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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 151
After an S election terminates, the corporation generally may NOT re-elect for:
Select an option first.
Correct answer: C — 5 years, absent IRS consent
Explanation: Following a termination, the corporation may NOT make a new S election for FIVE YEARS without IRS consent. This 'waiting period' discourages taxpayers from toggling between C and S status opportunistically.
Question 152
An S corporation shareholder's PRO RATA share is allocated:
Select an option first.
Correct answer: D — STRICTLY PER SHARE, PER DAY — S corporations may NOT make special allocations
Explanation: S corporation income is allocated STRICTLY PER SHARE, PER DAY. Unlike a PARTNERSHIP, an S corporation may NOT make SPECIAL ALLOCATIONS. This inflexibility is a key reason sophisticated investors prefer partnerships/LLCs.
Question 153
A partnership MAY make special allocations if they have:
Select an option first.
Correct answer: B — SUBSTANTIAL ECONOMIC EFFECT
Explanation: Partnerships MAY specially allocate items among partners, provided the allocation has SUBSTANTIAL ECONOMIC EFFECT — broadly, capital accounts are properly maintained, liquidating distributions follow capital accounts, and there is a deficit restoration obligation (or a qualified income offset). This flexibility is the partnership's great advantage over the S corporation.
Question 154
A partner's share of partnership DEBT:
Select an option first.
Correct answer: B — INCREASES the partner's outside basis; a DECREASE in that share is treated as a DEEMED CASH DISTRIBUTION
Explanation: An INCREASE in a partner's share of partnership liabilities is treated as a DEEMED CASH CONTRIBUTION (increasing basis); a DECREASE is treated as a DEEMED CASH DISTRIBUTION (decreasing basis — and potentially triggering GAIN if it exceeds basis). This debt-shift mechanic is unique to partnerships.
Question 155
Hot assets under §751 are:
Select an option first.
Correct answer: D — UNREALISED RECEIVABLES and INVENTORY — their sale or distribution can convert capital gain into ORDINARY income
Explanation: §751 HOT ASSETS are UNREALISED RECEIVABLES and INVENTORY. On the sale of a partnership interest, the portion of gain attributable to hot assets is ORDINARY income, not capital gain — preventing partners from converting ordinary income into capital gain simply by selling the interest.
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Question 156
A liquidating distribution to a partner may produce a LOSS only if the partner receives:
Select an option first.
Correct answer: B — ONLY cash, unrealised receivables and/or inventory
Explanation: A LOSS on a LIQUIDATING distribution is recognised ONLY if the partner receives NOTHING BUT cash, unrealised receivables and/or inventory. If ANY other property comes out, the remaining basis is ABSORBED into that property and NO loss is recognised.
Question 157
A corporation's organisational expenditures may be:
Select an option first.
Correct answer: D — Deducted up to a limited amount immediately, with the excess AMORTISED over 180 months
Explanation: ORGANISATIONAL expenditures (legal fees for incorporation, charter costs) and START-UP costs may be deducted up to a limited amount in the first year, with the EXCESS AMORTISED over 180 MONTHS (15 years). Note the immediate deduction PHASES OUT as total costs rise.
Question 158
A C corporation's charitable contributions must be:
Select an option first.
Correct answer: D — Authorised by the board and PAID by the 15th day of the 4th month after year-end for an ACCRUAL-basis corporation to deduct them in the prior year
Explanation: An ACCRUAL-basis corporation may DEDUCT a charitable contribution in the year AUTHORISED by the board, provided it is actually PAID within 2.5 months of year-end (by the 15th day of the 4th month). This is a rare exception to the economic performance requirement.
Question 159
The corporate alternative minimum tax (CAMT) applies to corporations with:
Select an option first.
Correct answer: D — Average ADJUSTED FINANCIAL STATEMENT INCOME exceeding $1 billion over the prior 3 years
Explanation: CAMT imposes a 15% minimum tax on ADJUSTED FINANCIAL STATEMENT INCOME (BOOK income), and applies only to very large corporations — those averaging over $1 BILLION of AFSI over the prior 3 years. It targets corporations reporting large book profits but little taxable income.
Question 160
A consolidated federal income tax return may be filed by:
Select an option first.
Correct answer: C — An AFFILIATED GROUP — a common parent owning at least 80% of vote AND value of each subsidiary
Explanation: A CONSOLIDATED return requires an AFFILIATED GROUP: a common PARENT directly or indirectly owning at least 80% of the VOTING POWER and 80% of the VALUE of each includible subsidiary. Note the tax 80% test is stricter than the >50% control test used for financial statement consolidation.
Question 161
In a complete corporate liquidation, the SHAREHOLDER generally recognises:
Select an option first.
Correct answer: C — CAPITAL gain or loss, equal to the FMV of property received less the stock's basis
Explanation: In a complete liquidation, the SHAREHOLDER treats it as a SALE of the stock: CAPITAL gain or loss = FMV of property received − stock basis. The CORPORATION also recognises gain or loss as if it had SOLD its assets at FMV — producing the classic double tax on liquidation.
