EA Part 2: Businesses

Part 2: what to distinguish while studying

Use the content outline to check coverage, then allocate extra practice to the errors you can explain. The distinctions below are study guidance, not measured candidate failure rates or an official study-hour prescription.

Exam format and tested tax year

Each part contains 100 multiple-choice questions in 3.5 hours: 85 scored and 15 experimental. The IRS lists 500 as the passing scaled score on a 200-800 scale; it is not a raw percentage. For the 2026 cycle, use law through December 31, 2025 and calendar year 2025 unless the question says otherwise. Verify the active bulletin before booking.

How the three business domains fit together

Business Entities and Considerations asks you to identify the entity and the consequences of its tax classification. Business Tax Preparation then applies income, deductions, accounting and other return rules. Specialized Returns and Taxpayers adds situations beyond the routine business return. The published allocation is 30, 37 and 18 scored questions respectively, so a plan limited to a few familiar Schedule C calculations leaves substantial coverage unaddressed.

Treat entity identification as the entry point. A sole proprietor, partnership, S corporation and C corporation do not use one interchangeable set of ownership, distribution and reporting rules. The legal name of a business is not always enough to establish its federal tax treatment. Read the classification and election facts supplied before using a formula learned for another entity.

Separate the business’s computation from the owner’s

An entity’s income, an owner’s distributive share, a cash distribution and the owner’s basis are different quantities. In a partnership example, allocated income can affect the partner even if no cash is paid. A distribution can change basis without being the same event as earning income. Keep a separate line for each event so that one number is not counted twice.

For a simplified basis exercise, write beginning basis, increases, decreases and ending basis in order. Label the assumptions, including whether liabilities or losses are excluded. The short example below is deliberately limited; more advanced problems can require additional rules and ordering. A reliable method shows which facts have been considered and which were expressly omitted, rather than pretending a three-line calculation covers every partnership transaction.

Check timing and capitalization before subtracting costs

Cash receipts, constructive receipt and accrual concepts ask when an item is recognized. A completed service and a collected payment can fall in different years, and the answer depends on the method and facts. An amount available without substantial restriction can raise a constructive-receipt issue even when the taxpayer chooses not to withdraw it. Read the availability condition rather than looking only at the bank-deposit date.

For costs, separate current deductions, inventory costs and capitalized acquisition costs. A machine’s purchase, freight and installation may belong in basis under the stated facts, while later depreciation changes adjusted basis. Personal spending does not become deductible merely because a business account paid it. Classifying the cost first helps prevent a mathematically correct subtraction from producing the wrong tax result.

Prepare by changing entity, timing and transaction facts

Use the outline to inventory all three domains, then practice one concept across contrasting situations. Compare an owner receiving income with receiving cash, or equipment acquisition with a later sale. Once the distinctions are clear, mix entity and timing questions so that the correct rule is no longer signaled by the chapter you just read. The aim is to identify the rule independently.

Track mistakes as entity-selection, timing, classification, basis-order or arithmetic errors. These categories suggest different repairs. Repeating arithmetic will not fix the use of a partnership rule in a corporate fact pattern. Use the practice page to test a small sample, the topic lessons for explanation and the retake page only when diagnosing an unsuccessful official attempt. No sample percentage guarantees a passing SEE result.