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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 391
The charitable deduction for appreciated LONG-TERM capital gain property given to a PUBLIC charity is:
Select an option first.
Correct answer: C — FAIR MARKET VALUE, limited to 30% of AGI — and NO capital gain is recognised
Explanation: Donating APPRECIATED long-term capital gain property to a PUBLIC charity permits a deduction at FULL FMV (30% of AGI limit), with NO recognition of the built-in gain. Selling first and donating the cash is strictly worse — you would pay tax on the gain and get the same deduction. This is the cleanest planning move in the individual Code.
Question 392
A charitable donation of ORDINARY INCOME property (e.g. inventory, or short-term capital gain property) is deductible at:
Select an option first.
Correct answer: B — The LESSER of BASIS or FMV
Explanation: ORDINARY INCOME property (inventory, works of art created by the donor, short-term capital gain property) is deductible only at the LESSER OF BASIS OR FMV — the built-in appreciation gets NO deduction. The FMV deduction is reserved for LONG-TERM capital gain property.
Question 393
A charitable contribution of appreciated property to a PRIVATE non-operating foundation is limited to:
Select an option first.
Correct answer: A — BASIS (for most property), 20% of AGI
Explanation: Donations to PRIVATE non-operating foundations are far less favourable: generally deductible at BASIS only, subject to a 20% of AGI ceiling. (An exception permits FMV for QUALIFIED APPRECIATED STOCK — publicly traded securities.) Public charity beats private foundation at every tier.
Question 394
A taxpayer's charitable deduction exceeding the AGI limit is:
Select an option first.
Correct answer: D — CARRIED FORWARD for 5 years
Explanation: Excess charitable contributions carry FORWARD for FIVE YEARS, retaining their character (and their applicable AGI percentage limitation). There is NO carryback for individuals.
Question 395
A casualty loss for an individual is deductible:
Select an option first.
Correct answer: C — ONLY if attributable to a FEDERALLY DECLARED DISASTER (post-TCJA), subject to a $100 floor per event and a 10%-of-AGI floor
Explanation: Post-TCJA, PERSONAL casualty losses are deductible ONLY if attributable to a FEDERALLY DECLARED DISASTER. Two floors apply: $100 per EVENT, then 10% of AGI on the aggregate. (Personal casualty GAINS may offset personal casualty losses even outside a declared disaster.)
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Question 396
A taxpayer's home office deduction requires the space to be used:
Select an option first.
Correct answer: A — EXCLUSIVELY and REGULARLY as the PRINCIPAL place of business, or to meet clients, or as a separate structure
Explanation: The home office must be used EXCLUSIVELY and REGULARLY (a) as the principal place of business, (b) as a place to meet clients/customers in the normal course, or (c) in a separate structure. EXCLUSIVITY is strict — a dining table used for both meals and work fails. Note EMPLOYEES may NOT claim it post-TCJA.
Question 397
An HSA offers a TRIPLE tax benefit:
Select an option first.
Correct answer: D — PRE-TAX contributions, TAX-FREE growth, and TAX-FREE withdrawals for qualified medical expenses
Explanation: The HSA is the ONLY vehicle in the Code with all three: a DEDUCTION going in (above the line), TAX-FREE growth, and TAX-FREE withdrawals for qualified medical expenses. It requires enrolment in a HIGH-DEDUCTIBLE HEALTH PLAN. After age 65, non-medical withdrawals are taxable but not penalised.
Question 398
A distribution from a traditional IRA before age 59½ is generally subject to:
Select an option first.
Correct answer: A — A 10% PENALTY, plus ordinary income tax — with exceptions (death, disability, first-time home purchase, qualified education, substantial medical expenses)
Explanation: An EARLY distribution incurs a 10% additional tax plus ordinary income tax. Exceptions include: death; disability; a first-time home purchase (up to a limit); qualified higher education expenses; unreimbursed medical expenses above the AGI floor; and a series of substantially equal periodic payments.
Question 399
Required minimum distributions from a traditional IRA:
Select an option first.
Correct answer: B — Must BEGIN by the required beginning date — and a ROTH IRA has NO lifetime RMD requirement for the owner
Explanation: Traditional IRAs require RMDs beginning at the statutory age (VERIFY the current age — it has changed with recent legislation). A ROTH IRA has NO lifetime RMD for the ORIGINAL OWNER — a major planning advantage. (Inherited accounts have their own distribution rules.)
Question 400
A §529 plan distribution used for qualified education expenses is:
Select an option first.
Correct answer: B — TAX-FREE (earnings excluded); contributions are NOT federally deductible but may qualify for a state deduction
Explanation: §529 plan EARNINGS are TAX-FREE when used for QUALIFIED education expenses. Contributions are NOT deductible federally (though many states allow a deduction). Contributions are treated as completed GIFTS eligible for the annual exclusion, with a 5-year forward-averaging election available.
Question 401
A like-kind exchange between RELATED parties requires both to hold the property for:
Select an option first.
