EA Part 2 Quick Facts
| Detail | Info |
|---|---|
| Number of Questions | 100 multiple-choice questions |
| Time Limit | 3 hours 30 minutes |
| Passing Score | Scaled score of 105 out of 150 |
| Prerequisites | None — any person can sit for the exam |
| Exam Fee | ~$206 per attempt (2024–2025 fee) |
| Pass Rate | ~60% (hardest of the three EA parts) |
| Typical Study Time | 100–150 hours over 8–12 weeks |
| Testing Format | Prometric test centers nationwide |
| Exam Window | May 1 – February 28 annually (closed in March–April for updating) |
| Validity | Passing score valid for 2 years; must pass all 3 parts within 2-year window |
What the EA Part 2 Exam Tests
EA Part 2 is the most technically demanding of the three Special Enrollment Examination parts. It tests your knowledge of federal income tax as applied to businesses — every major entity type, how income and losses flow through each structure, how basis is tracked, how transactions between owners and their entities are taxed, and how payroll, excise, and other business taxes work.
The exam covers C corporations, S corporations, partnerships, LLCs, sole proprietors, tax-exempt organizations, and trusts and estates (from a business taxation perspective). Each entity type has its own set of formation rules, taxation rules, distribution rules, and liquidation rules — and the exam tests all of them.
What makes Part 2 difficult is not that it tests obscure rules. It tests rules that are genuinely complex and that frequently interact. S corporation basis and the Accumulated Adjustments Account (AAA). Partnership inside versus outside basis and the substantial economic effect rules. C corporation dividend distributions versus return of capital versus capital gains at liquidation. Depreciation: MACRS recovery periods, Section 179 expensing limits, bonus depreciation phase-down. These are not simple look-up rules — they require understanding the underlying mechanics.
Candidates without practical experience preparing business returns (especially S-corp and partnership returns) find Part 2 particularly challenging. If your background is primarily individual tax preparation, budget extra time and study hours for Part 2.
Topic Breakdown with Percentages
Business Entities & Considerations — 28%
Entity classification and selection (check-the-box rules, default classifications). Formation of each entity type: asset contributions, recognizing gain or loss on formation (Section 351 for C-corps, Section 721 for partnerships). Initial basis in entity interest. Entity tax attributes. Employer identification numbers. Accounting methods (cash vs. accrual, special methods for specific industries). Accounting periods (taxable year, required taxable year, 52/53-week year). Business changes: change in accounting method (Form 3115), change in entity type, conversions, mergers, acquisitions.
Sole Proprietorships: Schedule C, self-employment tax, home office, vehicle expenses, ordinary and necessary expense standard, start-up costs (Section 195 — $5,000 immediate deduction, remainder amortized over 180 months).
Partnerships: Formation (Section 721 — generally no gain/loss), inside vs. outside basis, partnership agreement, partner capital accounts, allocations (substantial economic effect), distributive share of income/loss reported on Schedule K-1, separately stated items vs. non-separately stated items.
S Corporations: Eligibility requirements (100 or fewer shareholders, one class of stock, only permissible shareholders — individuals, certain trusts, and estates — no non-resident alien shareholders, no corporate shareholders). Formation, S election (Form 2553), built-in gains tax (for C-corp conversions), S-corp shareholder basis computation.
C Corporations: Double taxation structure, corporate tax rate (21% flat), dividends-received deduction, organizational and start-up costs, dividend distributions vs. returns of capital, E&P (earnings and profits) concept.
LLCs: Tax classification — single-member LLC (disregarded entity by default), multi-member LLC (partnership by default), or corporate election. Community property and single-member LLCs.
Tax-Exempt Organizations: Types (501(c)(3) public charities vs. private foundations, 501(c)(4) social welfare, 501(c)(6) business leagues, 527 political organizations). Application for exempt status (Form 1023, Form 1024). Unrelated Business Income Tax (UBIT): what triggers UBIT, the $1,000 specific deduction, debt-financed income. Private foundation rules and excise taxes.
