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 241
Continuing: the shareholder's basis in the STOCK is:
Select an option first.
Correct answer: A — $50,000 — basis $50,000 − boot received $20,000 + gain recognised $20,000
Explanation: Stock basis = Adjusted basis of property transferred ($50,000) − boot received ($20,000) + gain recognised ($20,000) = $50,000. Cross-check: FMV of stock ($70,000) − deferred gain ($20,000) = $50,000.
Question 242
Continuing: the CORPORATION'S basis in the property received is:
Select an option first.
Correct answer: A — $70,000 — the transferor's basis ($50,000) PLUS the gain recognised ($20,000)
Explanation: The corporation takes a CARRYOVER basis PLUS any gain recognised by the transferor: $50,000 + $20,000 = $70,000.
Question 243
A partner contributes property with a basis of $60,000, subject to a $40,000 liability assumed by the partnership. The partner has a 30% interest. Outside basis is:
Select an option first.
Correct answer: A — $32,000 — $60,000 − $40,000 (full debt relief) + $12,000 (30% share of the debt)
Explanation: Outside basis = contributed basis $60,000, LESS the full $40,000 liability shifted away (a deemed cash distribution), PLUS the partner's 30% SHARE of that liability ($12,000, a deemed contribution) = $32,000. Net debt relief = 70% × $40,000 = $28,000.
Question 244
A partnership has ordinary income of $200,000 and a partner holds a 25% interest. The partner's outside basis was $30,000 and they received a $40,000 cash distribution. Ending basis is:
Select an option first.
Correct answer: A — $40,000 — $30,000 + $50,000 income share − $40,000 distribution
Explanation: Order of adjustments: (1) INCREASE for the income share: 25% × $200,000 = $50,000, giving $80,000. (2) DECREASE for the distribution: $80,000 − $40,000 = $40,000. Income is added BEFORE distributions — that ordering prevents an unnecessary gain.
Question 245
A partner's outside basis is $15,000. They receive a cash distribution of $25,000. The result is:
Select an option first.
Correct answer: A — A $10,000 CAPITAL GAIN, and basis drops to zero
Explanation: Cash in excess of outside basis produces a CAPITAL GAIN: $25,000 − $15,000 = $10,000. Basis becomes zero. This is the ONLY way a current distribution triggers gain.
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 246
An S corporation shareholder has stock basis of $20,000 and a direct loan to the corporation of $10,000. The corporation allocates a $35,000 loss. The deductible loss is:
Select an option first.
Correct answer: C — $30,000 — stock basis ($20,000) PLUS debt basis ($10,000); $5,000 is suspended
Explanation: Losses reduce STOCK basis first, then DEBT basis. Total available = $20,000 + $10,000 = $30,000. The remaining $5,000 is SUSPENDED and carried forward. (Note: only DIRECT shareholder loans create debt basis — a guarantee does not.)
Question 247
A corporation has current E&P of $30,000 and accumulated E&P of $50,000. It distributes $100,000 to its sole shareholder, whose stock basis is $15,000. The DIVIDEND portion is:
Select an option first.
Correct answer: C — $80,000 — the total of current ($30,000) and accumulated ($50,000) E&P
Explanation: Tier 1: DIVIDEND to the extent of TOTAL E&P = $30,000 + $50,000 = $80,000. Tier 2: the next $15,000 is a tax-free RETURN OF CAPITAL, reducing stock basis to zero. Tier 3: the final $5,000 is a CAPITAL GAIN.
Question 248
Continuing: the CAPITAL GAIN recognised by the shareholder is:
Select an option first.
Correct answer: D — $5,000
Explanation: After the $80,000 dividend, $20,000 remains. Of that, $15,000 is a tax-free return of capital (absorbing the stock basis), leaving $5,000 taxed as CAPITAL GAIN.
Question 249
A corporation has taxable income of $200,000 before the DRD, including $100,000 of dividends from a 30%-owned corporation. The DRD is:
Select an option first.
Correct answer: D — $65,000 — 65% of the dividend, as ownership is between 20% and 80%
Explanation: Ownership of 20% to under 80% → 65% DRD. DRD = 65% × $100,000 = $65,000. Check the taxable income limitation: 65% × $200,000 = $130,000, which EXCEEDS $65,000, so the full DRD is allowed.
Question 250
A corporation has taxable income of $80,000 before the DRD, including $100,000 of dividends from a 30%-owned corporation. The DRD is:
Select an option first.
Correct answer: A — $52,000 — limited to 65% of TAXABLE INCOME ($80,000)
Explanation: Tentative DRD = 65% × $100,000 = $65,000. TAXABLE INCOME LIMIT = 65% × $80,000 = $52,000. The DRD is the LESSER = $52,000. Now check the NOL exception: the full $65,000 DRD would give taxable income of $80,000 − $65,000 = $15,000 — still POSITIVE, so no NOL would be created, and the limitation APPLIES.
Question 251
Same facts, but taxable income before the DRD is $60,000. The DRD is:
Select an option first.
