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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 361
The American Opportunity Tax Credit is available for:
Select an option first.
Correct answer: A — The FIRST 4 YEARS of post-secondary education, PER STUDENT
Explanation: The AOTC covers the first FOUR YEARS of post-secondary education, is claimed PER STUDENT, and is 40% REFUNDABLE. The LIFETIME LEARNING CREDIT is available for UNLIMITED years, is claimed PER RETURN, and is NONREFUNDABLE — the per-student vs per-return distinction decides most questions.
Question 362
A §1033 involuntary conversion permits deferral if the proceeds are reinvested in:
Select an option first.
Correct answer: A — QUALIFYING REPLACEMENT property, generally within 2 years (3 for federal condemnation of real property)
Explanation: §1033 permits deferral where property is involuntarily converted (destroyed, stolen, condemned) and the proceeds are REINVESTED in qualifying replacement property. The replacement period is generally 2 YEARS (3 years for condemnation of real property held for business or investment). Gain is recognised to the extent proceeds are NOT reinvested.
Question 363
Depreciation under MACRS for RESIDENTIAL RENTAL property uses a recovery period of:
Select an option first.
Correct answer: A — 27.5 years
Explanation: RESIDENTIAL RENTAL property: 27.5 years, straight-line, mid-month convention. NONRESIDENTIAL REAL property: 39 years. The other common classes: 5-year (autos, computers), 7-year (furniture, fixtures), 15-year (land improvements).
Question 364
The §179 expensing election is limited by:
Select an option first.
Correct answer: D — A dollar cap, a dollar-for-dollar PHASE-OUT above a spending threshold, AND the taxpayer's ACTIVE BUSINESS TAXABLE INCOME
Explanation: §179 has THREE limits, applied in order: (1) the annual DOLLAR CAP; (2) a dollar-for-dollar PHASE-OUT once qualifying property placed in service exceeds a threshold; and (3) the TAXABLE INCOME limitation — §179 cannot create a loss. The excess disallowed by the income limit carries forward.
Question 365
The order of applying cost recovery is:
Select an option first.
Correct answer: D — §179 FIRST, then BONUS depreciation, then MACRS on the remaining basis
Explanation: The ORDER is: §179 FIRST → BONUS depreciation on the remaining basis → MACRS on what is left. Getting the sequence wrong changes every downstream number. Note also that §179 cannot create a loss, but BONUS depreciation CAN.
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Question 366
A wash sale occurs when a taxpayer sells stock at a LOSS and:
Select an option first.
Correct answer: D — Acquires SUBSTANTIALLY IDENTICAL stock within 30 days BEFORE or AFTER the sale
Explanation: A WASH SALE arises when substantially identical securities are acquired within 30 DAYS BEFORE OR AFTER a loss sale (a 61-day window). The LOSS is DISALLOWED, and is instead ADDED to the basis of the replacement shares — deferred, not destroyed. Note the rule does NOT apply to GAINS.
Question 367
Losses on sales between RELATED PARTIES are:
Select an option first.
Correct answer: A — DISALLOWED — though the disallowed loss may reduce a later gain on the buyer's resale to an unrelated party
Explanation: §267 DISALLOWS losses on sales between related parties (family members, an individual and a controlled corporation). The disallowed loss is not lost forever: the RELATED BUYER may use it to REDUCE a subsequent GAIN on resale to an unrelated party — but it can never create or increase a loss.
Question 368
The kiddie tax applies to the UNEARNED income of a child who is:
Select an option first.
Correct answer: B — Under 19 (or under 24 if a full-time student), taxing income above a threshold at the PARENT'S marginal rate
Explanation: The KIDDIE TAX applies to a child's UNEARNED income (interest, dividends, capital gains) — NOT to earned income. It applies to children under 19, or under 24 if a full-time student whose earned income does not exceed half their support. Unearned income above the threshold is taxed at the PARENT'S marginal rate.
Question 369
A cash-basis taxpayer receives a cheque on 30 December but does not deposit it until 3 January. The income is recognised in:
Select an option first.
Correct answer: D — DECEMBER — CONSTRUCTIVE RECEIPT occurred when the cheque was made available without restriction
Explanation: CONSTRUCTIVE RECEIPT: income is taxable when it is credited, set apart, or made available without substantial limitation. Holding an uncashed cheque does NOT defer the income. (Had the cheque arrived on 2 January, it would be January income.)
Question 370
A taxpayer's employer offers to pay a bonus in December or defer it to January at the employee's election. If the employee elects deferral, the income is taxable in:
Select an option first.
Correct answer: A — JANUARY — a valid deferral election made BEFORE the income is earned/available avoids constructive receipt
Explanation: Constructive receipt does NOT apply where the taxpayer's control is subject to substantial limitations, or where a valid DEFERRAL ELECTION was made BEFORE the amount was earned or made available. Timing is everything: an election made AFTER the income was available would fail.