Correct answer: A — 2 YEARS — an earlier disposition by either party triggers the deferred gain
Explanation: §1031(f): in an exchange between RELATED parties, if EITHER party disposes of the property within TWO YEARS, the DEFERRED GAIN is triggered for both. The rule prevents related parties from using an exchange to shift basis and then cash out.
Question 402
The 45-day and 180-day rules in a deferred §1031 exchange are:
Select an option first.
Correct answer: A — ABSOLUTE — identify the replacement property within 45 days and close within 180 days; there is no reasonable-cause extension
Explanation: The IDENTIFICATION period (45 days) and the EXCHANGE period (180 days, or the due date of the return if earlier) are ABSOLUTE. Missing either destroys the exchange entirely. A QUALIFIED INTERMEDIARY is used to prevent CONSTRUCTIVE RECEIPT of the proceeds — touching the cash, even briefly, kills the deferral.
Question 403
A taxpayer's basis in property received in a §1031 exchange is:
Select an option first.
Correct answer: B — Old basis + boot GIVEN − boot RECEIVED + gain RECOGNISED (equivalently, FMV of the new property LESS the deferred gain)
Explanation: New basis = Old basis + Boot given − Boot received + Gain recognised. Equivalently: FMV of new property − deferred gain. The deferred gain is EMBEDDED in the lower basis, so it resurfaces on a later taxable sale. §1031 defers, it does not forgive — except at death, where §1014 steps up basis and the deferred gain disappears permanently.
Question 404
A taxpayer converts a personal residence to rental property. The basis for DEPRECIATION is:
Select an option first.
Correct answer: C — The LESSER of adjusted basis or FMV at the date of conversion
Explanation: On conversion from PERSONAL to BUSINESS use, the DEPRECIATION basis is the LESSER of the adjusted basis or the FMV at conversion. This prevents the taxpayer from depreciating a decline in value that occurred while the property was personal-use (and therefore not deductible).
Question 405
MACRS uses which convention for PERSONAL property, by default?
Select an option first.
Correct answer: B — HALF-YEAR — unless more than 40% of the year's personal property is placed in service in the FOURTH quarter, triggering the MID-QUARTER convention
Explanation: PERSONAL property defaults to the HALF-YEAR convention. If MORE THAN 40% of the year's personal property additions occur in Q4, the MID-QUARTER convention applies to ALL personal property placed in service that year. REAL property always uses the MID-MONTH convention.
Question 406
Bonus depreciation differs from §179 in that bonus depreciation:
Select an option first.
Correct answer: A — CAN create or increase a LOSS, whereas §179 cannot
Explanation: §179 is limited by ACTIVE BUSINESS TAXABLE INCOME and cannot create a loss (the excess carries forward). BONUS depreciation has NO income limitation and CAN create or increase a net operating loss. Bonus applies AUTOMATICALLY unless the taxpayer ELECTS OUT (by class).
Question 407
A gain on the sale of §1231 property held more than one year, where prior-year §1231 losses exist, is:
Select an option first.
Correct answer: B — ORDINARY to the extent of unrecaptured net §1231 LOSSES from the prior FIVE years (the lookback rule)
Explanation: The §1231 LOOKBACK: net §1231 GAINS are recharacterised as ORDINARY income to the extent of net §1231 LOSSES deducted in the prior FIVE years. This prevents taxpayers from taking ordinary losses in one year and capital gains in the next — Congress noticed the arbitrage.
Question 408
An installment sale defers gain, but DEPRECIATION RECAPTURE is:
Select an option first.
Correct answer: C — Recognised IN FULL IN THE YEAR OF SALE — even if no cash is received
Explanation: §1245/§1250 DEPRECIATION RECAPTURE is recognised ENTIRELY IN THE YEAR OF SALE, regardless of how little cash is received. The instalment method defers only the CAPITAL gain. This can produce a tax bill with no cash to pay it — the single most dangerous trap in instalment sales.
Question 409
The gross profit percentage in an instalment sale is:
Select an option first.
Correct answer: D — GROSS PROFIT / CONTRACT PRICE (contract price = selling price less qualifying debt assumed)
Explanation: GP% = Gross Profit / CONTRACT PRICE, where CONTRACT PRICE = selling price MINUS qualifying debt assumed by the buyer. Gain recognised each year = cash received (excluding interest) × GP%. Using the SELLING price as the denominator is the intended error.
Question 410
An estate's basis in property acquired from a decedent may use the ALTERNATE VALUATION DATE if:
Select an option first.
Correct answer: A — The election BOTH (1) DECREASES the gross estate AND (2) DECREASES the estate tax
Explanation: The ALTERNATE VALUATION DATE (6 months after death) may be elected ONLY IF it BOTH decreases the GROSS ESTATE and decreases the ESTATE TAX. Both conditions are required — the executor cannot cherry-pick it merely to raise the beneficiaries' basis.
Question 411
An NIIT applies to:
Select an option first.
