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Free CPA Taxation and Regulation Practice Questions & Answers
500 exam-style Taxation and Regulation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 271
A corporation has a $50,000 capital gain and a $70,000 capital loss. The deductible capital loss this year is:
Select an option first.
Correct answer: A — $50,000 — offsetting the capital GAIN only; the $20,000 excess carries back 3 / forward 5
Explanation: Corporations offset capital losses ONLY against capital GAINS. Deduct $50,000 (matching the gain). The remaining $20,000 carries BACK 3 years and FORWARD 5, as a short-term loss.
Question 272
A partnership has ordinary income of $300,000, tax-exempt interest of $20,000, and a separately-stated charitable contribution of $10,000. A 40% partner's basis INCREASES by:
Select an option first.
Correct answer: A — $124,000 — 40% of ($300,000 + $20,000 - $10,000)
Explanation: Basis increases for ALL income items — INCLUDING TAX-EXEMPT income — and decreases for ALL deductions, including separately-stated charitable contributions. Net = $300,000 + $20,000 - $10,000 = $310,000. Partner's share = 40% x $310,000 = $124,000. Omitting the tax-exempt interest gives $116,000 (option D) — the intended trap; tax-exempt income DOES create basis.
Question 273
A shareholder's S corporation stock basis is $60,000. The corporation reports ordinary income of $40,000, tax-exempt interest of $5,000, and a distribution of $30,000 (30% shareholder). Ending basis is:
Select an option first.
Correct answer: A — $43,500 — $60,000 + 30%($40,000) + 30%($5,000) − $30,000
Explanation: Order: INCREASE for income (30% × $40,000 = $12,000) and tax-exempt income (30% × $5,000 = $1,500), giving $73,500. Then DECREASE for the $30,000 distribution = $43,500. Tax-exempt income DOES increase basis.
Question 274
A C corporation with taxable income of $400,000 pays tax of:
Select an option first.
Correct answer: B — $84,000 — the flat 21% rate
Explanation: Corporate tax = 21% × $400,000 = $84,000. The flat 21% rate applies to ALL taxable income, including capital gains — corporations have no preferential capital gains rate.
Question 275
A corporation's §163(j) limit: business interest income $10,000; ATI $500,000; no floor plan interest. The deductible business interest is:
Select an option first.
Correct answer: A — $160,000 — $10,000 + 30% × $500,000
Explanation: §163(j) limit = business interest INCOME ($10,000) + 30% of ATI ($150,000) + floor plan interest ($0) = $160,000. Any business interest EXPENSE above that is disallowed and carries forward INDEFINITELY.
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Question 276
A partnership distributes property (inside basis $30,000; FMV $45,000) to a partner whose outside basis is $50,000, in a CURRENT distribution. The partner's basis in the property is:
Select an option first.
Correct answer: C — $30,000 — a carryover basis, since it is BELOW the partner's $50,000 outside basis
Explanation: In a CURRENT distribution, property takes a CARRYOVER basis ($30,000), CAPPED at the partner's remaining outside basis ($50,000). The carryover is lower, so it governs. The partner's outside basis drops to $50,000 − $30,000 = $20,000. NO gain is recognised.
Question 277
A shareholder owns 60 of a corporation's 100 shares. The corporation redeems 20. Post-redemption ownership is:
Select an option first.
Correct answer: B — 50% — 40 of the remaining 80 shares
Explanation: After redeeming 20 shares, the shareholder holds 40 and the corporation has 80 outstanding: 40/80 = 50%. To be SUBSTANTIALLY DISPROPORTIONATE, ownership must fall BELOW 80% of the former percentage (80% × 60% = 48%) AND below 50%. At exactly 50%, BOTH tests FAIL — so this is a DIVIDEND, not a sale.
Question 278
A corporation's E&P: taxable income $200,000; federal tax paid $42,000; municipal interest $15,000; non-deductible fines $8,000. Current E&P is:
Select an option first.
Correct answer: D — $165,000 — $200,000 − $42,000 + $15,000 − $8,000
Explanation: E&P = Taxable income $200,000 − Federal income tax $42,000 (a real cash outflow) + Municipal interest $15,000 (cash received, not taxable) − Non-deductible fines $8,000 (a real cash outflow) = $165,000. E&P measures ECONOMIC dividend capacity.
Question 279
A partner sells their partnership interest for $100,000. Outside basis is $60,000. The partnership holds unrealised receivables with a value of $25,000 attributable to that partner. The ORDINARY income is:
Select an option first.
