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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 421
A taxpayer's basis in stock acquired in a WASH SALE is:
Select an option first.
Correct answer: A — The purchase price PLUS the disallowed loss — and the holding period of the old shares TACKS
Explanation: The disallowed wash-sale loss is ADDED to the basis of the REPLACEMENT shares, and the HOLDING PERIOD of the sold shares TACKS onto the new ones. The loss is DEFERRED, not destroyed — it is recovered on the eventual sale of the replacement shares.
Question 422
A sale of §1244 stock at a GAIN produces:
Select an option first.
Correct answer: A — CAPITAL GAIN — §1244 provides ORDINARY LOSS treatment only; it does not affect gains
Explanation: §1244 is a ONE-WAY street: it converts a capital LOSS into an ORDINARY loss (up to the annual limits). It has NO effect on GAINS, which remain CAPITAL. The provision exists to encourage investment in small business by softening the downside — not to penalise the upside.
Question 423
§1202 QSBS gain exclusion requires the stock be held for:
Select an option first.
Correct answer: C — MORE THAN 5 YEARS, and be original-issue C corporation stock meeting the gross asset and active business tests
Explanation: §1202 requires: ORIGINAL ISSUE C corporation stock; held MORE THAN 5 YEARS; the corporation had gross assets below a statutory ceiling at issuance; and an 80% ACTIVE BUSINESS test. The exclusion is potentially the most valuable provision in the Code for a founder — and EVERY condition is a HARD GATE. Missing 5 years by a month destroys it entirely.
Question 424
A taxpayer's holding period for property received in a §1031 exchange:
Select an option first.
Correct answer: B — TACKS — it includes the holding period of the relinquished property
Explanation: The holding period TACKS in a §1031 exchange: the holding period of the RELINQUISHED property carries over to the REPLACEMENT property. The same tacking applies to gifts (for gain basis) and to §351/§721 contributions. Inherited property, by contrast, is AUTOMATICALLY long-term regardless.
Question 425
A taxpayer sells stock from multiple lots without specifying which shares. The default identification is:
Select an option first.
Correct answer: D — FIFO — the earliest-acquired shares are deemed sold first, absent adequate identification
Explanation: Absent ADEQUATE IDENTIFICATION at the time of sale, FIFO applies — the earliest-acquired shares are deemed sold first. SPECIFIC IDENTIFICATION is permitted (and often advantageous) but requires the taxpayer to identify the lot at the time of sale and receive confirmation. An AVERAGE COST method is available only for mutual fund shares.
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Question 426
A worthless security is treated as sold on:
Select an option first.
Correct answer: D — The LAST DAY of the tax year in which it becomes worthless — which can convert a short-term loss into a long-term one
Explanation: A WORTHLESS SECURITY is deemed sold on the LAST DAY OF THE TAX YEAR. This can transform a short-term loss into a LONG-TERM one: stock bought in March and worthless in October is deemed sold on 31 December, giving a holding period of more than nine months — but the deemed date can push it over one year in the right facts.
Question 427
The deduction for qualified business income is claimed:
Select an option first.
Correct answer: D — As a BELOW-the-line deduction, available whether the taxpayer itemises OR takes the standard deduction
Explanation: §199A is a BELOW-the-line deduction claimed on the face of Form 1040 — but it is available REGARDLESS of whether the taxpayer itemises. It does NOT reduce AGI and does NOT reduce self-employment tax.
Question 428
A cash-basis taxpayer prepays 12 months of rent in December for the following year. The deduction is:
Select an option first.
Correct answer: A — Generally allowed under the 12-MONTH RULE — the benefit does not extend beyond 12 months or the end of the NEXT tax year
Explanation: The 12-MONTH RULE permits a current deduction for a prepaid expense if the benefit does not extend beyond the EARLIER of (a) 12 months, or (b) the end of the tax year FOLLOWING the payment year. A 12-month prepayment made in December generally qualifies; a 24-month prepayment does not.
Question 429
An accrual-basis taxpayer's deduction requires:
Select an option first.
Correct answer: D — The ALL-EVENTS test AND ECONOMIC PERFORMANCE
Explanation: An accrual-basis DEDUCTION requires: (1) the ALL-EVENTS test (the liability is fixed and the amount determinable); AND (2) ECONOMIC PERFORMANCE (the services or property are actually provided, or the payment is made for certain liabilities). Economic performance prevents deducting a liability that will not be satisfied for years.
Question 430
A taxpayer has AGI of $80,000 and qualified medical expenses of $9,000. The medical itemised deduction is:
Select an option first.
Correct answer: C — $3,000
Explanation: Floor = 7.5% × $80,000 = $6,000. Deduction = $9,000 − $6,000 = $3,000. Only the EXCESS over the floor is deductible.
