ENROLLED AGENT EXAM PREP - PART 2 QUESTIONS AND
ANSWERS EXAM, SOLUTIONS (MULTIPLE CHOICES) 100%
CORRECT 2025!!
Question 1
Which form of business entity is not a legal entity separate and apart from its owner?
A. Corporation
B. Partnership
C. Sole proprietorship
D. S corporation
E. Limited Liability Company (LLC)
Correct Answer: C) Sole proprietorship
Rationale: A sole proprietorship is legally indistinguishable from its owner, meaning
the owner and the business are considered the same entity.
Question 2
Under which circumstance is an entity required to apply for a new employer identification
number (EIN)?
A. Business name change
B. Electing or revoking S corp status
C. 50% change of interest in partnership within 12 months
D. Proprietorship that incorporates
E. Moving the business to a different state
Correct Answer: D) Proprietorship that incorporates
Rationale: When a proprietorship incorporates, it transitions from being the owner's
personal extension to a separate legal entity (a corporation), necessitating a new
EIN.
,Question 3
Limited Liability Companies (LLCs) may be an attractive small business alternative as opposed
to an S corporation because LLCs offer the following advantage(s) not available in S
corporations:
A. Pass-through taxation
B. Inclusion of entity-level liabilities in tax basis
C. Flexibility in types of owners and ownership interest
D. Both inclusion of entity-level liabilities in tax basis and flexibility in types of
owners and ownership interests.
E. Limited liability protection
Correct Answer: D) Both inclusion of entity-level liabilities in tax basis and flexibility
in types of owners and ownership interests.
Rationale: For tax purposes, LLC members (when treated as partners) can include
entity-level debt in their tax basis, and LLCs have fewer restrictions on the number
and types of owners compared to S corporations.
Question 4
A domestic LLC with at least two members that does not file Form 8832, Entity Classification
Election, is classified as:
A. An entity disregarded as an entity separate from its owners by applying the rules in
Regulations Section 301.7701-3
B. A partnership
C. A corporation
D. A non-entity that requires members to report the income and related expenses on Form
,1040
E. A sole proprietorship
Correct Answer: B) A partnership
Rationale: Under the default "check-the-box" rules, a multi-member LLC that does
not elect corporate treatment is automatically classified as a partnership for
federal tax purposes.
Question 5
Which of the following statements regarding accounting methods is false?
A. If inventories are necessary, the accrual method is used for sales and purchases
B. A combination (hybrid) method is not an acceptable method of accounting
C. A change from the accrual to the cash method of accounting requires consent from the IRS
D. Under the cash method of accounting, gross income includes all items of income actually or
constructively received during the year
E. The cash method is generally simpler than the accrual method
Correct Answer: B) A combination (hybrid) method is not an acceptable method of
accounting
Rationale: Hybrid methods are indeed acceptable under certain circumstances, such
as when inventory is involved (accrual for sales/purchases, cash for other items).
Question 6
You can compute your taxable income under which of the following accounting methods?
A. Hybrid method
B. Accrual method
C. Special method for certain items
, D. All of the answers are correct
E. Only cash and accrual methods
Correct Answer: D) All of the answers are correct
Rationale: The IRS allows various acceptable accounting methods, including cash,
accrual, hybrid, and specific methods for certain income or expense items,
depending on the taxpayer's circumstances.
Question 7
Which of the following accounting changes do not require the filing of Form 3115 to request a
change in accounting method?
A. Correction of a math error
B. Change from accrual method to cash method
C. Change in the method inventory is valued
D. Change from cash method to accrual method
E. Change in depreciable life of an asset
Correct Answer: A) Correction of a math error
Rationale: Form 3115 is required for changes in accounting methods. Correcting a
math error is not a change in method; it's a correction of an inaccuracy.
Question 8
Which of the following accounting methods is not an acceptable method of reporting income
and expenses?
A. If an inventory is necessary to account for your income, you must use an accrual method for
purchases and sales. You can use the cash method for all other items of income and expenses.