Question 371
Prizes and awards are:
Select an option first.
Correct answer: D — Generally INCLUDED in gross income at FMV — with a narrow exclusion for certain achievement awards transferred directly to charity
Explanation: PRIZES and AWARDS are generally INCLUDED in gross income at FMV. A narrow exclusion applies where the recipient is selected without action, is not required to render services, AND DIRECTS the payor to transfer the award to a charity. Employee ACHIEVEMENT awards (tangible personal property) have their own limited exclusion.
Question 372
Gambling losses are deductible:
Select an option first.
Correct answer: C — As an ITEMISED deduction, but ONLY to the extent of gambling WINNINGS
Explanation: GAMBLING LOSSES are deductible ONLY to the extent of gambling WINNINGS, and only as an ITEMISED deduction. A taxpayer taking the standard deduction gets NO benefit — yet must still report the WINNINGS in gross income. Losses may not create a net deduction.
Question 373
The exclusion of gain under §121 requires ownership AND use as a principal residence for:
Select an option first.
Correct answer: C — 2 of the last 5 years — and the two tests need NOT cover the same 2 years
Explanation: Both the OWNERSHIP and USE tests require 2 OF THE LAST 5 YEARS, and — importantly — they need NOT be the SAME two years. For MFJ, only ONE spouse must meet OWNERSHIP, but BOTH must meet USE.
Question 374
A taxpayer sells a principal residence after only 14 months due to a job relocation. They may claim:
Select an option first.
Correct answer: D — A PARTIAL exclusion, prorated by qualifying months over 24
Explanation: A PARTIAL exclusion is available where the sale is due to a CHANGE OF EMPLOYMENT, HEALTH, or other UNFORESEEN CIRCUMSTANCES. It prorates the MAXIMUM EXCLUSION (not the gain) by qualifying months / 24. Note it prorates the CAP, not the gain — a distinction that changes the answer entirely.
Question 375
The 'gift of loss property' trap means a taxpayer should:
Select an option first.
Correct answer: C — SELL the loss property, claim the loss personally, and GIFT THE CASH — gifting destroys the built-in loss
Explanation: When FMV is BELOW the donor's basis, the donee's LOSS basis is limited to FMV — so the built-in loss simply EVAPORATES. The planning rule: NEVER gift loss property. Sell it, take the loss yourself, and gift the cash instead.
Question 376
A donee sells gifted property for an amount BETWEEN the donor's basis and the lower FMV at the date of gift. The result is:
Select an option first.
Correct answer: B — NO gain and NO loss — the 'no man's land' of the dual-basis rule
Explanation: Under the DUAL-BASIS rule (when FMV < donor's basis at the gift date), the GAIN basis is the donor's basis and the LOSS basis is FMV. A sale price falling BETWEEN the two produces NEITHER gain NOR loss — the celebrated 'no man's land'.
Question 377
An asset is sold at a gain. It was §1245 property with accumulated depreciation of $30,000 and a gain of $20,000. Ordinary income recapture is:
Select an option first.
Correct answer: A — $20,000 — recapture is limited to the GAIN
Explanation: §1245 recapture = the LESSER of the GAIN or the ACCUMULATED DEPRECIATION. Here the gain is only $20,000, so recapture is capped at $20,000 — all of it ordinary income, with no §1231 gain left over. Recapture can never EXCEED the gain.
Question 378
Unrecaptured §1250 gain is taxed at a MAXIMUM rate of:
Select an option first.
Correct answer: A — 25%
Explanation: UNRECAPTURED §1250 GAIN — the straight-line depreciation taken on real property — is taxed at a MAXIMUM of 25%. Because post-1986 real property uses straight-line, there is almost never any §1250 ORDINARY recapture; it is nearly all unrecaptured §1250 gain at 25%.
Question 379
In a §1031 exchange, debt RELIEF is treated as:
Select an option first.
Correct answer: B — BOOT RECEIVED (netted against any debt assumed and cash paid)
Explanation: Debt RELIEF (the other party assuming your mortgage) is BOOT RECEIVED. Debt ASSUMED by you is boot GIVEN. The two are NETTED — only NET relief counts as boot. Cash PAID also offsets debt relief.
Question 380
A rental real estate activity is generally:
Select an option first.
Correct answer: D — PASSIVE per se — regardless of participation — unless the taxpayer qualifies as a REAL ESTATE PROFESSIONAL
Explanation: Rental activities are PASSIVE PER SE, even if the taxpayer materially participates. Two exceptions: the $25,000 ACTIVE PARTICIPATION allowance (phased out over an AGI range), and qualifying as a REAL ESTATE PROFESSIONAL (over 750 hours AND more than half of personal services in real property trades).
