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CPA Exam — REG (Regulation) practice questions

209 free questions with answers and explanations.

Practice test
  1. 151.A client, a tax-exempt organization under IRC Section 501(c)(3), operates a small cafe on its premises. The cafe is open to the public and serves coffee, pastries, and light lunch items. The cafe's primary purpose is to generate revenue to support the organization's educational programs. The organization's educational programs are directly related to its tax-exempt purpose. What is the most likely tax treatment of the net income from the cafe?Federal Taxation of Entities
  2. 152.A client, an S corporation, has an accumulated adjustments account (AAA) balance of $60,000 and accumulated earnings and profits (AE&P) of $30,000. Its sole shareholder, whose stock basis is $120,000, receives a cash distribution of $100,000. What is the amount of the distribution that is considered a taxable dividend?Federal Taxation of Entities
  3. 153.A client, Partnership Delta, has two partners, E and F, who each have a 50% interest in profits and losses. The partnership has a nonrecourse debt of $100,000. Partner E's individual nonrecourse debt is $20,000, and Partner F's individual nonrecourse debt is $10,000. How much of the partnership's nonrecourse debt is allocated to Partner E for basis purposes, assuming no minimum gain exists?Federal Taxation of Entities
  4. 154.A client, a partnership, has two partners, Alex and Ben, who each have a 50% interest in profits and losses. The partnership has a nonrecourse liability of $100,000. How much of this liability is allocated to Alex for purposes of basis calculation?Federal Taxation of Entities
  5. 155.A client, a tax-exempt organization, operates a summer camp for children. The camp primarily offers educational programs and recreational activities consistent with its exempt purpose. To cover some costs, the organization also offers a week-long 'adventure photography' workshop to adults, which is open to the public and charges market rates. This workshop is staffed by professional photographers and is not related to the camp's educational programs for children. Is the income from the adventure photography workshop subject to Unrelated Business Income Tax (UBIT)?Federal Taxation of Entities
  6. 156.A client, a tax-exempt organization, received a $500,000 donation from a donor. The donor stipulated that the funds must be used to establish an endowment, and only the income generated from the endowment can be used for the organization's general operating expenses. The original principal must be held in perpetuity. How should this donation be classified in the organization's net assets?Federal Taxation of Entities
  7. 157.A client, an S corporation, made a cash distribution of $50,000 to its sole shareholder. At the time of the distribution, the corporation had no accumulated earnings and profits (AE&P) and an accumulated adjustments account (AAA) balance of $30,000. The shareholder's adjusted basis in the S corporation stock was $45,000 prior to the distribution. What is the shareholder's basis in the S corporation stock after the distribution?Federal Taxation of Entities
  8. 158.A client, a C corporation, distributes marketable securities to its sole shareholder as a nonliquidating distribution. The securities have a fair market value (FMV) of $75,000 and an adjusted basis of $60,000 to the corporation. What amount of gain must the corporation recognize on this distribution?Federal Taxation of Entities
  9. 159.A business, 'Creative Designs LLC', purchased a used 3D printer for $120,000 and placed it in service on July 1, 2023. The printer is 7-year MACRS property. The company's taxable income before the Section 179 deduction is $80,000. What is the maximum Section 179 deduction 'Creative Designs LLC' can take for the 3D printer in 2023?Federal Taxation of Property Transactions
  10. 160.A business, 'Rapid Logistics Inc.', acquired a new cargo van for $60,000 on September 1, 2023. The van is 5-year MACRS property. What is the allowable depreciation deduction for 2023? (Use MACRS depreciation tables. For 5-year property, the half-year convention percentages are: Year 1: 20.00%, Year 2: 32.00%, Year 3: 19.20%, Year 4: 11.52%, Year 5: 11.52%, Year 6: 5.76%.) Assume no Section 179 or bonus depreciation. The company's only other asset placed in service in 2023 was a computer for $10,000 on March 1, 2023.Federal Taxation of Property Transactions
  11. 161.A client, Mr. Thompson, purchased a commercial building for $1,200,000. The land was appraised at $300,000. He incurred $50,000 in legal fees and commissions related to the acquisition. What is the depreciable basis of the building?Federal Taxation of Property Transactions