Question 431
A single taxpayer has AGI of $60,000, itemised deductions of $12,000, and a standard deduction of $15,000. Taxable income (before QBI) is:
Select an option first.
Correct answer: D — $45,000
Explanation: The taxpayer takes the GREATER of the standard ($15,000) or itemised ($12,000) deduction — so the STANDARD deduction of $15,000 applies. Taxable income = $60,000 − $15,000 = $45,000. Using the smaller itemised figure gives $48,000 (option A), the intended trap.
Question 432
Net SE income is $100,000. SE tax is computed on:
Select an option first.
Correct answer: B — $92,350
Explanation: SE tax applies to 92.35% of net SE income: $100,000 × 0.9235 = $92,350. The 7.65% reduction approximates the employer's FICA share that an employee would never have been taxed on.
Question 433
Continuing: assuming the full amount is below the Social Security wage base, SE tax at 15.3% is:
Select an option first.
Correct answer: C — $14,130
Explanation: SE tax = 15.3% × $92,350 = $14,130. Applying 15.3% to the full $100,000 gives $15,300 (option A) — the intended trap, which skips the 92.35% adjustment.
Question 434
Continuing: the ABOVE-the-line deduction for one-half of SE tax is:
Select an option first.
Correct answer: B — $7,065
Explanation: One-half of the SE tax is deductible above the line: $14,130 ÷ 2 = $7,065. (Note the ADDITIONAL 0.9% Medicare tax, where applicable, is NOT deductible.)
Question 435
A taxpayer has NII of $40,000 and MAGI of $260,000. The NIIT threshold is $200,000. NIIT is:
Select an option first.
Correct answer: A — $1,520
Explanation: NIIT = 3.8% × the LESSER of NII ($40,000) or MAGI over the threshold ($260,000 − $200,000 = $60,000). The lesser is $40,000. NIIT = 3.8% × $40,000 = $1,520. Using the $60,000 excess gives $2,280 (option B) — the trap.
Question 436
Same facts, but NII is $80,000 and MAGI is $240,000 (threshold $200,000). NIIT is:
Select an option first.
Correct answer: D — $1,520
Explanation: NIIT = 3.8% × the LESSER of NII ($80,000) or the MAGI excess ($40,000). Now the MAGI EXCESS is smaller. NIIT = 3.8% × $40,000 = $1,520. The 'lesser of' test flips depending on the facts — which is precisely why it is tested twice.
Question 437
A taxpayer sells stock for $12,000 that was purchased for $20,000, and has no other capital transactions. The deduction against ordinary income this year is:
Select an option first.
Correct answer: D — $3,000, with $5,000 carried forward indefinitely
Explanation: Capital loss = $8,000. An individual may deduct only $3,000 per year against ordinary income, with the remaining $5,000 carried FORWARD INDEFINITELY (retaining its long-term character). There is no carryback for individuals.
Question 438
A taxpayer gifts stock (donor's basis $10,000; FMV at gift $6,000). The donee sells it for $8,000. The result is:
Select an option first.
Correct answer: C — NO gain and NO loss
Explanation: DUAL BASIS: gain basis = donor's basis ($10,000); loss basis = FMV at gift ($6,000). The sale price of $8,000 falls BETWEEN the two — the 'no man's land' — producing NEITHER gain NOR loss. Selling above $10,000 would give a gain; below $6,000, a loss.
Question 439
Same gift (basis $10,000; FMV at gift $6,000). The donee sells for $4,000. The recognised LOSS is:
Select an option first.
Correct answer: B — $2,000 — measured from the LOSS basis of $6,000 (the FMV at the gift date)
Explanation: For a LOSS, the basis is the LOWER of the donor's basis or FMV at the gift date = $6,000. Loss = $6,000 − $4,000 = $2,000. Using the donor's $10,000 basis gives $6,000 (option A) — the trap. The $4,000 of built-in loss at the gift date is simply DESTROYED, which is why one never gifts loss property.
Question 440
A taxpayer exchanges real property (basis $100,000; FMV $180,000) for like-kind property worth $150,000 plus $30,000 cash. Gain RECOGNISED is:
Select an option first.
Correct answer: C — $30,000 — the LESSER of realised gain ($80,000) or boot received ($30,000)
Explanation: Realised gain = $180,000 − $100,000 = $80,000. Boot received = $30,000. Recognised gain = the LESSER = $30,000. The remaining $50,000 is DEFERRED into the basis of the new property.
Question 441
Continuing: the basis of the NEW property is:
Select an option first.