B. If you use the cash method for figuring your income, you can use the accrual
ANSWERS EXAM, SOLUTIONS (MULTIPLE CHOICES) 100%
CORRECT 2025!!
Question 1
Which form of business entity is not a legal entity separate and apart from its owner?
A. Corporation
B. Partnership
C. Sole proprietorship
D. S corporation
E. Limited Liability Company (LLC)
Correct Answer: C) Sole proprietorship
Rationale: A sole proprietorship is legally indistinguishable from its owner, meaning
the owner and the business are considered the same entity.
Question 2
Under which circumstance is an entity required to apply for a new employer identification
number (EIN)?
A. Business name change
B. Electing or revoking S corp status
C. 50% change of interest in partnership within 12 months
D. Proprietorship that incorporates
E. Moving the business to a different state
Correct Answer: D) Proprietorship that incorporates
Rationale: When a proprietorship incorporates, it transitions from being the owner's
personal extension to a separate legal entity (a corporation), necessitating a new
EIN.
,Question 3
Limited Liability Companies (LLCs) may be an attractive small business alternative as opposed
to an S corporation because LLCs offer the following advantage(s) not available in S
corporations:
A. Pass-through taxation
B. Inclusion of entity-level liabilities in tax basis
C. Flexibility in types of owners and ownership interest
D. Both inclusion of entity-level liabilities in tax basis and flexibility in types of
owners and ownership interests.
E. Limited liability protection
Correct Answer: D) Both inclusion of entity-level liabilities in tax basis and flexibility
in types of owners and ownership interests.
Rationale: For tax purposes, LLC members (when treated as partners) can include
entity-level debt in their tax basis, and LLCs have fewer restrictions on the number
and types of owners compared to S corporations.
Question 4
A domestic LLC with at least two members that does not file Form 8832, Entity Classification
Election, is classified as:
A. An entity disregarded as an entity separate from its owners by applying the rules in
Regulations Section 301.7701-3
B. A partnership
C. A corporation
D. A non-entity that requires members to report the income and related expenses on Form
,1040
E. A sole proprietorship
Correct Answer: B) A partnership
Rationale: Under the default "check-the-box" rules, a multi-member LLC that does
not elect corporate treatment is automatically classified as a partnership for
federal tax purposes.
Question 5
Which of the following statements regarding accounting methods is false?
A. If inventories are necessary, the accrual method is used for sales and purchases
B. A combination (hybrid) method is not an acceptable method of accounting
C. A change from the accrual to the cash method of accounting requires consent from the IRS
D. Under the cash method of accounting, gross income includes all items of income actually or
constructively received during the year
E. The cash method is generally simpler than the accrual method
Correct Answer: B) A combination (hybrid) method is not an acceptable method of
accounting
Rationale: Hybrid methods are indeed acceptable under certain circumstances, such
as when inventory is involved (accrual for sales/purchases, cash for other items).
Question 6
You can compute your taxable income under which of the following accounting methods?
A. Hybrid method
B. Accrual method
C. Special method for certain items
, D. All of the answers are correct
E. Only cash and accrual methods
Correct Answer: D) All of the answers are correct
Rationale: The IRS allows various acceptable accounting methods, including cash,
accrual, hybrid, and specific methods for certain income or expense items,
depending on the taxpayer's circumstances.
Question 7
Which of the following accounting changes do not require the filing of Form 3115 to request a
change in accounting method?
A. Correction of a math error
B. Change from accrual method to cash method
C. Change in the method inventory is valued
D. Change from cash method to accrual method
E. Change in depreciable life of an asset
Correct Answer: A) Correction of a math error
Rationale: Form 3115 is required for changes in accounting methods. Correcting a
math error is not a change in method; it's a correction of an inaccuracy.
Question 8
Which of the following accounting methods is not an acceptable method of reporting income
and expenses?
A. If an inventory is necessary to account for your income, you must use an accrual method for
purchases and sales. You can use the cash method for all other items of income and expenses.
B. If you use the cash method for figuring your income, you can use the accrual