Correct answer: C — $65,000 — the full DRD, because the taxable-income limitation is WAIVED where the full DRD would create an NOL
Explanation: Tentative DRD = $65,000. The taxable income limit would be 65% × $60,000 = $39,000. BUT the full DRD ($65,000) would produce taxable income of $60,000 − $65,000 = $(5,000) — an NOL. Because the full DRD CREATES an NOL, the taxable-income limitation is WAIVED and the FULL $65,000 is allowed. This exception is the whole point of the question.
Question 252
A corporation's book income is $500,000, including $30,000 of municipal interest and $20,000 of non-deductible fines. Taxable income is:
Select an option first.
Correct answer: C — $490,000
Explanation: Taxable income = Book $500,000 − $30,000 (municipal interest: book income, not taxable) + $20,000 (fines: book expense, not deductible) = $490,000. Both are PERMANENT differences.
Question 253
A corporation has a net capital loss of $40,000 and no capital gains this year or in the 3 prior years. The current deduction is:
Select an option first.
Correct answer: A — $0 — corporations may offset capital losses ONLY against capital gains; the loss carries forward 5 years
Explanation: CORPORATIONS may NOT deduct capital losses against ordinary income. With no capital gains in the carryback years, the entire $40,000 carries FORWARD 5 years, as a SHORT-TERM loss.
Question 254
A corporation has taxable income of $500,000 and an NOL carryforward of $600,000 (post-2017). The NOL deduction this year is:
Select an option first.
Correct answer: D — $400,000 — limited to 80% of taxable income
Explanation: Post-2017 NOLs are limited to 80% of taxable income: 80% × $500,000 = $400,000. The corporation pays tax on the remaining $100,000. The unused $200,000 of NOL carries forward INDEFINITELY.
Question 255
A corporation's accumulated taxable income is $400,000 after the accumulated earnings credit. The accumulated earnings tax is:
Select an option first.
Correct answer: C — $80,000 — 20% of accumulated taxable income
Explanation: AET = 20% × $400,000 = $80,000. Note the rate is 20% (matching the top qualified-dividend rate), NOT the 21% corporate rate — applying 21% gives $84,000, the intended trap.
Question 256
A shareholder's §1244 loss is $130,000 (single filer, limit $50,000). The tax treatment is:
Select an option first.
Correct answer: C — $50,000 ORDINARY loss; the remaining $80,000 is a CAPITAL loss ($3,000 deductible this year)
Explanation: §1244 permits an ORDINARY loss of $50,000 (single). The excess $80,000 is a CAPITAL loss, of which only $3,000 is deductible against ordinary income this year, with $77,000 carried forward indefinitely.
Question 257
A QBI deduction: QBI is $200,000, taxable income before QBI is $180,000, and net capital gains are $20,000. The deduction is:
Select an option first.
Correct answer: B — $32,000 — the LESSER of 20% of QBI ($40,000) or 20% of (taxable income − net capital gains) = 20% × $160,000
Explanation: Overall limit = 20% × (Taxable income − Net capital gains) = 20% × ($180,000 − $20,000) = 20% × $160,000 = $32,000. Tentative QBI deduction = 20% × $200,000 = $40,000. The deduction is the LESSER = $32,000. Forgetting to subtract capital gains gives $36,000 (option C).
Question 258
A non-SSTB above the threshold has QBI of $500,000, W-2 wages of $120,000, and UBIA of $800,000. The wage/UBIA limit is:
Select an option first.
Correct answer: B — $60,000
Explanation: The limit is the GREATER of: (a) 50% of W-2 wages = 50% × $120,000 = $60,000; or (b) 25% of W-2 wages + 2.5% of UBIA = $30,000 + $20,000 = $50,000. The GREATER is $60,000. (The tentative 20% × $500,000 = $100,000 is then capped at $60,000.)
Question 259
An estate has DNI of $60,000 and distributes $80,000 to beneficiaries. The distribution deduction is:
Select an option first.
Correct answer: C — $60,000 — the deduction is CAPPED at DNI
Explanation: The distribution deduction is LIMITED TO DNI. Distributing $80,000 when DNI is only $60,000 gives a deduction of $60,000 — and the beneficiaries are taxed on $60,000. The extra $20,000 is a tax-free distribution of CORPUS.
Question 260
A donor gives $50,000 to each of 3 children. The annual exclusion is $18,000 per donee. Total TAXABLE gifts are:
Select an option first.
Correct answer: B — $96,000 — $150,000 less 3 × $18,000 of exclusions
Explanation: The annual exclusion applies PER DONEE: 3 × $18,000 = $54,000 of exclusions. Taxable gifts = $150,000 − $54,000 = $96,000, which consumes lifetime exemption. (VERIFY the current annual exclusion amount — it is indexed.)
Question 261
Same facts, but the donor's spouse consents to GIFT SPLITTING. Total taxable gifts are:
Select an option first.
Correct answer: B — $42,000 — gift splitting doubles the exclusion to $36,000 per donee
Explanation: GIFT SPLITTING treats each gift as made half by each spouse, effectively DOUBLING the exclusion: 3 × $36,000 = $108,000. Taxable gifts = $150,000 − $108,000 = $42,000. Gift splitting requires the consent of both spouses on a gift tax return.
