EA Part 2 (SEE 2: Businesses) Cheat Sheet (2026): Basis, Entities & Depreciation Rules

IRS Special Enrollment Examination Part 2 (SEE 2: Businesses) is widely considered the hardest of the three EA exams because Business Financial Information accounts for 45.3% of the test (38–39 scored questions).

Key facts

Official Governing Authority

Internal Revenue Service (IRS) & Prometric

Exam Format

100 Multiple-Choice Questions (85 scored + 15 experimental), 3.5 hours

Passing Scaled Score

105 on the 40–130 IRS scale

3 Official SEE 2 Domains

Business Entities & Considerations (35.3% / 30 Qs), Business Tax Preparation (45.3% / 38.5 Qs), Specialized Returns & Taxpayers (19.4% / 16.5 Qs)

VoraPrep EA Coverage

180 interactive lessons, 3,228+ IRS SEE questions, 767 FSRS flashcards ($19/mo or $149/yr)

1. Entity Formation & Basis Comparison Matrix (C-Corp vs. S-Corp vs. Partnership)

Feature	C-Corporation (Form 1120)	S-Corporation (Form 1120-S)	Partnership (Form 1065)
Tax-Free Formation Rule	IRC §351: Must own ≥80% control immediately after transfer; services do NOT count as property	IRC §351: Same ≥80% control test	IRC §721: No 80% control required (unless investment company)
Liability Assumed by Entity	Tax-free unless liabilities exceed adjusted basis (IRC §357(c) gain = Excess Liability)	Same (IRC §357(c) gain if liabilities > basis)	Partner's basis decreases by liabilities relieved + increases by share of partnership liabilities (IRC §752); gain only if net relief exceeds outside basis
Entity Debt Increases Owner Basis?	N/A	NO — Only direct shareholder loans create debt basis	YES — Recourse debt allocated by loss-sharing; nonrecourse by profit-sharing
Non-Liquidating Property Distribution	Corp recognizes gain (not loss) as if sold at FMV (§311(b)); Shareholder taxed on dividend to extent of E&P	S-Corp recognizes gain (flows through to all shareholders); shareholder reduces basis by FMV	Generally tax-free to both partnership and partner (§731); partner takes carryover basis capped at outside basis
Filing Due Date (Calendar Year)	April 15 (4th month); 6-mo extension to Oct 15	March 15 (3rd month); 6-mo extension to Sept 15	March 15 (3rd month); 6-mo extension to Sept 15

2. High-Yield Business Tax Formulas & Rules

Topic	Statutory Rule / Formula	Exam Watchout
Start-Up & Organizational Costs (IRC §195 / §248 / §709)	Deduct up to $5,000 in Year 1, reduced dollar-for-dollar once total costs exceed $50,000 (fully phased out at $55,000). Remainder amortized straight-line over 180 months (15 years).	Syndication costs (issuing/marketing partnership interests) are never deductible or amortizable.
MACRS Recovery Periods (IRC §168)	5-Year: Autos, trucks, computers, office machinery, breeding cattle. 7-Year: Office furniture, fixtures, general equipment. 15-Year: Qualified Improvement Property (QIP), land improvements. 27.5-Year: Residential rental. 39-Year: Nonresidential realty.	Mid-Quarter Convention triggers if >40% of personal property basis is placed in service during Q4 (excludes realty and property placed/disposed in same year).
Section 197 Intangibles	Acquired goodwill, covenants not to compete, franchises, trademarks, patents acquired with a business: amortized straight-line over 180 months (15 years) starting the month of acquisition.	Self-created goodwill is not amortizable; all §197 intangibles use 15 years regardless of legal life.
Dividends Received Deduction (DRD — IRC §243)	<20% owned: 50% DRD. 20% to <80% owned: 65% DRD. ≥80% owned (affiliated): 100% DRD.	Capped at 50%/65% of taxable income before DRD, unless subtracting the full DRD creates or increases a Net Operating Loss (NOL).
Schedule M-1 Book-to-Tax Formula	Net Book Income + Federal Income Tax Expense + Excess Capital Losses + Non-deductible Meals (50%) / Fines / Political Contributions + Tax-Over-Book Income − Tax-Exempt Interest − Book-Over-Tax Depreciation = Taxable Income.	Tax-exempt municipal bond interest and life insurance proceeds (where corp is beneficiary) are in Book Income but subtracted on M-1.

Frequently Asked Questions

What is the 4-step basis ordering rule for S-Corporations and Partnerships on EA Part 2?

When calculating year-end basis and determining how much loss a partner or S-Corp shareholder can deduct, you must adjust basis in this exact statutory order: (1) Increase for income items (including tax-exempt income), (2) Decrease for distributions (cash/property), (3) Decrease for nondeductible, noncapital expenses (e.g., 50% meals, fines), and (4) Decrease for deductible losses (never below zero). VoraPrep's EA SEE 2 lessons walk through interactive basis waterfalls for both Form 1065 and Form 1120-S.

How does the IRC §199A QBI deduction work on EA Part 2?

Eligible non-corporate taxpayers deduct up to 20% of Qualified Business Income (QBI) from pass-through entities (sole proprietorships, partnerships, S-Corps), capped at 20% of taxable income minus net capital gains. Above the taxable income phase-in thresholds, Specified Service Trades or Businesses (SSTBs—health, law, accounting, consulting, financial services; engineering and architecture are explicitly excluded) phase out, and non-SSTBs are limited to the greater of 50% of W-2 wages or 25% of W-2 wages + 2.5% of UBIA of qualified property. VoraPrep drills §199A calculations across every threshold tier.

What is the best way to pass EA Part 2 on the first try?

Focus 80% of your study time on Basis (C-Corp, S-Corp, Partnership), Depreciation (§179, MACRS, §1245/§1250 recapture), and Book-to-Tax M-1 reconciliations. VoraPrep's EA course ($19/month or $149/year) includes 1,200+ SEE 2 practice questions, interactive entity comparison tables, and a 1:1 Prometric exam simulator.