Question 381
Suspended passive losses are RELEASED when the taxpayer:
Select an option first.
Correct answer: B — Makes a FULLY TAXABLE DISPOSITION of the ENTIRE interest to an UNRELATED party
Explanation: Suspended passive losses are FULLY RELEASED on a COMPLETE, FULLY TAXABLE DISPOSITION of the ENTIRE activity to an UNRELATED party. A partial sale, a gift, or a sale to a related party does NOT trigger release. Timing that disposition is genuine tax planning.
Question 382
The AMT exemption:
Select an option first.
Correct answer: D — PHASES OUT as AMTI rises above a threshold, effectively increasing the marginal AMT rate in the phase-out range
Explanation: The AMT exemption PHASES OUT (typically at 25 cents per dollar) as AMTI exceeds a threshold. Within the phase-out range, each additional dollar of AMTI increases the AMT base by MORE than a dollar — producing an effective marginal rate ABOVE the stated 26%/28%.
Question 383
Social Security benefits are:
Select an option first.
Correct answer: B — Includible up to 50% or 85%, depending on PROVISIONAL INCOME (AGI + tax-exempt interest + half the benefits)
Explanation: Up to 85% of Social Security benefits may be taxable, depending on PROVISIONAL INCOME — AGI + tax-exempt interest + one-half of the benefits. Note that MUNICIPAL BOND interest, though excluded from gross income, IS counted in provisional income — so it can indirectly increase the tax on benefits.
Question 384
A taxpayer who is self-employed may deduct health insurance premiums:
Select an option first.
Correct answer: D — ABOVE the line, limited to net self-employment income and not available if eligible for an employer plan (including a spouse's)
Explanation: SELF-EMPLOYED HEALTH INSURANCE is an ABOVE-the-line deduction, capped at net SE income, and DISALLOWED for any month the taxpayer is eligible for subsidised coverage through an employer plan — INCLUDING a SPOUSE'S employer plan. That spousal disqualification is the trap.
Question 385
One-half of self-employment tax is deductible:
Select an option first.
Correct answer: C — ABOVE the line, reducing AGI (this deduction is allowed even for taxpayers taking the standard deduction)
Explanation: One-half of the regular SE tax is deducted ABOVE the line. It approximates the employer's share of FICA, which an employee would never have been taxed on. Note the ADDITIONAL 0.9% Medicare tax is NOT deductible.
Question 386
SE tax is computed on:
Select an option first.
Correct answer: A — 92.35% of NET SE income — the reduction approximates the exclusion of the employer's FICA share
Explanation: SE tax applies to 92.35% of NET SE earnings. The 7.65% haircut mirrors the fact that an employee's own FICA is not included in their wage base. Wages already subject to FICA reduce the amount of SE income subject to the Social Security portion (but not the Medicare portion, which is uncapped).
Question 387
A hobby loss is:
Select an option first.
Correct answer: D — NOT deductible — hobby EXPENSES are disallowed entirely post-TCJA, while hobby INCOME remains taxable
Explanation: Post-TCJA, hobby EXPENSES are NOT deductible at all (they were formerly miscellaneous itemised deductions subject to the 2% floor, which was suspended). Yet hobby INCOME remains fully TAXABLE. The activity is presumed a BUSINESS if it shows a profit in 3 of 5 consecutive years (2 of 7 for horses).
Question 388
A taxpayer materially participates in an activity if they:
Select an option first.
Correct answer: C — Meet ANY of seven tests — most commonly, participating MORE THAN 500 HOURS during the year
Explanation: MATERIAL PARTICIPATION is established by meeting ANY ONE of seven tests. The most common: more than 500 HOURS; substantially all the participation; more than 100 hours and no one else participates more; or participation on a regular, continuous and substantial basis. Material participation makes the activity NON-passive.
Question 389
The $25,000 rental real estate allowance is available to a taxpayer who:
Select an option first.
Correct answer: C — ACTIVELY participates (a lower standard) and owns at least 10% — phased out over an AGI range
Explanation: The $25,000 allowance requires only ACTIVE PARTICIPATION — a LOWER standard than material participation (approving tenants, setting rents, approving expenditures) — and at least a 10% ownership interest. It PHASES OUT as AGI rises through a specified range, disappearing entirely above the top of that range.
Question 390
A taxpayer qualifies as a REAL ESTATE PROFESSIONAL if they:
Select an option first.
Correct answer: B — Spend MORE THAN 750 HOURS AND MORE THAN HALF of all personal services in real property trades or businesses
Explanation: A REAL ESTATE PROFESSIONAL must satisfy BOTH: more than 750 HOURS in real property trades or businesses, AND more than HALF of all personal services performed in such businesses. If so, rental activities in which they MATERIALLY PARTICIPATE are NOT passive — a powerful result that unlocks losses against ordinary income.
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