Question 262
An S corporation with AAA of $40,000 and AE&P of $30,000 distributes $90,000 to a shareholder with a stock basis of $50,000. The TAXABLE DIVIDEND portion is:
Select an option first.
Correct answer: B — $30,000 — the AE&P tier
Explanation: Ordering: (1) AAA $40,000 — tax-free, reducing basis to $10,000. (2) AE&P $30,000 — a TAXABLE DIVIDEND. (3) Remaining $20,000 — tax-free to the extent of the $10,000 remaining basis. (4) The final $10,000 — CAPITAL GAIN. The dividend portion is the AE&P tier: $30,000.
Question 263
Continuing: the CAPITAL GAIN recognised is:
Select an option first.
Correct answer: A — $10,000
Explanation: After AAA ($40,000, reducing basis from $50,000 to $10,000) and AE&P ($30,000 dividend), $20,000 of the distribution remains. Of that, $10,000 is absorbed by the remaining basis (tax-free), leaving $10,000 as CAPITAL GAIN.
Question 264
A C corporation's built-in gains tax: recognised built-in gain is $200,000 and taxable income (computed as a C corporation) is $150,000. The BIG tax is:
Select an option first.
Correct answer: A — $31,500 — 21% of the LESSER of the two
Explanation: BIG tax = 21% × the LESSER of (a) recognised built-in gain ($200,000) or (b) taxable income as a C corporation ($150,000) = 21% × $150,000 = $31,500. Using the built-in gain gives $42,000 (option A) — the trap.
Question 265
A corporation liquidates. It distributes an asset with a basis of $100,000 and an FMV of $250,000 to its sole shareholder, whose stock basis is $80,000. The CORPORATION recognises:
Select an option first.
Correct answer: B — A $150,000 GAIN, as if it sold the asset at FMV
Explanation: In a COMPLETE LIQUIDATION the corporation recognises gain as if it SOLD the assets at FMV: $250,000 − $100,000 = $150,000. The SHAREHOLDER separately recognises capital gain of $250,000 − $80,000 = $170,000. Both levels are taxed — the classic double tax on liquidation.
Question 266
Continuing: the SHAREHOLDER'S capital gain is:
Select an option first.
Correct answer: B — $170,000 — FMV received ($250,000) less stock basis ($80,000)
Explanation: The shareholder treats the liquidation as a SALE of their stock: gain = FMV of property received ($250,000) − stock basis ($80,000) = $170,000, a CAPITAL gain. Their basis in the received asset becomes its FMV of $250,000.
Question 267
A partnership liquidating distribution: the partner's outside basis is $50,000. They receive $20,000 cash and inventory with an inside basis of $15,000. The recognised LOSS is:
Select an option first.
Correct answer: A — $15,000 — outside basis $50,000, less cash $20,000, less inventory basis $15,000
Explanation: In a LIQUIDATING distribution, a LOSS is recognised ONLY if the partner receives nothing but cash, unrealised receivables and/or inventory. That condition is met. Loss = $50,000 − $20,000 − $15,000 = $15,000 CAPITAL loss. Had ANY other property been distributed, the remaining basis would be absorbed into it and NO loss recognised.
Question 268
A corporation redeems 30 of a shareholder's 100 shares; the corporation has 200 shares outstanding. Ownership goes from 50% to 41.2%. This redemption is:
Select an option first.
Correct answer: A — NOT substantially disproportionate — the shareholder must fall BELOW 80% of their former percentage (below 40%) AND below 50%
Explanation: SUBSTANTIALLY DISPROPORTIONATE requires the shareholder's post-redemption percentage to be BOTH (a) below 80% of their pre-redemption percentage (80% × 50% = 40%) AND (b) below 50%. Here 70/170 = 41.2%, which is BELOW 50% but NOT below 40%. It FAILS, so the redemption is a DIVIDEND to the extent of E&P.
Question 269
A trust has DNI of $50,000, of which $10,000 is tax-exempt interest. It distributes all of it. The beneficiary reports:
Select an option first.
Correct answer: D — $40,000 taxable — the distribution retains its CHARACTER, so the $10,000 of tax-exempt interest stays tax-exempt
Explanation: DNI determines both the AMOUNT and the CHARACTER of what beneficiaries receive. The $10,000 of tax-exempt interest passes through as TAX-EXEMPT. The beneficiary reports $40,000 of taxable income. Character preservation is one of DNI's three functions.
Question 270
A corporation has gross income of $800,000, deductible expenses of $500,000, and a charitable contribution of $50,000. The charitable deduction (10% limit) is:
Select an option first.
Correct answer: D — $30,000 — 10% of taxable income computed BEFORE the charitable deduction ($300,000)
Explanation: Taxable income before the charitable deduction = $800,000 − $500,000 = $300,000. Limit = 10% × $300,000 = $30,000. Deduction = $30,000; the excess $20,000 carries FORWARD 5 years.
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.