You’re on a roll
Create a free account to save your CPA progress, track your accuracy by topic, and pick up right where you left off.
Free Questions › CPA › Taxation and Regulation
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 301
A partner receives a LIQUIDATING distribution of $30,000 cash and land (inside basis $10,000; FMV $60,000). Their outside basis is $70,000. The partner's basis in the LAND is:
Select an option first.
Correct answer: C — $40,000 — the remaining outside basis after cash is ABSORBED into the land; no loss is recognised
Explanation: Liquidating distribution ordering: (1) CASH reduces basis: $70,000 − $30,000 = $40,000 remaining. (2) The remaining $40,000 is ABSORBED into the LAND — even though the land's inside basis was only $10,000. NO loss is recognised, because property OTHER than cash/receivables/inventory was received. The partner's land basis becomes $40,000.
Question 302
A C corporation liquidates and distributes an asset (basis $200,000; FMV $80,000) to a RELATED shareholder who owns 60%. The corporation's LOSS is:
Select an option first.
Correct answer: B — DISALLOWED — losses on liquidating distributions to RELATED parties (over 50% ownership) of non-pro-rata property are not recognised
Explanation: Although a corporation generally recognises BOTH gains and losses in a complete liquidation, §336(d) DISALLOWS losses on distributions to a RELATED party (over 50% ownership) where the distribution is NOT PRO RATA, or where the property is 'disqualified property' (contributed within 5 years with a built-in loss). The anti-abuse rule prevents manufactured losses.
Question 303
A corporation has current E&P of $(60,000) (a deficit) and accumulated E&P of $100,000. It distributes $80,000 on 1 July. The DIVIDEND portion is approximately:
Select an option first.
Correct answer: C — $70,000 — accumulated E&P of $100,000, less the current deficit PRORATED to 1 July ($30,000)
Explanation: When CURRENT E&P is a DEFICIT and ACCUMULATED E&P is positive, the current deficit is PRORATED to the distribution date. Half the year has elapsed by 1 July, so $(60,000) × 6/12 = $(30,000). Available E&P = $100,000 − $30,000 = $70,000. Dividend = $70,000; the remaining $10,000 is a return of capital, then capital gain.
Question 304
A shareholder in a §351 exchange contributes property AND services. Property FMV $70,000; services FMV $30,000; they receive stock worth $100,000 and own 100%. The shareholder recognises:
Select an option first.
Correct answer: A — $30,000 of ORDINARY INCOME for the services — §351 protects only the PROPERTY portion
Explanation: §351 protects only the transfer of PROPERTY. Stock received for SERVICES produces ORDINARY INCOME equal to its FMV ($30,000), and those shares do NOT count toward the 80% control test. (Here control is met anyway, since the shareholder owns 100%, so the PROPERTY portion still qualifies for non-recognition.) The corporation deducts or capitalises the $30,000.
Question 305
A partnership's §704(c) allocation: a partner contributes property with a basis of $40,000 and an FMV of $100,000. The partnership later sells it for $110,000. The gain allocated to the CONTRIBUTING partner is:
Select an option first.
Correct answer: D — The $60,000 PRECONTRIBUTION gain entirely, PLUS their share of the $10,000 post-contribution gain
Explanation: §704(c) requires BUILT-IN GAIN existing at contribution ($100,000 − $40,000 = $60,000) to be allocated ENTIRELY to the CONTRIBUTING partner. Only the POST-contribution appreciation ($110,000 − $100,000 = $10,000) is shared per the partnership agreement. This is a MANDATORY anti-abuse rule preventing gain-shifting to lower-bracket partners.
Get the full CPA question bank — free
Drop your email and we'll send you fresh CPA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 306
A donor transfers $18,000 to a trust for a minor with NO right of withdrawal. The annual exclusion available is:
Select an option first.
Correct answer: C — ZERO — a gift to a trust with no present enjoyment is a FUTURE interest, which does not qualify
Explanation: The annual exclusion requires a PRESENT INTEREST — an immediate, unrestricted right to use or enjoy the property. A gift to a trust with NO right of withdrawal is a FUTURE interest and gets NO exclusion; the entire $18,000 consumes lifetime exemption. A CRUMMEY POWER (a temporary right to withdraw) is the standard fix, converting it into a present interest.
Question 307
A C corporation pays its sole shareholder-employee a salary of $800,000. The IRS deems $300,000 unreasonable. The consequences are:
Select an option first.
