Free SEE Part 2 practice test: 20 questions
This free SEE Part 2 practice test has 20 questions weighted like the real exam: 7 on Business Entities and Considerations, 9 on Business Tax Preparation and 4 on Specialized Returns and Taxpayers, mirroring the 30/37/18 split of scored questions. All questions use tax year 2025 rules, as the current exam does. They are original questions, not real exam items. At real exam pace, allow about 42 minutes.
Business Entities and Considerations
Question 1. A married couple jointly own and operate an unincorporated catering business. They are its only owners, both materially participate, file a joint return and have not formed a state-law entity. How can they report the business?
- A. They must file Form 1065 because there are two owners
- B. They must file Form 1120-S
- C. They can elect qualified joint venture treatment and each file a Schedule C
- D. Only the spouse with more hours may report the business
Show answer
Answer: C
Spouses meeting these conditions can elect to be treated as a qualified joint venture, so each reports their share of income and expenses on their own Schedule C and Schedule SE instead of filing a partnership return. Form 1120-S requires an S election by a corporation, and Form 1065 is the default the election avoids.
Question 2. A partner receives a guaranteed payment for services from the partnership. How is the payment treated?
- A. Deductible by the partnership in figuring ordinary income and ordinary income to the partner, generally subject to self-employment tax
- B. A nontaxable distribution that reduces the partner’s basis
- C. Wages reported to the partner on Form W-2
- D. Capital gain to the partner
Show answer
Answer: A
A guaranteed payment for services is deductible in figuring the partnership’s ordinary income and is ordinary income to the partner, generally subject to self-employment tax. It is paid regardless of partnership profit, is not a distribution reducing basis, and is not wages reported on Form W-2 because a partner is not an employee of the partnership.
Question 3. Which of the following decreases a partner's basis in a partnership interest?
- A. The partner’s share of partnership taxable income
- B. An additional cash contribution by the partner
- C. An increase in the partner’s share of partnership liabilities
- D. A cash distribution to the partner
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Answer: D
Distributions of cash reduce basis, as do the partner’s share of losses and a decrease in the partner’s share of liabilities. A share of taxable income, an additional contribution and an increase in the share of partnership liabilities all increase basis.
Question 4. Which partnership is eligible to elect out of the centralized partnership audit regime for 2025?
- A. One with five individual partners and one partner that is itself a partnership
- B. One with six individual partners and two C corporation partners
- C. One with four individual partners and a trust as partner
- D. One with 150 individual partners
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Answer: B
A partnership can elect out only if it has 100 or fewer eligible partners, and eligible partners are individuals, C corporations, S corporations, certain foreign entities and estates of deceased partners. A partnership, a trust or more than 100 partners makes the partnership ineligible.
Question 5. Which shareholder would make a corporation ineligible to be an S corporation?
- A. A US citizen living abroad
- B. The estate of a deceased shareholder
- C. A nonresident alien individual
- D. A resident alien individual
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Answer: C
An S corporation can have only eligible shareholders — individuals, estates, certain trusts and certain exempt organisations — and cannot have a nonresident alien shareholder. A US citizen living abroad, a decedent’s estate and a resident alien are all eligible shareholders.
Question 6. An S corporation shareholder has stock basis of $8,000 and has personally lent the corporation $5,000. Her share of the corporation's 2025 ordinary loss is $15,000. How much loss can she deduct for 2025, before the at-risk and passive activity limits?
- A. $8,000
- B. $5,000
- C. $15,000
- D. $13,000
Show answer
Answer: D
An S corporation shareholder can deduct losses up to her stock basis plus her debt basis from loans she personally made to the corporation: $8,000 plus $5,000 equals $13,000. The remaining $2,000 is suspended and carried forward until basis is restored. Stock basis alone ignores debt basis, and the full loss exceeds total basis.
Question 7. A C corporation owns 30% of the stock of a taxable domestic corporation and receives $100,000 of dividends from it. Before any taxable income limitation, what is its dividends-received deduction?
