Enrolled Agent (EA) Exam Part 2: Businesses 2026–2027 | 300
Practice Questions & Tax Calculations
This comprehensive study resource is a premium test bank engineered for tax
professionals preparing for the Internal Revenue Service (IRS) Special Enrollment
Examination (SEE) Part 2. It delivers 300 high-yield practice questions, verified
answers, and detailed step-by-step business tax calculation rationales fully
updated for the 2026/2027 testing cycle and corporate tax laws. Mastering these
premium materials ensures deep competence across C-corporation formations, S-
corporation elections, partnership distributions, and asset depreciation schedules to
help you secure your federal credentials on your very first attempt.
1. A sole proprietor operates a landscaping business. On which form does the sole
proprietor report the business's net profit or loss?
A. Form 1065
B. Form 1120
C. Schedule C (Form 1040)
D. Form 1120-S
Correct Answer: C
Rationale: A sole proprietor reports business income and expenses on Schedule C (Form
1040). The net profit or loss flows through to the individual's Form 1040. Form 1065 is for
partnerships, Form 1120 is for C corporations, and Form 1120-S is for S corporations.
2. Which of the following statements about a sole proprietorship is correct?
A. A sole proprietor may not use a business or trade name other than their legal name
B. A sole proprietorship is a separate legal entity from its owner
C. A sole proprietor reports business income on Schedule C
D. A sole proprietorship must file an annual information return
,Correct Answer: C
Rationale: A sole proprietor reports business income and expenses on Schedule C. A sole
proprietor may use a trade name (A is incorrect). A sole proprietorship is not a separate
legal entity (B is incorrect). A sole proprietorship does not file a separate information
return (D is incorrect).
3. A sole proprietor has gross receipts of $150,000, cost of goods sold of $60,000,
and business expenses of $40,000. What is the net profit?
A. $50,000
B. $60,000
C. $90,000
D. $110,000
Correct Answer: A
Rationale: Net profit = Gross receipts - Cost of goods sold - Business expenses = $150,000
- $60,000 - $40,000 = $50,000.
4. A sole proprietor paid $5,000 in self-employment tax. What is the deductible
portion of self-employment tax?
A. $0
B. $2,500
C. $5,000
D. $7,500
Correct Answer: B
Rationale: The deductible portion of self-employment tax is 50% of the self-employment
tax. $5,000 × 50% = $2,500. This is an adjustment to income on Form 1040.
,5. A sole proprietor's business use of home expenses are limited to which of the
following?
A. Gross income from the business
B. Taxable income from the business before home office deduction
C. Taxable income from the business after home office deduction
D. Gross income from all sources
Correct Answer: B
Rationale: The home office deduction is limited to the gross income from the business
minus other business expenses. The deduction cannot create or increase a business loss.
6. A sole proprietor had $10,000 in business bad debts in 2026. How are these
treated?
A. As a capital loss
B. As an ordinary loss
C. As a non-deductible item
D. As a short-term capital loss
Correct Answer: B
Rationale: Business bad debts are deductible as ordinary losses on Schedule C. Non-
business bad debts are treated as short-term capital losses.
7. A sole proprietor's net profit is $80,000. What is the self-employment tax?
, A. $9,832
B. $11,304
C. $12,240
D. $15,300
Correct Answer: B
Rationale: Net earnings = $80,000 × 92.35% = $73,880. Self-employment tax = $73,880 ×
15.3% = $11,304.
8. Which of the following is NOT a deductible business expense for a sole
proprietor?
A. Health insurance premiums for the owner
B. Business liability insurance
C. Personal life insurance premiums
D. Professional dues
Correct Answer: C
Rationale: Personal life insurance premiums are not deductible. Health insurance
premiums (A) are deductible as an adjustment to income (not on Schedule C). Business
liability insurance (B) and professional dues (D) are deductible business expenses.
9. A sole proprietor's business is audited. Which of the following is required to
substantiate business expenses?