Question 162
A corporation distributing APPRECIATED property as a dividend recognises:
Select an option first.
Correct answer: C — GAIN as if it had SOLD the property at FMV
Explanation: A corporation distributing APPRECIATED property recognises GAIN as though it SOLD the property at FMV. Notably, LOSSES on distributed property are generally NOT recognised — an asymmetry that discourages distributing depreciated assets.
Question 163
An LLC with a single member is, by default, treated for federal tax purposes as:
Select an option first.
Correct answer: C — A DISREGARDED ENTITY (taxed as a sole proprietorship)
Explanation: A SINGLE-MEMBER LLC is by default a DISREGARDED ENTITY — its activity is reported on the owner's return (Schedule C for an individual). A MULTI-MEMBER LLC defaults to PARTNERSHIP treatment. Either may ELECT corporate (and then possibly S) status by 'checking the box'.
Question 164
Warlow Corp has current E&P of $50,000 and an accumulated E&P DEFICIT of $(80,000). It distributes $40,000. The distribution is:
Select an option first.
Correct answer: C — A TAXABLE DIVIDEND of $40,000 — CURRENT E&P is sufficient, and a deficit in ACCUMULATED E&P does not offset it
Explanation: CURRENT E&P is tested FIRST and is NOT reduced by an accumulated DEFICIT. With current E&P of $50,000, the entire $40,000 distribution is a TAXABLE DIVIDEND. (The reverse case — a current-year DEFICIT with positive accumulated E&P — requires netting on a pro rata or specific-date basis.)
Question 165
A corporation has NO current E&P but $60,000 of accumulated E&P, and distributes $100,000. The tax result is:
Select an option first.
Correct answer: C — $60,000 DIVIDEND, then a tax-free RETURN OF CAPITAL reducing stock basis, then CAPITAL GAIN
Explanation: The THREE-TIER rule: (1) DIVIDEND to the extent of E&P ($60,000); (2) tax-free RETURN OF CAPITAL, reducing stock basis; (3) CAPITAL GAIN once basis reaches zero. The remaining $40,000 flows through tiers 2 and 3 depending on the shareholder's basis.
Question 166
A partner contributes property with a basis of $30,000 and an FMV of $50,000, subject to a $20,000 mortgage assumed by the partnership. The partner has a 25% interest. Outside basis is:
Select an option first.
Correct answer: D — $15,000 — basis of $30,000, LESS the $20,000 debt relieved, PLUS the partner's 25% share ($5,000) of that debt
Explanation: Contributed basis $30,000 − the FULL $20,000 debt shifted to the other partners... more precisely: $30,000 − $20,000 (deemed distribution of the whole liability) + $5,000 (25% share of the liability, a deemed contribution) = $15,000. The partner is relieved of 75% of the debt, a deemed cash distribution.
Question 167
An S corporation shareholder's basis is $10,000. The corporation allocates a $15,000 loss. The shareholder may deduct:
Select an option first.
Correct answer: B — $10,000 — limited to basis; the remaining $5,000 is SUSPENDED and carried forward indefinitely
Explanation: Losses are limited to the shareholder's STOCK basis plus DEBT basis (direct shareholder loans only). The excess $5,000 is SUSPENDED and carried forward indefinitely, deductible when basis is restored — by income allocations or additional contributions. Note the loss must ALSO clear the at-risk and passive hurdles.
Question 168
An S corporation with accumulated E&P has passive investment income exceeding 25% of gross receipts for 3 CONSECUTIVE years. The result is:
Select an option first.
Correct answer: B — TERMINATION of the S election, effective the following year (plus a possible corporate-level tax on the excess passive income)
Explanation: An S corporation with ACCUMULATED E&P (from a prior C corp life) whose PASSIVE INVESTMENT INCOME exceeds 25% of gross receipts for THREE CONSECUTIVE years has its S election TERMINATED. A corporate-level tax may also apply in the interim years. Note this trap ONLY arises where AE&P exists.
Question 169
The QBI deduction is generally the LESSER of:
Select an option first.
Correct answer: A — 20% of QBI, or 20% of (taxable income LESS net capital gains)
Explanation: The OVERALL limitation: the QBI deduction cannot exceed 20% of (TAXABLE INCOME − NET CAPITAL GAINS). Capital gains are subtracted because they already enjoy a preferential rate and should not also generate a QBI deduction. Above the income thresholds, the W-2 wage / UBIA limitations apply as well.
Question 170
Above the QBI income thresholds, a NON-SSTB is limited to the GREATER of:
Select an option first.
Correct answer: D — 50% of W-2 WAGES, or 25% of W-2 wages PLUS 2.5% of the unadjusted basis of qualified property (UBIA)
Explanation: For a NON-SSTB above the thresholds, the deduction is CAPPED at the GREATER of (a) 50% of W-2 wages or (b) 25% of W-2 wages + 2.5% of UBIA. The UBIA alternative exists for capital-intensive businesses with few employees (a real estate rental with no payroll would otherwise get nothing).
Question 171
An SSTB owner whose taxable income exceeds the UPPER threshold receives a QBI deduction of:
Select an option first.