- A. $50,000
- B. $65,000
- C. $80,000
- D. $100,000
Show answer
Answer: B
A corporation owning 20% or more, but less than 80%, of a domestic corporation’s stock generally deducts 65% of dividends received, here $65,000. The 50% rate applies to less-than-20%-owned corporations, and 100% applies to certain affiliated group members.
Business Tax Preparation
Question 8. A sole proprietor pays $300 for a dinner with a client at which they discuss a contract. The proprietor attends. How much is deductible in 2025?
- A. $150
- B. $300
- C. $25
- D. $0
Show answer
Answer: A
Business meals with a client, where the taxpayer is present and the meal is not lavish, are generally 50% deductible, so $150. The full $300 ignores the 50% limit, and the $25 per-recipient cap applies to gifts, not meals.
Question 9. In 2025, a self-employed consultant drives 8,000 business miles and pays $200 in business parking fees. She uses the standard mileage rate. What is her total vehicle-related deduction?
- A. $5,600
- B. $5,360
- C. $5,800
- D. $8,000
Show answer
Answer: C
The 2025 standard mileage rate is 70 cents per mile, so 8,000 miles gives $5,600. Business parking fees and tolls are deductible in addition to the standard mileage rate, for a total of $5,800. $5,600 omits the parking, and $5,360 uses a rate that is not the 2025 rate.
Question 10. On Schedule M-1 of Form 1120, which item is added to net income per books to reach taxable income?
- A. Tax-exempt interest income
- B. The dividends-received deduction
- C. Tax depreciation in excess of book depreciation
- D. Federal income tax expense
Show answer
Answer: D
Federal income tax is expensed in the books but not deductible for tax, so it is added back. Tax-exempt interest is book income that is not taxable, so it is subtracted, and the dividends-received deduction is a tax deduction with no book counterpart, also subtracted. Tax depreciation in excess of book depreciation is an additional deduction, also subtracted.
Question 11. A furniture store receives $12,000 in cash from one customer for a single purchase. Which form must the store file?
- A. Form 8300
- B. Form 1099-NEC
- C. Form 1099-K
- D. Form W-2G
Show answer
Answer: A
A business that receives more than $10,000 in cash in one transaction, or in related transactions, must file Form 8300. Form 1099-NEC reports nonemployee compensation paid, Form 1099-K is filed by payment settlement entities, and Form W-2G reports certain gambling winnings.
Question 12. A business acquires and places in service new machinery in May 2025 and makes no election. What special depreciation allowance applies?
- A. 40%
- B. 100%
- C. 60%
- D. 80%
Show answer
Answer: B
The 2025 legislation reinstated a 100% special depreciation allowance for qualified property acquired and placed in service after January 19, 2025. A taxpayer may elect a 40% allowance instead for the first tax year ending after that date, but without an election the 100% allowance applies.
Question 13. A business buys a car placed in service in 2025 and uses it 45% for business. Which statement is correct?
- A. It can claim section 179 on the 45% business portion
- B. It can claim the special allowance but not section 179
- C. It cannot claim section 179 or the special allowance and must use straight-line ADS
- D. It cannot depreciate the car at all
Show answer
Answer: C
Listed property must be used more than 50% for qualified business use to claim the section 179 deduction or a special depreciation allowance. At 45%, neither is available and the business portion is depreciated under the alternative depreciation system using the straight-line method.
Question 14. All of the following are categories of evidence the IRS considers in deciding whether a worker is an employee or an independent contractor, EXCEPT:
- A. Behavioural control
- B. Financial control
- C. The relationship of the parties
- D. The worker’s educational qualifications
Show answer
Answer: D
The IRS groups the evidence into behavioural control, financial control and the relationship of the parties. The worker’s educational qualifications are not one of these categories, so D is the exception.
Question 15. A C corporation that is not a farming business or insurance company has a net operating loss for 2025. How is the loss generally used?
