EA Part 2 common mistakes
EA Part 2 · Understand the traps and how to avoid them.
Treating a single-member LLC as a separate entity for federal tax purposes instead of a disregarded entity, and filing a separate return for it.
Candidates conflate state law entity formation with federal tax classification, and default to assuming every LLC files its own return.
What to do instead
Before answering any entity-classification item, ask two questions: how many owners, and has Form 8832 or 2553 been filed? With one owner and no election, the LLC is disregarded and reports on the owner's return (Schedule C, or Schedule E if rental).
Applying the corporate 21% rate or corporate-level tax to an S corporation's income.
The pass-through rules are known in the abstract but are dropped under time pressure when the word 'corporation' appears in the stem.
What to do instead
Anchor on the phrase 'S corporations generally pay no federal income tax.' Income, deductions, and credits flow to shareholders via Schedule K-1 and are taxed at shareholder rates. Reserve the 21% rate for C corporations.
Failing to separately state a partner's guaranteed payment versus distributive share, and treating guaranteed payments as self-employment income without analysis.
Guaranteed payments and distributive shares both appear on Schedule K-1 and candidates collapse them into one number.
What to do instead
Memorize the distinction: a guaranteed payment is made without regard to partnership income and is ordinary income to the partner; a distributive share is the partner's allocable portion of partnership items. Report them on separate lines and analyze SE tax treatment separately.
Mixing the filing deadlines for calendar-year partnerships, S corporations, and C corporations, and missing the extension rules.
Multiple dates are memorized as a block and then recalled imprecisely under exam pressure.
What to do instead
Build a date table and rehearse it: partnership and S corporation returns (Forms 1065 and 1120-S) due the 15th day of the third month after year end; C corporation Form 1120 due the 15th day of the fourth month. Confirm the extension period for each before answering.
Assuming an extension to file also extends the time to pay tax owed.
Candidates treat 'extension' as a single concept rather than separating filing from payment.
What to do instead
State the rule explicitly in your reasoning: an extension extends the filing deadline only. Any tax due is still owed by the original due date, and interest and penalties accrue on late payment.
Missing the due date for a trust or estate return or applying individual taxpayer rules to it.
Fiduciary returns are studied less and candidates default to individual rules.
What to do instead
Flag Form 1041 as a specialized return, confirm its due date and extension treatment as part of your date table, and note that fiduciary income is taxed to the estate or trust or distributed to beneficiaries via Schedule K-1.
Using the cash method for a business with inventory without considering the small business taxpayer exception or the requirement to account for inventory.
Candidates apply the cash method reflexively because it is the default they know best, without checking eligibility.
What to do instead
Before choosing a method, test eligibility: check the gross receipts threshold for the small business taxpayer exception and whether the business must account for inventory. If inventory is required, use an accrual-based inventory method unless an exception applies.
Confusing the rules for changing an accounting method with the rules for adopting one on the first return.
Both involve Form 3115 in candidates' memory, and the distinction between initial adoption and a change is blurred.
What to do instead
Separate the two: adopting a method on the first return generally does not require Form 3115, while changing from an established method generally requires Form 3115 and IRS consent. Read the stem for whether a prior method existed.
Deducting capital expenditures as ordinary business expenses, or failing to capitalize and depreciate an asset placed in service.
The line between repair and improvement is fact-intensive and candidates skip the analysis when the stem describes a cost casually.
What to do instead
Apply a two-step test to every cost: does it restore, or does it add to value or prolong life? Repairs are currently deductible; improvements are capitalized. Then identify the recovery period and convention for the capitalized amount.
Claiming a credit without verifying the taxpayer meets the eligibility requirements, such as the qualified business income deduction thresholds or the research credit substantiation rules.
Candidates recognize a credit name and assume it applies, skipping the qualification screen.
What to do instead
For every credit or deduction item, write out the eligibility conditions first, then test the facts against them. If a threshold is not given and cannot be inferred, treat the answer as indeterminate rather than assuming eligibility.