Business Tax Preparation — 39%
This is the largest domain — nearly 40% of the exam. Covers the actual preparation of business tax returns for each entity type.
Partnership Returns (Form 1065): Ordinary income/loss, separately stated items (capital gains/losses, Section 1231 gains, charitable contributions, investment interest expense — these must be separately stated because partners have different tax situations), guaranteed payments, partner basis limitations on loss deductions, Schedule K-1 preparation.
S Corporation Returns (Form 1120-S): Ordinary income/loss, separately stated items, AAA account tracking, distributions from AAA vs. AEP (accumulated E&P from C-corp years), shareholder basis, stock basis vs. debt basis, ordering rules for basis adjustments (income first, then distributions, then losses — but losses cannot reduce basis below zero), the at-risk and passive activity rules for S-corp shareholders.
C Corporation Returns (Form 1120): Taxable income computation, corporate AMT (Inflation Reduction Act reinstated corporate AMT for large corporations), dividends-received deduction (50% for less than 20% ownership, 65% for 20%+ ownership, 100% for 80%+ affiliated group), net operating loss carryforward (80% of taxable income limitation, indefinite carryforward), estimated tax requirements for corporations.
Payroll Taxes: FICA (Social Security and Medicare) — employer/employee split. Federal unemployment tax (FUTA): 6% on first $7,000 wages, reduced by state unemployment credit (to 0.6% effective rate in states with no credit reduction). Federal tax deposit rules: monthly depositors vs. semi-weekly depositors, the $100,000 next-day rule, lookback period. Employment tax returns: Form 941 (quarterly), Form 940 (annual FUTA). Trust fund recovery penalty: 100% penalty on responsible persons who willfully fail to deposit withheld payroll taxes. W-2 and W-3 filing deadlines.
Estimated Tax for Corporations: Must deposit quarterly (April 15, June 15, September 15, December 15 for calendar-year corps). Safe harbor: 100% of prior year's tax liability OR 100% of current year estimated tax liability. Large corporations ($1M+ taxable income in any of the prior 3 years) cannot use prior-year safe harbor.
Specific Business Returns — 23%
Depreciation: MACRS recovery periods (3-year, 5-year, 7-year, 15-year, 27.5-year for residential rental, 39-year for nonresidential real property). Half-year convention (default), mid-quarter convention (triggered when more than 40% of personal property placed in service in Q4). Listed property (vehicles, computers used for business) — additional limitations. Section 179 expensing: $1,160,000 limit (2023), phases out dollar-for-dollar above $2,890,000 in property placed in service, cannot create or increase a net operating loss. Bonus depreciation: phasing down (100% in 2022, 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, 0% in 2027 under current law).
Asset Sales and Like-Kind Exchanges: Section 1231 assets (business use property held more than 1 year) — gain taxed at preferential capital gain rates after netting; loss is ordinary. Depreciation recapture: Section 1245 (personal property — recapture as ordinary income to the extent of depreciation taken); Section 1250 (real property — unrecaptured Section 1250 gain at maximum 25% rate). Like-kind exchanges under Section 1031: only real property qualifies post-TCJA, boot recognition rules, basis in replacement property.
Installment Sales: Gross profit percentage, contract price, installment income recognition, related-party rules, disposition of installment obligation.
Qualified Business Income (Section 199A): Same rules as Part 1 but applied to S-corps, partnerships, and sole proprietors as business entities.
Trusts and Estates: Fiduciary income tax returns (Form 1041), distributable net income (DNI), the distribution deduction, charitable deductions for trusts, simple vs. complex trusts.
Other specialized returns: Farmers (Form 1043F), farm income averaging, timber and natural resources.
Other Taxes — 10%
Excise taxes: Federal excise taxes applicable to businesses — fuel taxes, environmental taxes, communications excise taxes, sport fishing and archery taxes. Heavy vehicle use tax (Form 2290). Excise taxes on private foundations.