Correct answer: B — NET INVESTMENT INCOME — interest, dividends, capital gains, rents, royalties and PASSIVE business income — but NOT wages or ACTIVE business income
Explanation: NII INCLUDES: interest, dividends, annuities, royalties, rents, capital gains, and income from PASSIVE activities. It EXCLUDES: wages, self-employment income, ACTIVE business income, tax-exempt interest, and distributions from qualified retirement plans. That active/passive line is what makes material participation so valuable.
Question 412
A taxpayer subject to the AMT typically has:
Select an option first.
Correct answer: B — Large AMT PREFERENCES and ADJUSTMENTS — such as ISO bargain elements, private activity bond interest, or (formerly) large SALT deductions
Explanation: Common AMT triggers: the BARGAIN ELEMENT on exercise of INCENTIVE STOCK OPTIONS (an AMT adjustment, though not regular-tax income); interest on certain PRIVATE ACTIVITY BONDS; and depreciation differences. Post-TCJA, higher exemptions and the SALT cap have sharply reduced the number of individuals affected.
Question 413
Exercising an INCENTIVE STOCK OPTION (ISO) creates:
Select an option first.
Correct answer: A — NO regular taxable income, but the BARGAIN ELEMENT is an AMT ADJUSTMENT
Explanation: Exercising an ISO produces NO REGULAR taxable income — but the BARGAIN ELEMENT (FMV less exercise price) IS an AMT adjustment, and can produce a large AMT bill on stock the employee has not sold. A QUALIFYING disposition (2 years from grant, 1 year from exercise) then gives full LTCG treatment on sale.
Question 414
A NON-QUALIFIED stock option (NQSO) exercise creates:
Select an option first.
Correct answer: B — ORDINARY INCOME equal to the BARGAIN ELEMENT (FMV less exercise price) at exercise — and the employer gets a corresponding DEDUCTION
Explanation: An NQSO exercise produces ORDINARY compensation income equal to the bargain element, subject to withholding, with a matching EMPLOYER DEDUCTION. The employee's basis becomes the FMV at exercise; subsequent appreciation is capital gain. Contrast the ISO, which produces no regular income at exercise and NO employer deduction on a qualifying disposition.
Question 415
Qualified dividends require a holding period of:
Select an option first.
Correct answer: B — MORE THAN 60 DAYS during the 121-day period beginning 60 days BEFORE the ex-dividend date
Explanation: To be QUALIFIED, the shareholder must hold the stock for MORE THAN 60 DAYS within the 121-day window straddling the ex-dividend date (more than 90 days in a 181-day window for certain preferred). Failing the holding period converts the dividend to ORDINARY rates — a trap for dividend-capture strategies.
Question 416
The standard deduction for a DEPENDENT is limited to:
Select an option first.
Correct answer: A — The GREATER of a small floor amount, or earned income plus a specified increment — capped at the regular standard deduction
Explanation: A DEPENDENT'S standard deduction is the GREATER of (a) a small statutory floor, or (b) EARNED INCOME plus a specified increment — but it can never EXCEED the regular standard deduction. VERIFY the current amounts. This is why a child with only unearned income gets a very small standard deduction.
Question 417
A taxpayer's AGI affects:
Select an option first.
Correct answer: C — The medical floor, charitable ceilings, IRA deductibility, education credits, and numerous other phase-outs — which is why ABOVE-the-line deductions are more valuable
Explanation: AGI is the GATEKEEPER of the individual return. It gates the 7.5% medical floor, the charitable AGI ceilings, IRA deductibility, education credits, the rental real estate allowance, and dozens of phase-outs. A dollar deducted ABOVE the line therefore does double duty.
Question 418
The self-employment tax Social Security portion applies to earnings up to:
Select an option first.
Correct answer: D — The annual WAGE BASE (indexed each year) — VERIFY the current figure; the MEDICARE portion is UNCAPPED
Explanation: The 12.4% SOCIAL SECURITY portion applies only up to the annual WAGE BASE (indexed each year — VERIFY). The 2.9% MEDICARE portion is UNCAPPED, and an ADDITIONAL 0.9% applies above a threshold. So a very high earner pays 2.9% (plus 0.9%) on every additional dollar, but no more Social Security tax.
Question 419
An employee's unreimbursed business expenses are:
Select an option first.
Correct answer: C — NOT deductible post-TCJA — miscellaneous itemised deductions subject to the 2% floor were SUSPENDED
Explanation: Post-TCJA, MISCELLANEOUS ITEMISED DEDUCTIONS subject to the 2% floor — including unreimbursed EMPLOYEE business expenses, tax preparation fees, and investment expenses — are SUSPENDED entirely. A SELF-EMPLOYED person deducts the same costs on Schedule C without limitation, which is a substantial structural advantage.
Question 420
The moving expense deduction is available to:
Select an option first.
Correct answer: C — ACTIVE-DUTY MILITARY on a permanent change of station ONLY, post-TCJA
Explanation: Post-TCJA, the MOVING EXPENSE deduction (and the employer reimbursement exclusion) is SUSPENDED — available ONLY to ACTIVE-DUTY MILITARY on a permanent change of station. Employer-paid moving expenses for everyone else are now TAXABLE compensation.
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