Correct answer: B — $25,000 — the HOT ASSET portion under §751
Explanation: Total gain = $100,000 − $60,000 = $40,000. Under §751, the portion attributable to HOT ASSETS (unrealised receivables and inventory) is ORDINARY: $25,000. The REMAINING $15,000 is CAPITAL gain. Treating the whole $40,000 as capital gain (option A) is the intended trap.
Question 280
An estate has gross income of $80,000, deductions of $20,000, and distributes $50,000. DNI is $60,000. Taxable income of the ESTATE is:
Select an option first.
Correct answer: B — $10,000 — DNI of $60,000 less the $50,000 distribution deduction
Explanation: The estate is a CONDUIT: it deducts distributions up to DNI. Distribution deduction = the LESSER of the distribution ($50,000) or DNI ($60,000) = $50,000. Estate taxable income ≈ $60,000 − $50,000 = $10,000 (before the personal exemption). The beneficiaries are taxed on $50,000.
Question 281
A donor makes a taxable gift of $500,000 and has $200,000 of prior taxable gifts. Cumulative taxable gifts are:
Select an option first.
Correct answer: D — $700,000 — the gift tax is CUMULATIVE over the donor's lifetime
Explanation: The gift tax is CUMULATIVE: current-year taxable gifts ($500,000) are ADDED to all prior taxable gifts ($200,000) = $700,000. Tax is computed on the cumulative total, with a credit for gift tax deemed paid on the prior gifts — which pushes the current gift into higher brackets.
Question 282
A decedent's gross estate is $10,000,000; debts and expenses are $500,000; and $2,000,000 passes to a surviving US citizen spouse. The TAXABLE estate is:
Select an option first.
Correct answer: D — $7,500,000 — $10m less $500k of debts less the $2m unlimited marital deduction
Explanation: Taxable estate = Gross estate $10,000,000 − Debts/expenses $500,000 − Marital deduction $2,000,000 (UNLIMITED for a US citizen spouse) = $7,500,000. The exemption is then applied against this figure.
Question 283
A CFC has Subpart F income of $500,000. A US shareholder owns 25%. The current inclusion is:
Select an option first.
Correct answer: B — $125,000 — 25% of the Subpart F income, taxed CURRENTLY with no distribution
Explanation: Subpart F income is included CURRENTLY in the income of 10%-or-greater US shareholders, in proportion to ownership: 25% × $500,000 = $125,000. No distribution is required — that is the entire point of an anti-deferral regime.
Question 284
A corporation has an NOL carryforward of $300,000 (post-2017) and current taxable income of $250,000. Taxable income after the NOL is:
Select an option first.
Correct answer: A — $50,000 — the NOL is limited to 80% × $250,000 = $200,000
Explanation: NOL deduction = 80% × $250,000 = $200,000. Taxable income after NOL = $250,000 − $200,000 = $50,000, on which tax is paid. The unused $100,000 of NOL carries forward indefinitely.
Question 285
A partnership allocates a $60,000 loss to a partner with an outside basis of $40,000, an at-risk amount of $25,000, and $10,000 of passive income. The DEDUCTIBLE loss is:
Select an option first.
Correct answer: D — $10,000 — the loss must clear BASIS ($40,000), then AT-RISK ($25,000), then PASSIVE ($10,000 of passive income)
Explanation: The THREE HURDLES, in order: (1) BASIS limits the loss to $40,000. (2) AT-RISK limits it further to $25,000. (3) PASSIVE limits it to passive income of $10,000. Deductible = $10,000. The rest is suspended at the respective levels. This sequential mechanic is the single most examinable structure in the loss rules.
Question 286
A C corporation converts to an S corporation. At conversion, assets have an FMV of $800,000 and a basis of $500,000. NUBIG is:
Select an option first.
Correct answer: C — $300,000 — the net unrealised built-in gain (FMV less basis at conversion)
Explanation: NUBIG = FMV of assets − adjusted basis at the S-election date = $800,000 − $500,000 = $300,000. This is the CEILING on the built-in gains tax: no matter how much gain is recognised later, the BIG tax can never reach beyond the appreciation existing at conversion.
Question 287
A corporation distributes property (basis $60,000; FMV $40,000 — a LOSS) as a non-liquidating dividend. The corporation recognises:
Select an option first.