Correct answer: B — The corporation LOSES a $300,000 deduction (paying 21% tax on it), and the shareholder is taxed on a $300,000 DIVIDEND rather than wages — creating DOUBLE tax
Explanation: Excessive compensation is recharacterised as a CONSTRUCTIVE DIVIDEND. The corporation loses the $300,000 DEDUCTION (adding $63,000 of corporate tax at 21%), AND the shareholder is taxed on a DIVIDEND. Note the shareholder may actually pay LESS personal tax (dividend rates beat ordinary wage rates) — but the corporate deduction loss makes it worse OVERALL. Both levels must be considered.
Question 308
An LLC taxed as a partnership has two members. One member's basis is $0 and the LLC allocates them a $20,000 loss. The LLC then borrows $100,000 (recourse to neither member). The member's deductible loss is:
Select an option first.
Correct answer: D — Potentially $20,000 — the NONRECOURSE debt increases outside BASIS (a partner's share of nonrecourse liabilities creates basis), though the AT-RISK rules may still limit it
Explanation: This chains two concepts. NONRECOURSE debt DOES increase a partner's OUTSIDE BASIS (partners share nonrecourse liabilities). So basis is restored and the loss clears the BASIS hurdle. BUT nonrecourse debt generally does NOT increase the AT-RISK amount — except for QUALIFIED NONRECOURSE REAL ESTATE financing. So the loss may still be blocked at the at-risk stage. Basis and at-risk are NOT the same test.
Question 309
A corporation with a June 30 year-end elects S status on 1 September. The election is effective:
Select an option first.
Correct answer: D — The FOLLOWING tax year — an election made after the 15th day of the 3rd month of the current year takes effect the next year
Explanation: An S election must be filed by the 15th day of the THIRD MONTH of the tax year to be effective for THAT year. Filed later, it takes effect for the FOLLOWING tax year. (Separately, the corporation would then generally have to change to a CALENDAR year, since S corporations must use one absent a business purpose.)
Question 310
A partnership distributes inventory (inside basis $20,000; FMV $50,000) to a partner in a CURRENT distribution. The partner's outside basis is $60,000. The partner sells the inventory 3 years later for $55,000. The gain is:
Select an option first.
Correct answer: B — $35,000 ORDINARY income — distributed inventory retains its ORDINARY character for 5 years
Explanation: The partner takes the inventory at a CARRYOVER basis of $20,000 (below their $60,000 outside basis, so no cap applies). Selling it for $55,000 gives a $35,000 gain. Because it was INVENTORY when distributed and was sold within FIVE YEARS, the gain is ORDINARY. Holding past 5 years would allow capital treatment (if it is a capital asset in the partner's hands).
Question 311
A corporation is a PHC. It has undistributed PHC income of $200,000. The PHC tax is:
Select an option first.
Correct answer: C — $40,000 — 20% of undistributed PHC income
Explanation: PHC tax = 20% × undistributed PHC income = 20% × $200,000 = $40,000. It is imposed IN ADDITION to the regular 21% corporate tax. Note the PHC tax is SELF-ASSESSED (the taxpayer computes it), whereas the AET is IRS-ASSERTED — and BOTH may be escaped by DISTRIBUTING the income.
Question 312
A shareholder owns 100% of an S corporation. In Year 1 the corporation has a $50,000 loss (basis $30,000). In Year 2 it has $60,000 of income. Taxable income to the shareholder in Year 2 is:
Select an option first.
Correct answer: D — $40,000 — $60,000 of current income LESS the $20,000 of suspended loss now released as basis is restored
Explanation: Year 1: the $50,000 loss is limited to the $30,000 basis; $20,000 is SUSPENDED and basis drops to zero. Year 2: the $60,000 income RESTORES basis, which RELEASES the $20,000 suspended loss. Net taxable = $60,000 − $20,000 = $40,000. The suspended loss is not lost; it waits for basis.
Question 313
A Type B reorganisation: the acquirer exchanges voting stock for 85% of the target's shares, and pays $10,000 cash for fractional shares. The reorganisation is:
Select an option first.
Correct answer: D — INVALID — a Type B requires SOLELY VOTING STOCK; ANY boot, even cash for fractional shares, destroys it
Explanation: TYPE B is the strictest reorganisation: SOLELY VOTING STOCK, with no boot whatsoever. Even a small cash payment for fractional shares can destroy it (in practice, careful structuring avoids this). Contrast a TYPE A statutory merger, which tolerates substantial boot — up to roughly 60% — because continuity of interest requires only ~40% stock.
