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IRS Special Enrollment Examination Part 2 - Businesses Practice Test

The IRS Special Enrollment Examination Part 2 - Businesses practice material covers federal tax treatment of business income, expenses, assets, and transactions. Its question bank includes scenarios involving partnership contributions and income allocation, corporate returns and compensation, inventory and sales returns, business records, net operating losses, state franchise taxes, and start-up costs.

Exam overview

Exam providerInternal Revenue Service
Exam codeNot listed
CategoryTax Professional

About the IRS Special Enrollment Examination Part 2 - Businesses Exam

Business tax preparation requires identifying the entity and transaction before determining how an item is reported. Partnership scenarios call for distinguishing a contribution from taxable income and matching a partner’s distributive share to the applicable reporting year. Corporate questions involve return timing, deductible compensation, and the treatment of taxes paid to states. For sole proprietors and other businesses, questions address substantiating expenses, separating personal and business costs, and evaluating qualifying pre-opening costs. Inventory and sales scenarios test how unsold merchandise and returned goods affect business income calculations. Net operating loss questions require attention to federal rules that can change over time. These concepts support practical tasks such as organizing client records, classifying receipts and outlays, and preparing or reviewing business tax returns.

Sample Practice Questions

Review a selection from this exam's published US Practice Tests practice bank.

Question 1

A sole proprietor begins operating a business during the year and pays ordinary, necessary costs before the business opens. Which statement best describes the possible treatment of qualifying start-up costs?

  1. AAll costs must be deducted as personal expenses because the business had not opened.
  2. BQualifying costs may be deductible under the rules for start-up expenditures, subject to applicable limits and amortization requirements.
  3. CAll costs must be deducted immediately, without regard to amount or type.
  4. DQualifying costs are treated as wages paid to the owner.
Show answerCorrect answer: B

Certain expenses incurred in investigating or creating an active trade or business may qualify as start-up expenditures. The tax rules generally provide a limited current deduction, with remaining qualifying amounts amortized over a specified period once the business begins; not every pre-opening cost qualifies.

Question 2

A C corporation pays a state franchise tax imposed on the corporation for doing business in the state. How is the payment generally treated for federal income tax purposes?

  1. AIt may generally be deductible as a business tax expense, subject to applicable federal rules.
  2. BIt is always a nondeductible personal expense of the corporation’s shareholders.
  3. CIt must be reported as wages paid to the corporation’s officers.
  4. DIt is automatically refundable as a federal tax credit.
Show answerCorrect answer: A

A state tax imposed on a corporation in connection with its business is generally treated as a business expense for federal income tax purposes, subject to applicable rules. Its treatment is separate from any federal tax credit or refund.

Question 3

A business buys merchandise for resale and has not sold all of it by year-end. Under the general inventory rules, what does the cost of the unsold merchandise generally represent?

  1. AA current deduction in the year purchased, regardless of whether the goods are sold.
  2. BA personal expense that cannot be recovered for tax purposes.
  3. CAn amount generally included in ending inventory and recovered through cost of goods sold when the merchandise is sold.
  4. DA tax credit equal to the purchase price.
Show answerCorrect answer: C

For a business required to account for merchandise as inventory, the cost of unsold goods generally remains in ending inventory at year-end. The cost is generally taken into account in cost of goods sold as the goods are sold, subject to applicable accounting and tax rules.

Question 4

A business sells inventory to a customer and later receives the returned goods in saleable condition. What is the general effect of an allowable sales return on the business's sales reporting?

  1. AIt may be accounted for as a reduction of gross sales or through an appropriate sales-returns account.
  2. BIt is always treated as a charitable contribution.
  3. CIt must be reported as new gross income in the year the goods are returned.
  4. DIt is ignored because the original sale was completed.
Show answerCorrect answer: A

Sales returns and allowances generally reduce gross sales in arriving at net sales, subject to the taxpayer's accounting practices and applicable tax rules. Returned inventory may also affect inventory accounting.

Question 5

A business has a deductible net operating loss for a tax year. Which statement is generally accurate under current federal rules?

  1. AThe loss is automatically refundable as a cash payment
  2. BThe loss may generally be carried forward, subject to applicable limitations
  3. CThe loss must be assigned to the business’s employees
  4. DThe loss is always carried back exactly three years
Show answerCorrect answer: B

Net operating losses are generally carried forward under current federal rules, with limitations that can affect the amount deductible in a future year. Treatment can vary for particular taxpayers and special provisions.

Question 6

A business owner uses a personal credit card to pay a clearly documented business expense. What is the most appropriate general tax-recordkeeping approach?

  1. AIgnore the expense because it was not paid from a business bank account
  2. BRecord the business expense and retain documentation showing its business purpose and amount
  3. CClaim the expense without keeping records because the card issuer has a statement
  4. DTreat the expense as a business asset regardless of what was purchased
Show answerCorrect answer: B

A business expense may still be deductible when paid personally if it otherwise qualifies. The taxpayer should keep records supporting the amount, date, business purpose, and nature of the expense; separating business and personal transactions also improves recordkeeping.

Question 7

A partnership receives a contribution of cash from a new partner in exchange for a partnership interest. What is the general federal income tax treatment of the contribution to the partnership?

  1. AIt is generally treated as a taxable sale of services by the partnership.
  2. BIt is generally not included in the partnership’s gross income.
  3. CIt is generally treated as ordinary income to all existing partners.
  4. DIt is generally deductible by the partnership as an operating expense.
Show answerCorrect answer: B

A partner’s contribution of money or property to a partnership in exchange for a partnership interest is generally not income to the partnership. Other consequences can depend on the transaction’s facts and applicable rules.

How to use this practice test

The free practice bank contains 50 questions. A session presents up to 20 random questions, then shows results so you can identify which business-tax concepts need more review. Use missed items to revisit the underlying transaction and its general federal reporting treatment.

Preparation tips

  • For partnership scenarios, distinguish cash or property contributions from income and trace when partners generally report distributive shares.
  • Practice classifying business expenses, including reasonable employee compensation, state franchise taxes, and documented expenses paid with a personal card.
  • Work through inventory examples involving unsold merchandise, returned goods, and the effect of each on income calculations.
  • Compare start-up costs with ordinary operating expenses, focusing on when the business begins and whether costs qualify for special treatment.
  • For net operating loss questions, verify the applicable current federal rules rather than relying on older carryback or carryforward assumptions.
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