Correct answer: A — NO loss — losses on non-liquidating distributions of depreciated property are NOT recognised
Explanation: A corporation recognises GAIN on distributing APPRECIATED property (as if sold at FMV), but does NOT recognise LOSS on distributing DEPRECIATED property in a NON-LIQUIDATING distribution. The asymmetry discourages distributing loss assets. (In a COMPLETE LIQUIDATION, losses generally ARE recognised.)
Question 288
A trust has taxable income of $14,000 retained. Trusts reach the top bracket at very low income levels. This illustrates that trusts should generally:
Select an option first.
Correct answer: B — DISTRIBUTE income to beneficiaries, who are usually in lower brackets — hence the 65-day rule
Explanation: Trust brackets are HIGHLY COMPRESSED — the top rate is reached at a very low income level (a few thousand dollars). Retaining income is therefore expensive. Distributing shifts the tax to beneficiaries in lower brackets, and the 65-DAY RULE allows that decision to be made up to 65 days AFTER year-end.
Question 289
A corporation has AFSI of $1.5 billion and regular tax of $180 million. CAMT is 15% of AFSI. The CAMT liability is:
Select an option first.
Correct answer: B — $45 million — the EXCESS of CAMT ($225m) over regular tax ($180m)
Explanation: CAMT = 15% × $1.5 billion = $225 million. The corporation pays the GREATER of regular tax or CAMT — so the ADDITIONAL liability is $225m − $180m = $45 million. Like the individual AMT, it is a FLOOR, not a second tax.
Question 290
Halloran Corp has taxable income of $100,000 before the DRD, including $150,000 of dividends from a 25%-owned corporation. The DRD is:
Select an option first.
Correct answer: D — $65,000 — the taxable-income limitation APPLIES, because the full DRD would still leave positive taxable income
Explanation: Tentative DRD = 65% x $150,000 = $97,500. Taxable-income limit = 65% x $100,000 = $65,000. Now TEST the NOL exception: would the FULL $97,500 create an NOL? Taxable income would be $100,000 - $97,500 = $2,500 — still POSITIVE. NO NOL is created, so the exception does NOT apply and the limitation GOVERNS. DRD = $65,000. Had taxable income been $90,000, the full DRD would produce $(7,500) — an NOL — and the limitation would be WAIVED, allowing the full $97,500. The exception turns on a single dollar.
Question 291
A partner's outside basis is $20,000. The partnership's debt allocated to them DROPS by $35,000 during the year. The partner recognises:
Select an option first.
Correct answer: A — A $15,000 CAPITAL GAIN — the debt reduction is a DEEMED CASH DISTRIBUTION exceeding basis
Explanation: A DECREASE in a partner's share of partnership liabilities is a DEEMED CASH DISTRIBUTION. Deemed cash of $35,000 exceeds the $20,000 outside basis, producing a $15,000 CAPITAL GAIN — with NO actual cash received. This 'phantom gain' is one of the most dangerous features of partnership taxation.
Question 292
A shareholder contributes property (basis $30,000; FMV $100,000) to a corporation in a §351, and the corporation assumes a $45,000 liability. The shareholder recognises:
Select an option first.
Correct answer: B — $15,000 GAIN — the liability ($45,000) EXCEEDS the basis ($30,000), and the excess is taxable
Explanation: Liabilities assumed are generally NOT boot — UNLESS they EXCEED the ADJUSTED BASIS of the property transferred. Excess = $45,000 − $30,000 = $15,000, recognised as GAIN. The shareholder's stock basis becomes $30,000 − $45,000 + $15,000 = $0 (basis can never go negative).
Question 293
An S corporation shareholder has stock basis of $30,000 and debt basis of $20,000. A $45,000 loss is allocated in Year 1; in Year 2 the corporation reports $25,000 of income. At the END of Year 2, the shareholder's DEBT basis is:
Select an option first.
Correct answer: D — $20,000 — fully restored, because income restores DEBT basis BEFORE stock basis
Explanation: YEAR 1: the $45,000 loss reduces STOCK basis first ($30,000 to zero), then DEBT basis by the remaining $15,000 — leaving debt basis of $5,000. YEAR 2: income RESTORES DEBT BASIS FIRST. $15,000 of the $25,000 income fully restores debt basis to $20,000; the remaining $10,000 then increases STOCK basis to $10,000. The RESTORATION order (debt before stock) is the REVERSE of the reduction order (stock before debt) — and that inversion is exactly what is tested.
Question 294
A corporation redeems 40 of a shareholder's 100 shares; the corporation has 200 shares outstanding. The shareholder's SON owns another 50 shares. Post-redemption, the shareholder's ownership (with attribution) is:
Select an option first.