Correct answer: C — ZERO — SSTBs are fully phased OUT above the upper threshold
Explanation: An SSTB (law, health, accounting, consulting, financial services) loses the QBI deduction ENTIRELY above the upper threshold. Between the lower and upper thresholds it phases out proportionately. A NON-SSTB, by contrast, merely becomes subject to the W-2/UBIA cap — it does not lose the deduction.
Question 172
A partnership distributes property (basis $20,000, FMV $35,000) to a partner whose outside basis is $12,000. The partner's basis in the property is:
Select an option first.
Correct answer: B — $12,000 — property basis is CAPPED at the partner's remaining outside basis
Explanation: In a CURRENT distribution, distributed property takes a CARRYOVER basis, CAPPED at the partner's remaining OUTSIDE BASIS. Here the carryover basis of $20,000 exceeds the $12,000 outside basis, so the partner takes the property at $12,000, and outside basis drops to zero. NO gain is recognised on a property distribution.
Question 173
A shareholder sells §1244 stock at a $120,000 loss (MFJ). The tax treatment is:
Select an option first.
Correct answer: C — $100,000 ORDINARY loss, with the remaining $20,000 a CAPITAL loss (limited to $3,000 per year against ordinary income)
Explanation: §1244 permits ORDINARY loss treatment up to $100,000 for MFJ ($50,000 otherwise). The EXCESS $20,000 is a CAPITAL loss, subject to the $3,000 annual limit against ordinary income, with the remainder carried forward indefinitely.
Question 174
A corporation's capital loss of $50,000 in the current year, with no capital gains:
Select an option first.
Correct answer: D — Is NOT deductible this year — it carries BACK 3 years and FORWARD 5 years, offsetting only CAPITAL GAINS
Explanation: CORPORATIONS may offset capital losses ONLY against capital GAINS — never against ordinary income. With no gains, the $50,000 loss carries BACK 3 years and FORWARD 5 years. Contrast individuals, who deduct $3,000 per year against ordinary income with an INDEFINITE carryforward.
Question 175
A C corporation pays a shareholder-employee an UNREASONABLY HIGH salary. The IRS may:
Select an option first.
Correct answer: B — RECHARACTERISE the excess as a DIVIDEND — non-deductible to the corporation and taxable to the shareholder
Explanation: Excessive compensation to a shareholder-employee may be RECHARACTERISED as a constructive DIVIDEND: the corporation LOSES the deduction (creating double tax) and the shareholder is taxed on a dividend rather than wages. The mirror-image abuse is an S corporation paying an UNREASONABLY LOW salary to dodge payroll tax.
Question 176
An S corporation shareholder-employee takes NO salary and only distributions. The IRS is likely to:
Select an option first.
Correct answer: C — RECHARACTERISE distributions as WAGES subject to payroll tax, plus penalties
Explanation: An S corporation shareholder-employee must take REASONABLE COMPENSATION for services rendered. Taking only distributions (which escape FICA) invites RECHARACTERISATION as wages, with back payroll taxes, interest and penalties. 'Reasonable' is the battleground of the entire strategy.
Question 177
A corporation's DRD is limited to a percentage of TAXABLE INCOME — but the limitation does NOT apply if:
Select an option first.
Correct answer: C — Applying the full DRD would CREATE or INCREASE an NOL
Explanation: The taxable-income limitation on the DRD is SUSPENDED if the FULL DRD would CREATE or INCREASE a net operating loss. So the limitation only bites in the middle range — a subtlety candidates consistently miss, and a favourite exam construction.
Question 178
A corporation's basis in property received in a §351 exchange is:
Select an option first.
Correct answer: D — The TRANSFEROR'S basis, PLUS any gain recognised by the transferor
Explanation: The CORPORATION takes a CARRYOVER basis: the transferor's adjusted basis PLUS any gain the transferor recognised. The SHAREHOLDER'S stock basis = adjusted basis of property transferred − boot received + gain recognised. Two basis computations, running in parallel.
Question 179
A shareholder transfers property with a basis of $40,000 and an FMV of $100,000, plus a $70,000 liability assumed by the corporation. The shareholder recognises:
Select an option first.
Correct answer: A — $30,000 GAIN — the liability ($70,000) EXCEEDS the basis ($40,000), and the excess is taxable
Explanation: Liabilities assumed are generally NOT boot — UNLESS they EXCEED the ADJUSTED BASIS of the property transferred. Here $70,000 − $40,000 = $30,000 of GAIN. This rule prevents a shareholder from extracting cash tax-free by encumbering property before contributing it.
Question 180
A partnership's TAX YEAR is generally determined by:
Select an option first.
Correct answer: C — The MAJORITY INTEREST rule, then the PRINCIPAL PARTNER rule, then the LEAST AGGREGATE DEFERRAL rule
Explanation: A partnership must adopt the tax year of its MAJORITY INTEREST partners (over 50%); failing that, the year of all its PRINCIPAL PARTNERS (5%+ owners); failing that, the year producing the LEAST AGGREGATE DEFERRAL of income. A different year requires a business purpose or a §444 election.
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