Self-employment taxes for business owners (restated from Part 1 in the business context).
Employment taxes for household employees: Nanny tax rules, Schedule H.
Backup withholding: When required, 24% rate, Form 1099 requirements.
Information returns: Form 1099-NEC (nonemployee compensation), Form 1099-MISC, Form 1099-K, W-2 requirements, Form W-9, TIN solicitation.
Who Needs the EA Part 2 Credential (and the Full EA)
Any tax professional who wants to represent business clients before the IRS needs this knowledge. Specific roles include:
- CPA firm staff and managers who handle S-corp, partnership, and C-corp returns
- Tax professionals at multi-specialty practices who work with small business owners
- Payroll specialists who want comprehensive understanding of employer tax obligations
- Business tax advisors at accounting firms, banks, and advisory practices
- Bookkeepers and accountants serving small business clients who need to understand the tax consequences of business decisions
- Anyone pursuing the full EA designation — Part 2 is required as part of the three-part SEE
Even for enrolled agents who focus primarily on individual returns, Part 2 knowledge is essential for clients who are self-employed, own S-corps, or are partners in business ventures.
Difficulty and Pass Rate
Part 2's ~60% pass rate makes it the hardest of the three parts. That is not because the material is obscure — it is because business entity taxation has genuine complexity that cannot be simplified into easy rules.
Why candidates fail Part 2:
- No prior business entity experience. Candidates who have only prepared individual returns (Form 1040) encounter S-corp basis, partnership capital accounts, and C-corp E&P as entirely new concepts. Without practical context, these are abstract and hard to retain.
- Confusing inside and outside basis in partnerships. This is probably the single most commonly missed topic. Inside basis (the partnership's basis in its assets) and outside basis (each partner's basis in their partnership interest) are completely different numbers that change in different ways.
- S-corp basis and the AAA ordering rules. Many candidates understand the concept but make errors applying the ordering rules under stress.
- Depreciation. MACRS recovery periods, the mid-quarter convention trigger, Section 179 limitations, and bonus depreciation phase-down are all tested quantitatively.
- Payroll deposit rules. The lookback period, the $100,000 next-day rule, and the distinction between monthly and semi-weekly depositors are rule-dense and frequently tested.
Step-by-Step Study Timeline (8–12 Weeks)
Weeks 1–2: Entity Overview and Formation
Study all entity types at a high level first: sole proprietors, partnerships, LLCs, S-corps, C-corps, tax-exempt organizations. Understand default classifications and the check-the-box election system. Study formation rules for each (Section 351 for corporations, Section 721 for partnerships). Build a comparison chart: entity type / default tax treatment / pass-through vs. entity-level tax / self-employment tax exposure.
Weeks 3–4: Partnership Taxation In Depth
Inside vs. outside basis. Capital accounts (tax basis vs. book/GAAP capital accounts). Partner's basis: starts with contribution FMV (or adjusted basis), increases with income allocations and additional contributions, decreases with loss allocations and distributions. Liabilities: recourse liabilities allocated to partners who bear economic risk of loss; nonrecourse liabilities allocated based on profit-sharing ratios or minimum gain. Guaranteed payments. Separately stated items. Distributions: current vs. liquidating, basis limitations, hot assets (Section 751 — unrealized receivables and inventory). Study this for a full week — do not rush it.
Weeks 5–6: S Corporation Taxation In Depth
S-corp eligibility requirements (memorize the restrictions cold). Stock basis calculation: initial contribution basis, then each year: add ordinary income and separately stated income items; subtract distributions (non-dividend character if from AAA); subtract ordinary loss and separately stated loss items (cannot go below zero). Debt basis: loans directly from shareholder to corporation. AAA: tracks the S-corp's undistributed income since S election. AEP: E&P from C-corp years, distributed as dividend after AAA is depleted. Built-in gains tax (10-year recognition period for C-corp conversions). Built-in losses. Compensation to shareholder-employees: reasonable compensation requirement (SE tax avoidance issue).
