for a qualified joint venture election by a married
couple?
a) Both spouses materially participate in the business
b) The business is co-owned by both spouses
c) The business is operated as a partnership under state law
d) The spouses file a joint tax return
Correct Answer: c) The business is operated as a partnership under state law
Rationale: A qualified joint venture allows a married couple to elect not to be treated as a
partnership for federal tax purposes. The business must be co-owned and operated by both
spouses who materially participate and file a joint return. They can elect this treatment even if
not a partnership under state law .
Question 10
A business that receives payments for services must file Form 1099-NEC for each recipient paid
at least:
a) $400
b) $600
c) $1,000
d) $10,000
Correct Answer: b) $600
Rationale: Form 1099-NEC (Nonemployee Compensation) must be filed for each person who
received at least $600 in payments for services performed during the year in the course of the
payer's trade or business .
SECTION B: PARTNERSHIPS (Questions 11-24)
Question 11
A partnership has four equal partners. The partnership incurs a loss of $100,000. Each partner's
distributive share of the loss is:
a) $100,000
b) $50,000
c) $25,000
d) $0
Correct Answer: c) $25,000
Rationale: Partnership income, gains, losses, deductions, and credits are allocated according to
Latest Version with All the 100 Questions for Part 2,
100% Correct Answers and Rationale
SECTION A: BUSINESS ENTITIES AND CONSIDERATIONS (Questions 1-10)
Question 1
A sole proprietor has gross income of $150,000 and business expenses of $60,000. What is their
net self-employment income?
a) $60,000
b) $90,000
c) $150,000
d) $210,000
Correct Answer: b) $90,000
Rationale: Net self-employment income = Gross income - business expenses. This amount
($90,000) is subject to self-employment tax and reported on Schedule C (Profit or Loss from
Business) .
Question 2
Which of the following is NOT a factor in determining whether a worker is an employee or
independent contractor?
a) Behavioral control
b) Financial control
c) Type of relationship
d) Number of hours worked per week
Correct Answer: d) Number of hours worked per week
Rationale: The IRS uses common law rules considering behavioral control (who directs work),
financial control (who bears business costs), and the type of relationship (contracts, benefits).
Hours worked alone is not a determining factor .
Question 3
A business that operates as a sole proprietorship must obtain which identifying number?
a) Only a Social Security Number (SSN)
b) An Employer Identification Number (EIN) if they have employees or meet other requirements
c) Always an EIN regardless of circumstances
d) A Preparer Tax Identification Number (PTIN)
Correct Answer: b) An Employer Identification Number (EIN) if they have employees or meet
other requirements
Rationale: Sole proprietors without employees may use their SSN for tax purposes. An EIN is
required if the business has employees, files excise tax returns, or has a Keogh plan .
Question 4
A business with $50,000 in gross receipts and $65,000 in total expenses has a net operating loss.
How is this NOL treated?
,a) It can only be carried back 2 years
b) It can be carried forward indefinitely under current law
c) It expires after 5 years
d) It cannot be used to offset any income
Correct Answer: b) It can be carried forward indefinitely under current law
Rationale: Under the Tax Cuts and Jobs Act, NOLs arising in tax years beginning after
December 31, 2017, can be carried forward indefinitely. The carryback provision was generally
eliminated for most taxpayers .
Question 5
A taxpayer operates a business as a hobby rather than a for-profit activity. Which statement is
correct regarding hobby losses?
a) Expenses are deductible in full against hobby income
b) Expenses are deductible only up to the amount of hobby income
c) No expenses are deductible
d) All expenses are deductible as business expenses
Correct Answer: b) Expenses are deductible only up to the amount of hobby income
Rationale: For hobby activities (not engaged in for profit), expenses are deductible as itemized
deductions (subject to the 2% floor, which is suspended) but only to the extent of hobby income.
Expenses cannot create a loss .
Question 6
Which accounting method is generally required for businesses with average annual gross receipts
exceeding $25 million?
a) Cash method
b) Accrual method
c) Hybrid method
d) Any method the taxpayer chooses
Correct Answer: b) Accrual method
Rationale: Under IRC Section 448, C corporations, partnerships with a C corporation partner,
and tax shelters cannot use the cash method. For 2025, the gross receipts test is $30 million
(adjusted for inflation). Businesses above this threshold generally must use the accrual method .
Question 7
A business changes its accounting method from cash to accrual. Which form must be filed?
a) Form 3115
b) Form 1128
c) Form 8716
d) Form 2553
Correct Answer: a) Form 3115
Rationale: Form 3115 (Application for Change in Accounting Method) is used to request a
change in accounting method. The change requires IRS consent and is filed with the taxpayer's
timely filed return, with a copy sent to the IRS in Ogden, Utah .
Question 8
A sole proprietor has net earnings from self-employment of $80,000. What is the amount subject
, to self-employment tax?
a) $80,000
b) $73,880
c) $76,200
d) $85,000
Correct Answer: b) $73,880
Rationale: Self-employment tax is calculated on 92.35% of net earnings from self-employment.
$80,000 × 0.9235 = $73,880. This amount is multiplied by 15.3% (12.4% Social Security + 2.9%
Medicare) to determine the self-employment tax .
Question 9
Which of the following is NOT a requirement for a qualified joint venture election by a married
couple?
a) Both spouses materially participate in the business
b) The business is co-owned by both spouses
c) The business is operated as a partnership under state law
d) The spouses file a joint tax return
Correct Answer: c) The business is operated as a partnership under state law
Rationale: A qualified joint venture allows a married couple to elect not to be treated as a
partnership for federal tax purposes. The business must be co-owned and operated by both
spouses who materially participate and file a joint return. They can elect this treatment even if
not a partnership under state law .
Question 10
A business that receives payments for services must file Form 1099-NEC for each recipient paid
at least:
a) $400
b) $600
c) $1,000
d) $10,000
Correct Answer: b) $600
Rationale: Form 1099-NEC (Nonemployee Compensation) must be filed for each person who
received at least $600 in payments for services performed during the year in the course of the
payer's trade or business .
SECTION B: PARTNERSHIPS (Questions 11-24)
Question 11
A partnership has four equal partners. The partnership incurs a loss of $100,000. Each partner's
distributive share of the loss is:
a) $100,000
b) $50,000
c) $25,000
d) $0
Correct Answer: c) $25,000
Rationale: Partnership income, gains, losses, deductions, and credits are allocated according to
