Free Special Enrollment Examination: Part 2 Practice Questions

Sample Practice Questions

Try these 10 sample questions from the Special Enrollment Examination: Part 2 practice bank. Each includes the answer and explanation. Continue with the interactive practice above to review the full question set.

1. 1For federal tax purposes, which description identifies a sole proprietorship?

   1. A. An unincorporated business owned by one individual
   2. B. A separate corporation owned by one shareholder
   3. C. A business owned jointly by two individual partners
   4. D. An organization owned by shareholders through stock

   Answer: A

   Explanation: Publication 583 states, "A sole proprietorship is an unincorporated business that is owned by one individual." The sole owner and unincorporated form distinguish it from a partnership or corporation.

   Reference: Starting a Business and Keeping Records (Publication 583) — Business structures, Sole proprietorships, page 3

2. 2A business receives Form 1099-K reporting payment-card transactions. Why might the form's amount differ from reportable business income?

   1. A. It can omit receipts and include amounts such as sales tax
   2. B. It includes only profits after business expenses
   3. C. It excludes every card transaction below $600
   4. D. It reports only cash received from customers

   Answer: A

   Explanation: Publication 334 says a Form 1099-K amount "may not be the amount you should report as income, as it may not include all the receipts and it may include items that are not included in your receipts (such as sales tax)." Reconciliation is needed before treating the form total as income.

   Reference: Tax Guide for Small Business (Publication 334) — Chapter 5, Payment card and third-party network transactions, page 20

3. 3Which requirement is necessary for a trust to qualify as a simple trust for the tax year?

   1. A. Its instrument requires all income to be distributed currently.
   2. B. It distributes at least one item of corpus each year.
   3. C. It permanently sets aside income for charity.
   4. D. It retains all income until termination.

   Answer: A

   Explanation: The IRS states, "The trust instrument requires that all income must be distributed currently;" Current distribution of all income is one of the simple-trust conditions.

   Reference: 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1 — Entity Type, Simple Trust

4. 4A sole proprietor incurs a business liability. Which statement describes the owner's liability under the sole proprietorship form?

   1. A. Only assets titled in the business name are exposed
   2. B. The owner has personal liability for business debts
   3. C. Liability is limited to the owner's original investment
   4. D. Liability passes to the federal income tax return

   Answer: B

   Explanation: Publication 583 says, "Its liabilities are your personal liabilities." A sole proprietorship does not shield the owner's personal assets from its liabilities.

   Reference: Starting a Business and Keeping Records (Publication 583) — Business structures, Sole proprietorships, page 3

5. 5A sole proprietor receives cash for business services, but the customer does not issue Form 1099. How is the receipt generally treated?

   1. A. Excluded because no Form 1099 was filed
   2. B. Reported as business income unless excluded by law
   3. C. Reported only if paid by credit card
   4. D. Deferred until the customer files an information return

   Answer: B

   Explanation: Publication 334 states, "You must report on your tax return all income you receive from your business, including income not reported to you on a Form 1099 filed by the payor, unless it is excluded by law." The information return is not what makes the receipt taxable.

   Reference: Tax Guide for Small Business (Publication 334) — Chapter 5, Kinds of Income, page 21

6. 6A trust otherwise distributes all income currently but also distributes an amount allocated to corpus. How is its simple-trust status affected for that year?

   1. A. The corpus distribution prevents simple-trust qualification.
   2. B. It remains simple because all income was distributed.
   3. C. It becomes a grantor trust solely because of the distribution.
   4. D. It becomes a decedent's estate solely because of the distribution.

   Answer: A

   Explanation: The IRS states, "The trust doesn’t distribute amounts allocated to the corpus of the trust." A corpus distribution violates an additional simple-trust condition.

   Reference: 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1 — Entity Type, Simple Trust

7. 7An individual is the sole member of a domestic LLC and has made no corporate tax election. How is the LLC generally treated for federal income tax?

   1. A. As a partnership filing Form 1065
   2. B. As a corporation filing Form 1120
   3. C. As disregarded from its owner
   4. D. As a tax-exempt association

   Answer: C

   Explanation: Publication 334 says, "Generally, for income tax purposes, a single-member LLC is disregarded as an entity separate from its owner". With no corporate election, its income and deductions generally appear on the owner's return.

   Reference: Tax Guide for Small Business (Publication 334) — Are You Self-Employed?, Limited liability company, page 2

8. 8A business exchanges its services for another firm's services with a fair market value of $2,000. What amount generally enters the business's gross receipts from the barter?

   1. A. $0
   2. B. $1,000
   3. C. $2,000
   4. D. $4,000

   Answer: C

   Explanation: Publication 334 says, "You must include in your gross receipts, at the time received, the fair market value of property or services you receive in exchange for something else." The received services have a fair market value of $2,000, rather than zero, half, or double that amount.

   Reference: Tax Guide for Small Business (Publication 334) — Chapter 5, Bartering for Property or Services, page 21

9. 9A revocable living trust is generally treated as which type of trust for federal income tax purposes?

   1. A. A grantor type trust
   2. B. A simple trust in every year
   3. C. A qualified disability trust
   4. D. A decedent's estate

   Answer: A

   Explanation: The IRS states, "Because this type of trust is revocable, it is treated as a grantor type trust for tax purposes." Revocability is the controlling trust characteristic.

   Reference: 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1 — Revocable Living Trust

10. 10Spouses jointly own and operate a business through an LLC. Can they elect qualified joint venture treatment for that LLC?

    1. A. Yes, if they each materially participate
    2. B. Yes, if they file a joint income tax return
    3. C. Yes, if they each file a separate Schedule C
    4. D. No, because the business is owned through an LLC

    Answer: D

    Explanation: Publication 334 expressly states, "a business owned and operated by spouses through an LLC does not qualify for the election of a QJV." Material participation and joint filing do not remove that entity restriction.

    Reference: Tax Guide for Small Business (Publication 334) — Business Owned and Operated by Spouses, Qualified joint venture, page 3