Weeks 7–8: C Corporations and Depreciation
C-corp tax structure, rate (21%), dividends-received deduction, NOL carryforward rules, estimated tax, corporate AMT. Dividends: distributions reduce E&P, excess is return of capital (reduces shareholder basis), further excess is capital gain. Corporate liquidations: Section 331 (shareholder level) and Section 336 (corporate level — gains recognized).
Depreciation: MACRS recovery periods for each asset class. Half-year vs. mid-quarter convention. Section 179 (limits, phase-out, cannot create NOL). Bonus depreciation (current phase-down schedule). Listed property additional limitations. Depreciation recapture (Section 1245 vs. 1250).
Week 9: Payroll Taxes and Business Returns
FICA mechanics, FUTA rates and credit system. Federal tax deposit rules (lookback period, monthly vs. semi-weekly, $100,000 rule). Trust fund recovery penalty. Form 941, Form 940. W-2 / 1099-NEC filing requirements. Backup withholding.
Week 10: Tax-Exempt Organizations and Other Taxes
501(c)(3) requirements, private foundation rules, UBIT. Excise taxes. Installment sales, like-kind exchanges, Section 1231 and depreciation recapture. Information return requirements.
Weeks 11–12: Intensive Practice
500+ practice questions. Full timed practice exam. Review all wrong answers methodically. Prioritize partnership basis and S-corp basis questions — they are the highest-difficulty items and often determine whether borderline candidates pass or fail.
Study Strategy: How to Actually Pass
Build Entity Comparison Tables
Create a master reference table with each entity type across columns and key attributes as rows: default tax treatment, self-employment tax exposure, formation gain/loss rule, basis determination, distribution rules, loss limitation rules, liquidation rules. Reviewing this table regularly will reinforce the differences and prevent mix-ups on exam day.
High-Yield Topics
- S-corporation basis and AAA (Business Tax Prep — 39%) — Highest exam frequency, highest difficulty
- Partnership inside/outside basis (Business Tax Prep) — Second hardest, second most tested
- Depreciation: MACRS, Section 179, bonus (Specific Business Returns — 23%) — Quantitative questions guaranteed
- Payroll tax deposit rules and trust fund penalty (Business Tax Prep) — Rule-dense, high test frequency
Focus on the Mechanics, Not Just the Rules
Part 2 is unusual in that many questions require you to actually calculate something — a partner's basis after a distribution, an S-corp shareholder's loss limitation, an allowable Section 179 deduction. Do not just memorize the rules; practice working through the actual calculations step by step.
The Hardest Topics Explained
1. S-Corporation Shareholder Basis and the AAA Account
Shareholder Basis in Stock: Every S-corp shareholder has a basis in their stock that starts with the amount they paid or contributed, and then adjusts each year in a specific order:
- Add: Ordinary income, all separately stated income items (capital gains, tax-exempt income)
- Subtract: Distributions (treated as non-dividend if from AAA, meaning they reduce basis dollar for dollar)
- Subtract: Ordinary loss, all separately stated loss/deduction items
Basis cannot go below zero. Losses that exceed basis are suspended and carry forward to future years when basis is restored.
Stock Basis vs. Debt Basis: If the shareholder has directly lent money to the S-corp, they also have debt basis. Losses can absorb debt basis after stock basis reaches zero. But when the corporation repays the loan, the shareholder recognizes income equal to the amount by which the debt repayment exceeds the remaining adjusted debt basis.
AAA (Accumulated Adjustments Account): The AAA is a corporate-level account that tracks the S-corp's cumulative income and losses since the S election was made, reduced by distributions. Distributions from an S-corp with no C-corp E&P history are non-dividend and reduce shareholder basis — no dividend treatment. Distributions from an S-corp that was formerly a C-corp come first from AAA (non-dividend), then from AEP (taxable dividend), then as return of capital, then as capital gain.