Correct answer: C — 68.75% — attributing the son's 50 shares: (60 + 50) / 160
Explanation: §318 FAMILY ATTRIBUTION deems the shareholder to own their SON'S shares. Pre-redemption: (100 + 50)/200 = 75%. Post-redemption: (60 + 50)/160 = 110/160 = 68.75%. To be substantially disproportionate, they must fall below 80% × 75% = 60% AND below 50%. At 68.75%, BOTH tests FAIL — so this is a DIVIDEND, not a sale. Attribution destroys what looked like a clean redemption.
Question 295
A partner sells their partnership interest for $150,000. Outside basis is $90,000, which INCLUDES a $40,000 share of partnership debt. The amount realised is:
Select an option first.
Correct answer: D — $190,000 — cash received PLUS the $40,000 of debt RELIEF
Explanation: AMOUNT REALISED includes the RELIEF FROM LIABILITIES: $150,000 cash + $40,000 debt relief = $190,000. Gain = $190,000 − $90,000 outside basis = $100,000. Ignoring the debt relief gives a gain of only $60,000 — understating it by exactly the debt. Both sides of the debt must be tracked.
Question 296
A C corporation with $200,000 of E&P distributes property (basis $50,000; FMV $120,000) to its sole shareholder. The effect on E&P is:
Select an option first.
Correct answer: C — INCREASED by the $70,000 gain, then REDUCED by the $120,000 FMV distributed — a net reduction of $50,000
Explanation: TWO effects. First, the corporation recognises a $70,000 GAIN (as if it sold at FMV), which INCREASES E&P. Second, the distribution REDUCES E&P by the FMV of $120,000. Net effect = +$70,000 − $120,000 = a $50,000 REDUCTION. Missing the gain step is the classic error.
Question 297
An S corporation has AAA of $60,000 and AE&P of $50,000. A shareholder with a stock basis of $80,000 receives a $130,000 distribution. The TAXABLE DIVIDEND is:
Select an option first.
Correct answer: D — $50,000 — the AE&P tier
Explanation: Tiers in order: (1) AAA $60,000 — TAX-FREE, reducing stock basis from $80,000 to $20,000. (2) AE&P $50,000 — a TAXABLE DIVIDEND (note: dividends do NOT require basis and do NOT reduce it). (3) The remaining $20,000 — tax-free return of basis, absorbing the $20,000 that remains. Nothing is left for capital gain. The taxable dividend is the AE&P tier alone: $50,000.
Question 298
A corporation makes an S election effective 1 January. It has AE&P of $40,000 from its C years and passive investment income of 30% of gross receipts for 3 consecutive years. The consequence is:
Select an option first.
Correct answer: C — TERMINATION of the S election, plus a corporate-level tax on the excess net passive income in the interim years
Explanation: An S corporation with AE&P whose PASSIVE INVESTMENT INCOME exceeds 25% of gross receipts for THREE CONSECUTIVE years has its election TERMINATED. A corporate-level tax also applies to the excess in each year. CRITICALLY, this trap only fires where AE&P EXISTS — an S corp that was never a C corp is immune, which is why purging AE&P (via a bypass election) is a real strategy.
Question 299
A partnership has a §754 election in effect. Partner A sells their interest to B for $200,000. A's share of inside basis is $120,000. The §743(b) adjustment is:
Select an option first.
Correct answer: D — A POSITIVE $80,000 adjustment, benefiting B ONLY — inside basis is stepped up with respect to the transferee
Explanation: §743(b) adjusts inside basis with respect to the TRANSFEREE ONLY: $200,000 purchase price − $120,000 share of inside basis = an $80,000 step-up, benefiting B alone. The other partners' inside basis is UNCHANGED. Without a §754 election, D would suffer a permanent mismatch — paying $200,000 but inheriting only $120,000 of inside basis.
Question 300
A corporation's §382 limitation after an ownership change: the equity value at the change date is $5,000,000 and the long-term tax-exempt rate is 3%. The ANNUAL NOL usage limit is:
Select an option first.
Correct answer: C — $150,000 — equity value × the long-term tax-exempt rate
Explanation: §382 limit = Equity value at the change date × the long-term tax-exempt rate = $5,000,000 × 3% = $150,000 PER YEAR. In a low-rate environment this is brutally small — a $10 million NOL would take 66 years to use, rendering it practically worthless. That is precisely why the rate environment matters so much to loss-company valuations.
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