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IRS Special Enrollment Examination (SEE) for Enrolled Agents

1. Business entities and considerations: practice questions

Our Enrolled Agent (SEE) bank has 72 questions on this topic. Here are 5 of them with answers; the full mock exam draws from every topic, like the real one.

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Question 1

Which is a 'family partnership' rule for capital interests received as a gift?

  1. The donee is never treated as a partner
  2. The donee's share must reflect reasonable compensation for the donor's services and be in proportion to capital
  3. Only children over 18 can be partners
  4. The donee's income is taxed to the donor in all cases
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B. The donee's share must reflect reasonable compensation for the donor's services and be in proportion to capital — A family member is a partner if capital is a material income-producing factor and he or she owns a capital interest. Income must first be allocated for services rendered by the donor.

Question 2

Which disqualifies a corporation from being an S corporation?

  1. Having two classes of stock with different distribution rights
  2. Having a December year end
  3. Having 90 shareholders
  4. Having voting and nonvoting common stock with identical distribution rights
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A. Having two classes of stock with different distribution rights — An S corporation may have only one class of stock. Differences in voting rights alone do not create a second class.

Question 3

Health insurance premiums an S corporation pays for a more-than-2% shareholder-employee are:

  1. Excluded from the shareholder's income
  2. Treated as a nondeductible distribution
  3. Subject to Social Security tax
  4. Included in the shareholder's W-2 wages, and the shareholder may claim the self-employed health insurance deduction
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D. Included in the shareholder's W-2 wages, and the shareholder may claim the self-employed health insurance deduction — Premiums for a 2% shareholder are reported in box 1 of Form W-2 (not subject to Social Security and Medicare if paid under a plan) and the shareholder may deduct them as self-employed health insurance.

Question 4

Which item INCREASES a partner's basis in a partnership interest?

  1. The partner's share of nondeductible expenses
  2. The partner's share of tax-exempt income
  3. A decrease in the partner's share of liabilities
  4. Cash distributions to the partner
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B. The partner's share of tax-exempt income — Basis increases for contributions, share of taxable and tax-exempt income, and increases in share of liabilities. It decreases for distributions, losses, nondeductible expenses and decreases in liabilities.

Question 5

A partner's share of partnership losses is deductible only to the extent of:

  1. The partner's share of partnership income in prior years
  2. The partner's adjusted basis in the interest at year end, then at-risk and passive limits
  3. $25,000 per year
  4. The cash the partner contributed in the current year
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B. The partner's adjusted basis in the interest at year end, then at-risk and passive limits — Losses are limited first by basis, then by the at-risk rules, then by the passive activity rules (and the excess business loss limit). Disallowed amounts carry forward.

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