The Ordering Rules for Basis Adjustment Matter Immensely: Exam questions will test what happens when a shareholder has losses, receives a distribution, and has both stock and debt basis. Always follow the ordering rules precisely.
2. Partnership Inside vs. Outside Basis
Inside Basis: The partnership's tax basis in each of its assets. This is the starting point for depreciation calculations and gain/loss on asset sales.
Outside Basis: Each partner's tax basis in their partnership interest. Completely separate from inside basis, calculated independently for each partner.
Why They Differ: When a partnership buys an asset for $100 and depreciates it to $40, the inside basis is $40. Partner A (50% owner) would have $30 less in their outside basis from their share of the depreciation deductions. But if Partner A bought their interest from another partner in a secondary transaction, their outside basis is whatever they paid — unrelated to the original inside basis. This creates a difference. A Section 754 election allows the partnership to make an adjustment (Section 743(b) for transfers of partnership interests) to bring inside basis in line with the new partner's outside basis, preventing the new partner from bearing taxable gain on the appreciation that economically occurred before they joined.
Liabilities and Outside Basis: Partners include their share of partnership liabilities in their outside basis. A partner's share of a recourse liability is based on who would bear the economic risk of loss if the liability became due and payable. A partner's share of a nonrecourse liability is generally based on the profit-sharing ratio. When a partner is relieved of a share of liabilities (e.g., the partnership takes out a loan previously personally guaranteed by a partner), that is treated as a cash distribution and reduces outside basis.
Loss Limitation: A partner cannot deduct their distributive share of partnership losses in excess of their outside basis. The excess loss is suspended and carries forward. The at-risk rules and passive activity rules apply as additional layers of limitation above the outside basis limitation.
3. C-Corporation Distributions, E&P, and the Dividends-Received Deduction
Earnings and Profits (E&P): E&P is a tax concept that roughly tracks a corporation's accumulated economic earnings. It is different from retained earnings on the GAAP balance sheet and different from taxable income. E&P increases with taxable income and certain tax-exempt income; it decreases with federal income taxes, dividend distributions, and certain non-deductible expenses.
Distribution Ordering: A C-corp distribution is treated as: (1) a taxable dividend to the extent of current E&P; (2) a return of capital to the extent of shareholder basis; (3) a capital gain for any excess.
Dividends-Received Deduction (DRD): When a C-corp receives a dividend from another C-corp in which it is a shareholder, it gets a partial deduction to prevent triple taxation: 50% DRD for less than 20% ownership, 65% DRD for 20% or greater ownership, 100% DRD for an 80% or more affiliated group. The DRD is limited to a percentage of taxable income (using the same percentages), with an exception when the full DRD would generate or increase a net operating loss.
4. Payroll Tax Deposit Rules and the Trust Fund Recovery Penalty
Deposit Schedule Determination: Every employer is classified as either a monthly depositor or a semi-weekly depositor based on a "lookback period" — the four quarters ending June 30 of the prior year. If total payroll tax liability during the lookback period was $50,000 or less, you are a monthly depositor (deposit by the 15th of the following month). If it exceeded $50,000, you are a semi-weekly depositor (deposit by Wednesday for payroll on Wednesday–Friday, or by Friday for payroll on Saturday–Tuesday).
The $100,000 Next-Day Rule: Regardless of deposit schedule, if accumulated payroll tax liability reaches $100,000 on any day, the employer must deposit the next business day. This also permanently converts monthly depositors to semi-weekly depositors for the remainder of the year and all of the following year.
