How to Pass EA Part 2: Business Taxation Study Guide

The IRS Special Enrollment Examination (SEE) Part 2 covers business taxation — and it has a reputation as the hardest of the three parts. Where Part 1 tests individual returns and Part 3 covers representation, Part 2 demands a working knowledge of every major business entity, employment taxes, depreciation, and loss limitation rules. A strategic study approach makes the difference between a passing score and a retake.

What Is Actually Tested on Part 2

The IRS publishes a content outline that divides Part 2 into three broad domains:

• Businesses (~60% of questions): This is the core. It covers sole proprietors (Schedule C), partnerships, C-corporations, S-corporations, and tax-exempt organizations. Expect questions on formation, income, deductions, distributions, liquidations, and basis.
• Businesses — Specialized Returns and Taxpayers (~20%): Farm income, rental activity, at-risk rules, passive activity losses, and qualified opportunity zones.
• Representation, Practices, and Procedures related to business entities (~20%): Employment taxes, payroll forms, penalties, and employer responsibilities.

Every question is multiple choice. You have 3.5 hours for 100 questions, giving you about two minutes per question — more than enough time if you know the material cold.

The Hardest Entity Types

Most candidates find partnerships the steepest climb. Outside basis, inside basis, the Section 754 election, hot assets under Section 751, and the substantial economic effect rules for allocations form a dense web of interrelated concepts. Plan to spend 30–40% of your business-entity study time here.

S-corporations rank second in difficulty. The eligibility requirements are specific and frequently tested. Shareholder basis calculations — especially how to treat debt basis and the distribution ordering rules — generate a lot of exam questions that look similar until you read them carefully.

C-corporations are more mechanical. The 21% flat rate is straightforward, but the dividends-received deduction (DRD) percentages, accumulated earnings tax thresholds, and the interplay between NOL deductions and taxable income trip up candidates who memorize surface-level facts instead of understanding the underlying mechanics.

Recommended Study Order

Start with the entities you are least likely to already know from everyday work, then reinforce the ones you feel comfortable with:

Phase 1: Foundational Entities (Weeks 1–2)

Begin with sole proprietors and Schedule C. This is the simplest business structure and overlaps with Part 1 material many candidates already know. Move through Schedule C deductions, home office rules, vehicle expenses, startup cost amortization, and the self-employment tax deduction.

Phase 2: Pass-Through Entities (Weeks 3–5)

Tackle S-corporations first, then partnerships. Study them back-to-back so the basis rules stay fresh and you can compare them directly. Pay particular attention to:

• Stock basis vs. debt basis for S-corp shareholders
• Outside basis for partners (including assumption of liabilities under Section 752)
• The ordering rules for S-corp distributions vs. partnership distributions

Phase 3: C-Corporations and Tax-Exempt Organizations (Week 6)

C-corps benefit from studying after pass-throughs because you can contrast treatment of the same transactions across entity types. Tax-exempt organizations — especially unrelated business taxable income (UBTI) — are a discrete topic that rewards focused study over a few days.

Phase 4: Cross-Cutting Topics (Weeks 7–8)

Close with topics that apply across entities:

• Depreciation (MACRS, Section 179, bonus depreciation)
• Employment taxes (FICA, FUTA, trust fund recovery penalty)
• At-risk and passive activity loss rules
• Business credits (R&D, WOTC, general business credit carryforwards)

These topics appear in entity-specific questions as well as standalone questions, so mastering them reinforces everything you studied in earlier phases.

High-Yield Study Tactics

Practice questions before you feel ready. The SEE tests application, not recall. Starting practice questions early reveals which concepts you misunderstand before you spend time over-studying the wrong things.

Make a basis cheat sheet. Basis questions are everywhere on Part 2. Write out the calculation for S-corp stock basis, S-corp debt basis, and partnership outside basis in a single reference sheet. Differences become obvious when they sit side by side.

Understand the policy behind the rules. When you understand why the accumulated earnings tax exists — to prevent corporations from retaining excess cash to avoid shareholder-level tax — the $250,000 threshold and its exceptions become logical rather than arbitrary.

Use the IRS publications. Publication 541 (Partnerships), Publication 542 (Corporations), and Publication 334 (Small Business) are free and authoritative. Cross-referencing your study materials with the source documents builds confidence you are learning the right rules.

Flag timing-sensitive material. Bonus depreciation percentages are phasing down and Section 179 limits adjust for inflation. Know the current-year numbers and be aware that older practice materials may have stale figures.

Ready to drill EA Part 2 questions? Advisor Exam Academy covers all business tax entity types with instant explanations.