A. Bank statements only
B. Receipts and canceled checks
C. Credit card statements only
D. Verbal testimony only
Practice Questions & Tax Calculations
This comprehensive study resource is a premium test bank engineered for tax
professionals preparing for the Internal Revenue Service (IRS) Special Enrollment
Examination (SEE) Part 2. It delivers 300 high-yield practice questions, verified
answers, and detailed step-by-step business tax calculation rationales fully
updated for the 2026/2027 testing cycle and corporate tax laws. Mastering these
premium materials ensures deep competence across C-corporation formations, S-
corporation elections, partnership distributions, and asset depreciation schedules to
help you secure your federal credentials on your very first attempt.
1. A sole proprietor operates a landscaping business. On which form does the sole
proprietor report the business's net profit or loss?
A. Form 1065
B. Form 1120
C. Schedule C (Form 1040)
D. Form 1120-S
Correct Answer: C
Rationale: A sole proprietor reports business income and expenses on Schedule C (Form
1040). The net profit or loss flows through to the individual's Form 1040. Form 1065 is for
partnerships, Form 1120 is for C corporations, and Form 1120-S is for S corporations.
2. Which of the following statements about a sole proprietorship is correct?
A. A sole proprietor may not use a business or trade name other than their legal name
B. A sole proprietorship is a separate legal entity from its owner
C. A sole proprietor reports business income on Schedule C
D. A sole proprietorship must file an annual information return
,Correct Answer: C
Rationale: A sole proprietor reports business income and expenses on Schedule C. A sole
proprietor may use a trade name (A is incorrect). A sole proprietorship is not a separate
legal entity (B is incorrect). A sole proprietorship does not file a separate information
return (D is incorrect).
3. A sole proprietor has gross receipts of $150,000, cost of goods sold of $60,000,
and business expenses of $40,000. What is the net profit?
A. $50,000
B. $60,000
C. $90,000
D. $110,000
Correct Answer: A
Rationale: Net profit = Gross receipts - Cost of goods sold - Business expenses = $150,000
- $60,000 - $40,000 = $50,000.
4. A sole proprietor paid $5,000 in self-employment tax. What is the deductible
portion of self-employment tax?
A. $0
B. $2,500
C. $5,000
D. $7,500
Correct Answer: B
Rationale: The deductible portion of self-employment tax is 50% of the self-employment
tax. $5,000 × 50% = $2,500. This is an adjustment to income on Form 1040.
,5. A sole proprietor's business use of home expenses are limited to which of the
following?
A. Gross income from the business
B. Taxable income from the business before home office deduction
C. Taxable income from the business after home office deduction
D. Gross income from all sources
Correct Answer: B
Rationale: The home office deduction is limited to the gross income from the business
minus other business expenses. The deduction cannot create or increase a business loss.
6. A sole proprietor had $10,000 in business bad debts in 2026. How are these
treated?
A. As a capital loss
B. As an ordinary loss
C. As a non-deductible item
D. As a short-term capital loss
Correct Answer: B
Rationale: Business bad debts are deductible as ordinary losses on Schedule C. Non-
business bad debts are treated as short-term capital losses.
7. A sole proprietor's net profit is $80,000. What is the self-employment tax?
, A. $9,832
B. $11,304
C. $12,240
D. $15,300
Correct Answer: B
Rationale: Net earnings = $80,000 × 92.35% = $73,880. Self-employment tax = $73,880 ×
15.3% = $11,304.
8. Which of the following is NOT a deductible business expense for a sole
proprietor?
A. Health insurance premiums for the owner
B. Business liability insurance
C. Personal life insurance premiums
D. Professional dues
Correct Answer: C
Rationale: Personal life insurance premiums are not deductible. Health insurance
premiums (A) are deductible as an adjustment to income (not on Schedule C). Business
liability insurance (B) and professional dues (D) are deductible business expenses.
9. A sole proprietor's business is audited. Which of the following is required to
substantiate business expenses?
A. Bank statements only
B. Receipts and canceled checks
C. Credit card statements only
D. Verbal testimony only