Trust Fund Recovery Penalty (TFRP): Withheld income taxes and employee FICA contributions are "trust fund taxes" — they belong to the government, not the employer. If these are not deposited, the IRS can assess a 100% penalty (equal to the entire unpaid trust fund amount) personally against any "responsible person" who willfully failed to collect or pay over these taxes. A responsible person is anyone with authority over financial decisions: officers, directors, check-signers, accountants — not necessarily just the CEO. The penalty is not dischargeable in bankruptcy. The exam heavily tests who qualifies as a responsible person and what "willful" means in this context.
Practice Question Strategy
The 100-150 Hour Commitment Is Real
Part 2's lower pass rate reflects genuine difficulty. Candidates who treat it like a slightly harder Part 1 and study for 60–70 hours typically fail. Build your schedule around the 100–150 hour target.
The Three Topics That Decide Your Exam
Partnership basis, S-corp basis and AAA, and depreciation calculations together probably account for 20–25% of your exam score. If you can consistently answer those questions correctly, you have a significant structural advantage. Many candidates fail specifically because these topics are confusing and they do not drill them enough.
Use Gleim or Surgent — Both Are Strong for Part 2
Both Gleim EA Review and Surgent EA Review have strong Part 2 content. Gleim's question bank is large and covers the nuances of business entity taxation comprehensively. Surgent uses adaptive technology to focus your study time on your weakest areas, which can be efficient for candidates who are strong in some areas but weak in others.
Aim for 80%+ on Practice Exams Before Scheduling
Given the ~60% pass rate, you want a meaningful cushion above the passing threshold in practice before you sit. Candidates consistently scoring 75% or below on full practice exams should delay scheduling and continue targeted review.
Exam Day Logistics
Registration: Register at prometric.com. Select EA SEE Part 2. Choose a test center or online proctoring option. Schedule at least 2–3 weeks in advance.
What to Bring: Government-issued photo ID matching your registration name. Prometric provides scratch paper and pencils. No calculators are permitted — the exam is designed for mental math and does not require complex calculations, though you should practice mental MACRS percentage calculations.
Pacing: 100 questions in 210 minutes = approximately 2 minutes 6 seconds per question. The business entity tax questions can be reading-intensive — practice managing your time so you are not rushing through the final 20 questions.
Scoring: Reported immediately after completion. 105/150 or above is passing. If you fail, you receive a diagnostic report by domain to guide your remediation.
Retakes: Up to four retakes per testing window. Use your diagnostic report to focus remediation before retaking.
Frequently Asked Questions
Q: Is Part 2 really that much harder than Part 1? Yes. The ~60% pass rate versus ~70% for Part 1 understates the qualitative difference. Part 2 has more dense, interrelated rules — especially around partnership and S-corp basis — that require genuine understanding rather than rule memorization.
Q: Do I need to know how to prepare an actual Form 1065 or Form 1120-S? Not in the sense of physically filling out every line. But you need to understand what goes on each form, what constitutes a separately stated item, how the Schedule K-1 reports information to partners/shareholders, and how owners incorporate that information into their personal returns.
Q: How much of Part 2 overlaps with Part 1? There is meaningful overlap in areas like depreciation (Section 179, bonus depreciation, MACRS), retirement accounts for self-employed individuals (SEP, SIMPLE), the QBI deduction (Section 199A), and self-employment tax. Candidates who took Part 1 recently will have a foundation in these areas that reduces Part 2 study time modestly.
Q: What is the hardest single topic in Part 2? Most study providers and experienced EA candidates identify partnership basis (inside vs. outside) and the related allocation rules as the hardest single topic — followed closely by S-corp basis and AAA tracking. These are genuinely complex mechanical rules that require understanding the underlying tax policy to avoid confusion.
Q: Can I use the standard mileage rate for business vehicles on Part 2? The exam tests both standard mileage and actual expense methods for business vehicles. Know the rules for when each can be used (standard mileage must be chosen in the first year; certain vehicles must use actual expense), and the listed property rules that apply to vehicles used for both business and personal purposes.
Q: Does Part 2 cover state business taxes? No. Like all three parts of the SEE, Part 2 covers federal tax law only.