- A. Carried forward indefinitely, with the deduction generally limited to 80% of taxable income
- B. Carried back 2 years, then forward 20 years
- C. Carried forward 20 years with no percentage limit
- D. Deducted only against capital gains
Show answer
Answer: A
For corporations, NOLs arising in tax years after 2017 generally cannot be carried back — only farming losses and certain insurance company losses can — and are carried forward indefinitely, with the deduction limited to 80% of taxable income. A 20-year life and a 2-year carryback belong to older rules.
Question 16. Which 2025 exchange can qualify as a like-kind exchange?
- A. A delivery truck for a newer delivery truck
- B. An office building used in a business for undeveloped land held for investment
- C. Shares of one corporation for shares of another
- D. A personal residence for a rental apartment building
Show answer
Answer: B
Since 2018, like-kind exchange treatment is limited to real property held for use in a trade or business or for investment. An office building held for business exchanged for land held for investment qualifies. Vehicles, equipment and stock are not real property, and a personal residence is not held for business or investment.
Specialized Returns and Taxpayers
Question 17. What is the main role of distributable net income (DNI) in taxing a trust and its beneficiaries?
- A. It limits the trust’s distribution deduction and the amount taxable to beneficiaries
- B. It is the trust’s taxable income after all deductions
- C. It determines which tax rate schedule applies
- D. It is the income the trust instrument requires to be distributed
Show answer
Answer: A
DNI limits both the distribution deduction the trust can claim and the amount the beneficiaries must include in income, so income is taxed once, either to the trust or to the beneficiaries. It is not the trust’s taxable income, a rate schedule or the fiduciary accounting income set by the governing instrument.
Question 18. A decedent's estate has $750 of gross income for its 2025 tax year and no nonresident alien beneficiaries. Must the executor file Form 1041?
- A. No, because the $600 exemption reduces taxable income to $150
- B. No, estates file only in the year of final distribution
- C. Yes, because gross income is $600 or more
- D. Yes, but only if there is a nonresident alien beneficiary
Show answer
Answer: C
A domestic estate must file Form 1041 if its gross income for the tax year is $600 or more, whatever its taxable income. $750 exceeds that threshold. The $600 exemption reduces taxable income but does not remove the filing requirement.
Question 19. To qualify as a real estate professional for 2025, a taxpayer must meet which requirement, in addition to material participation?
- A. Hold a state real estate licence
- B. More than half of personal services, and more than 750 hours, in real property trades or businesses
- C. Actively participate in at least one rental property
- D. Have modified AGI below $100,000
Show answer
Answer: B
More than half of the personal services performed in all trades or businesses must be in real property trades or businesses in which the taxpayer materially participates, and those services must exceed 750 hours for the year. A licence, active participation or an income threshold is not the test.
Question 20. At least two-thirds of a farmer's gross income for 2024 and 2025 was from farming. He did not make estimated tax payments for 2025. How can he avoid an estimated tax penalty?
- A. By making four quarterly payments in 2026
- B. By filing Form 4835 with his return
- C. He cannot; estimated payments were required each quarter
- D. By filing his 2025 return and paying all tax due by March 2, 2026
Show answer
Answer: D
A farmer meeting the two-thirds gross income test does not have to make estimated payments for 2025 if he files his 2025 return and pays all tax due by March 2, 2026. Otherwise a single required payment by January 15, 2026 applies. Quarterly payments are not required of qualifying farmers, and Form 4835 is for landowners who do not materially participate.
How did you do?
| Score | What it suggests |
|---|---|
| 17–20 | Close to exam-ready. Sit a full timed exam next |
| 14–16 | On track. Rework the domain where you dropped most |
| Below 14 | Go back to the domain guides before another practice run |
Check which domain your misses came from. Wrong answers in questions 1–7 point to the business entities guide, 8–16 to business tax preparation and 17–20 to specialized returns. If most misses were calculations you understood but got wrong, the exam tips on fixed layouts will help more than more reading.