Correct answer: B — $100,000 — Old basis $100,000 + boot given $0 − boot received $30,000 + gain recognised $30,000
Explanation: New basis = Old basis ($100,000) + boot given ($0) − boot received ($30,000) + gain recognised ($30,000) = $100,000. Cross-check: FMV of the new property ($150,000) − deferred gain ($50,000) = $100,000. Both routes reconcile.
Question 442
§1245 property is sold for $70,000. Original cost $100,000; accumulated depreciation $50,000. Ordinary income recapture is:
Select an option first.
Correct answer: D — $20,000
Explanation: Adjusted basis = $100,000 − $50,000 = $50,000. Gain = $70,000 − $50,000 = $20,000. §1245 recapture = the LESSER of the GAIN ($20,000) or accumulated depreciation ($50,000) = $20,000, ALL ordinary. Recapture can never exceed the gain.
Question 443
Same asset, but sold for $120,000. Ordinary recapture and §1231 gain are:
Select an option first.
Correct answer: C — $50,000 ORDINARY recapture and $20,000 §1231 gain
Explanation: Gain = $120,000 − $50,000 adjusted basis = $70,000. §1245 recapture = the LESSER of gain ($70,000) or accumulated depreciation ($50,000) = $50,000 ORDINARY. The REMAINING $20,000 (the gain above original cost) is §1231 gain, eligible for LTCG treatment.
Question 444
An instalment sale: selling price $500,000; basis $300,000; no debt assumed. In Year 1 the seller collects $100,000 of principal. Gain recognised is:
Select an option first.
Correct answer: B — $40,000
Explanation: Gross profit = $500,000 − $300,000 = $200,000. Contract price = $500,000. GP% = $200,000/$500,000 = 40%. Gain in Year 1 = $100,000 × 40% = $40,000.
Question 445
A taxpayer sells a principal residence (basis $300,000) for $900,000. They are MFJ and meet the §121 tests. Taxable gain is:
Select an option first.
Correct answer: C — $100,000 — $600,000 gain less the $500,000 MFJ exclusion
Explanation: Gain = $900,000 − $300,000 = $600,000. §121 excludes $500,000 for MFJ. Taxable gain = $600,000 − $500,000 = $100,000, taxed as LTCG.
Question 446
A taxpayer's §179 election: qualifying property placed in service is $3,500,000; the cap is $1,250,000 and the phase-out threshold is $3,130,000. The maximum §179 deduction (before the income limit) is:
Select an option first.
Correct answer: A — $880,000
Explanation: Phase-out = property placed in service − threshold = $3,500,000 − $3,130,000 = $370,000, reduced DOLLAR FOR DOLLAR. Maximum §179 = $1,250,000 − $370,000 = $880,000. (Then the ACTIVE BUSINESS TAXABLE INCOME limit applies as a further cap.)
Question 447
A taxpayer has active business taxable income of $600,000 and an otherwise-allowable §179 of $880,000. The §179 deduction this year is:
Select an option first.
Correct answer: B — $600,000 — capped at active business taxable income; the $280,000 excess CARRIES FORWARD
Explanation: §179 cannot create a loss. The deduction is capped at ACTIVE BUSINESS TAXABLE INCOME = $600,000. The disallowed $280,000 CARRIES FORWARD indefinitely. Note BONUS depreciation, by contrast, has NO income limit and CAN create a loss.
Question 448
A wash sale: 100 shares sold at a $3,000 loss; 100 substantially identical shares repurchased 10 days later for $8,000. The basis of the new shares is:
Select an option first.
Correct answer: A — $11,000 — purchase price PLUS the disallowed $3,000 loss
Explanation: The wash-sale loss is DISALLOWED and ADDED to the basis of the replacement shares: $8,000 + $3,000 = $11,000. The holding period of the OLD shares also TACKS. The loss is deferred, not destroyed.
Question 449
A taxpayer with AGI of $150,000 donates appreciated LTCG stock (basis $20,000; FMV $60,000) to a public charity. The maximum current deduction is:
Select an option first.
Correct answer: A — $45,000 — the FMV of $60,000 is limited to 30% of AGI
Explanation: Appreciated LTCG property to a PUBLIC charity is deductible at FULL FMV ($60,000), subject to a 30% of AGI ceiling = 30% × $150,000 = $45,000. The excess $15,000 carries FORWARD 5 years. No capital gain is recognised on the appreciation.
Question 450
A taxpayer has a $40,000 passive loss and $15,000 of passive income. The deductible loss is:
Select an option first.
Correct answer: D — $15,000 — limited to passive income; $25,000 is SUSPENDED
Explanation: Passive losses offset only PASSIVE income. Deductible = $15,000. The remaining $25,000 is SUSPENDED and carried forward indefinitely, released in full on a fully taxable disposition of the entire interest.
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