Question 314
A partnership has two partners sharing profits equally. Partner A contributed cash of $100,000; Partner B contributed services. The partnership loses $60,000. Absent an agreement on losses, they are shared:
Select an option first.
Correct answer: C — EQUALLY — losses follow the PROFIT-sharing ratio absent a contrary agreement
Explanation: LOSSES follow the PROFIT-sharing ratio absent a specific agreement. Sharing profits EQUALLY means sharing losses EQUALLY — $30,000 each — even though A contributed all the capital and B contributed only services. This surprises capital partners routinely, and is exactly why partnership agreements specify loss allocations separately.
Question 315
A corporation redeems ALL of a shareholder's stock. The shareholder's SON remains a shareholder. To qualify as a COMPLETE TERMINATION (sale treatment), the shareholder must:
Select an option first.
Correct answer: A — WAIVE family attribution — agreeing to have no interest (other than as a creditor) for 10 years and to notify the IRS of any acquisition
Explanation: §318 FAMILY ATTRIBUTION would deem the shareholder to still own the son's shares, defeating the 'complete termination'. A WAIVER of family attribution is available if the shareholder: retains NO interest other than as a CREDITOR (no officer, director or employee role); acquires no interest for TEN YEARS (except by inheritance); and NOTIFIES the IRS of any prohibited acquisition. Without the waiver, it is a DIVIDEND.
Question 316
A corporation has an NOL of $500,000 arising in 2016 (pre-TCJA) and taxable income of $400,000 this year. The NOL deduction is:
Select an option first.
Correct answer: C — $400,000 — PRE-2018 NOLs are NOT subject to the 80% limitation
Explanation: PRE-2018 NOLs have a 2-year carryback and 20-year carryforward, and are NOT subject to the 80% of taxable income limitation. So the full $400,000 offsets all current taxable income. The 80% cap applies ONLY to post-2017 NOLs. The NOL's VINTAGE determines the rules — the fact pattern will always tell you the year.
Question 317
Same facts, but the taxpayer INHERITED the residence (FMV at death $500,000) instead. The taxable gain is:
Select an option first.
Correct answer: A — $0 — the §1014 step-up gives a $500,000 basis; gain of $100,000 is fully covered by the $250,000 §121 exclusion
Explanation: INHERITED property gets a STEP-UP to FMV at death ($500,000). Gain = $600,000 − $500,000 = $100,000, fully sheltered by the $250,000 §121 exclusion. Taxable = $0. Compare the GIFT version: $200,000 taxable. Identical facts, and the transfer method alone swings the tax by $200,000 — the clearest illustration of why the gift/inheritance basis distinction matters.
Question 318
A partnership has a §754 election. Partner C DIES; their interest passes to an heir. The heir's outside basis is the FMV at death ($300,000); C's share of inside basis was $180,000. The §743(b) adjustment is:
Select an option first.
Correct answer: B — A $120,000 step-up, benefiting the HEIR only
Explanation: DEATH triggers §743(b) where a §754 election is in effect. The heir's outside basis is stepped up to FMV ($300,000) under §1014, while inside basis remains $180,000. The §743(b) adjustment of $120,000 steps up INSIDE basis with respect to the HEIR ONLY — preventing them from being taxed on gain that was already reflected in the estate.
Question 319
The individual income tax formula begins with:
Select an option first.
Correct answer: A — GROSS INCOME, less above-the-line deductions, to arrive at AGI
Explanation: Gross income − Above-the-line deductions (for AGI) = ADJUSTED GROSS INCOME. AGI − the greater of the standard or itemised deduction − the QBI deduction = TAXABLE INCOME. AGI is the pivotal figure, because it gates the medical floor, charitable ceilings, and dozens of phase-outs.
Question 320
An ABOVE-the-line deduction is one that:
Select an option first.
Correct answer: C — Reduces AGI — and is therefore worth MORE than a below-the-line deduction of the same size
Explanation: Above-the-line deductions reduce AGI. Because AGI gates so many other limits, a dollar deducted ABOVE the line is worth more than a dollar deducted BELOW it. Examples: HSA contributions, one-half of self-employment tax, self-employed health insurance, student loan interest, and educator expenses.
Question 321
The medical expense itemised deduction is allowed only to the extent it EXCEEDS:
Select an option first.
Correct answer: B — 7.5% of AGI
Explanation: Qualified medical expenses are deductible only to the extent they EXCEED 7.5% of AGI. The 7.5% floor is now permanent. Expenses paid from an HSA or reimbursed by insurance are EXCLUDED — you cannot deduct what you already paid with tax-free money.
Question 322
A tax CREDIT differs from a tax DEDUCTION in that a credit:
Select an option first.
Correct answer: B — Reduces the TAX itself, dollar for dollar
Explanation: A DEDUCTION reduces taxable INCOME (its value = deduction × marginal rate). A CREDIT reduces the TAX itself, dollar for dollar. A $1,000 credit is worth $1,000 to every taxpayer; a $1,000 deduction is worth only $220 to someone in the 22% bracket.
Question 323
A REFUNDABLE credit:
Select an option first.
Correct answer: D — Can reduce tax below zero, generating a refund
Explanation: A REFUNDABLE credit can reduce tax BELOW ZERO, producing a refund even when no tax is owed (the Earned Income Credit, the Additional Child Tax Credit, and 40% of the AOTC). A NONREFUNDABLE credit can only reduce tax to zero (the Lifetime Learning Credit, the Child and Dependent Care Credit).
Question 324
Head of Household filing status requires the taxpayer to be:
Select an option first.
Correct answer: C — UNMARRIED, to have paid MORE THAN HALF the cost of maintaining a household, and to have a QUALIFYING PERSON living there for more than half the year
Explanation: Head of Household requires ALL of: unmarried (or considered unmarried) at year-end; paying MORE THAN 50% of the household maintenance costs; and a QUALIFYING PERSON residing there for MORE THAN HALF the year. Exception: a dependent PARENT need NOT live with the taxpayer.
Question 325
The qualifying CHILD tests are remembered as CARES. The 'A' stands for:
Select an option first.
Correct answer: C — AGE — under 19, under 24 if a full-time student, or any age if permanently and totally disabled
Explanation: CARES: Citizen (US/Canada/Mexico); AGE (under 19, under 24 if a full-time student, any age if disabled); Relationship (child, sibling, or descendant of either); Economic support (the child did not provide over half of their OWN support); Same principal residence for more than half the year.
Question 326
Unlike a qualifying CHILD, a qualifying RELATIVE is subject to:
Select an option first.
Correct answer: D — A GROSS INCOME limit
Explanation: The QUALIFYING RELATIVE test (SUPORT) includes a GROSS INCOME limit — the person's gross income must be below a specified threshold. The QUALIFYING CHILD test has NO gross income limit. That is the biggest structural difference between the two, and it decides many dependency questions.
Question 327
Municipal bond interest is:
Select an option first.
Correct answer: D — EXCLUDED from gross income for federal purposes
Explanation: Interest on state and local (municipal) bonds is EXCLUDED from federal gross income — a PERMANENT difference. Note it may still be an AMT preference item for certain private activity bonds, and it can affect the taxability of Social Security benefits.
Question 328
Life insurance proceeds received by a beneficiary on the death of the insured are:
Select an option first.
Correct answer: A — EXCLUDED from gross income
Explanation: Life insurance DEATH BENEFITS are EXCLUDED from the beneficiary's gross income. (Interest earned on proceeds left with the insurer IS taxable, and a transfer-for-value can destroy the exclusion.) Premiums paid are generally NOT deductible — the two rules are a matched pair.
Question 329
Gifts and inheritances received are:
Select an option first.
Correct answer: B — EXCLUDED from the recipient's gross income (the transfer tax falls on the donor/estate, not the recipient)
Explanation: GIFTS and INHERITANCES are EXCLUDED from the RECIPIENT'S gross income. Any transfer tax (gift or estate tax) is imposed on the DONOR or the ESTATE, not on the recipient. However, INCOME subsequently earned on the gifted or inherited property IS taxable to the recipient.
Question 330
Alimony under a divorce decree executed AFTER 2018 is:
Select an option first.
Correct answer: C — NEITHER deductible by the payor NOR taxable to the recipient
Explanation: For decrees executed AFTER 2018 (post-TCJA), alimony is NEITHER deductible by the payor NOR includible in the recipient's income. For PRE-2019 decrees, the old rules still apply (deductible/taxable) unless the decree is modified to adopt the new treatment. The date of the decree is decisive.
More free CPA topics
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.