  12. 162.A client, a C corporation, incurred a net capital loss of $20,000 in 2023. In 2021, the corporation had a net capital gain of $5,000, and in 2022, it had a net capital gain of $12,000. How much of the 2023 net capital loss can the corporation carry back to 2021?Federal Taxation of Entities
  13. 163.A client, Ms. Davis, exchanges a business vehicle (adjusted basis $15,000, FMV $20,000) for a new business vehicle (FMV $25,000) and receives $5,000 in cash. What is Ms. Davis's recognized gain on this like-kind exchange?Federal Taxation of Property Transactions
  14. 164.A client, an S corporation, distributes land with a fair market value (FMV) of $150,000 and an adjusted basis of $100,000 to its sole shareholder. The shareholder's basis in their S corporation stock before the distribution was $200,000. What is the S corporation's recognized gain on this distribution?Federal Taxation of Entities
  15. 165.A client, Mr. Jones, sells a rental property for $900,000 on October 1, 2023. The property was purchased on January 1, 2010, for $600,000. During his ownership, Mr. Jones claimed $150,000 in straight-line depreciation. What is the amount of unrecaptured Section 1250 gain Mr. Jones must report?Federal Taxation of Property Transactions
  16. 166.A client, Mr. White, purchased a new light-duty truck for his landscaping business for $45,000 on December 1, 2023. This was the only asset placed in service during 2023. The truck is 5-year MACRS property. What is the allowable depreciation deduction for 2023? (Use MACRS depreciation tables. For 5-year property, the mid-quarter convention percentages for Q4 are: Year 1: 5.00%, Year 2: 24.00%, Year 3: 17.28%, Year 4: 10.37%, Year 5: 10.37%, Year 6: 5.19%.) Assume no Section 179 or bonus depreciation.Federal Taxation of Property Transactions
  17. 167.A corporation, 'Global Tech Inc.', acquired another company's assets, including a patent for $150,000, on July 1, 2023. The patent has a remaining legal life of 10 years. What is the allowable amortization deduction for the patent in 2023?Federal Taxation of Property Transactions
  18. 168.A client, an S corporation, made a cash distribution of $40,000 to its sole shareholder. At the time of the distribution, the S corporation had an accumulated adjustments account (AAA) balance of $25,000, accumulated earnings and profits (AE&P) of $10,000, and the shareholder's stock basis was $60,000. How much of this distribution is treated as a return of capital?Federal Taxation of Entities
  19. 169.A client, a partnership, has two partners, Alex and Ben, who each have a 50% interest in profits and losses. The partnership has a nonrecourse debt of $100,000. How much of this nonrecourse debt increases Alex's basis in his partnership interest?Federal Taxation of Entities
  20. 170.A client, Ms. Lopez, bought stock for $5,000 on January 15, 2022. On January 14, 2023, she sold the stock for $7,000. What is the character of her gain?Federal Taxation of Property Transactions
  21. 171.A client, a tax-exempt organization recognized under IRC Section 501(c)(3), operates a gift shop that sells religious books, educational materials, and small souvenirs related to its charitable mission. The gift shop is open to the public and generates significant revenue. Which of the following statements is true regarding the income generated by the gift shop?Federal Taxation of Entities
  22. 172.A client, a partnership, incurred $60,000 in ordinary business losses for the current year. Partner A, a 40% partner, has an adjusted basis in their partnership interest of $20,000 before considering the loss. Partner A is not at risk for any amount beyond their basis. How much of Partner A's share of the loss can be deducted currently?Federal Taxation of Entities
  23. 173.A client, a C corporation, distributes marketable securities to its sole shareholder as a nonliquidating distribution. The securities have a fair market value (FMV) of $75,000 and an adjusted basis to the corporation of $60,000. The corporation has current E&P of $100,000. What is the corporation's recognized gain on this distribution?Federal Taxation of Entities
  24. 174.A client, Ms. Kim, sells her primary residence for $750,000 on June 1, 2023. She purchased it on July 1, 2020, for $400,000 and lived in it as her primary residence until the sale. She is single. What is her recognized gain on the sale?Federal Taxation of Property Transactions
  25. 175.A client, Mr. Ramirez, sold land for $300,000. He originally purchased the land for $180,000 and paid $10,000 in closing costs when he bought it. During his ownership, he paid $5,000 in property taxes and $2,000 for a special assessment for a new sewer line. What is Mr. Ramirez's recognized gain or loss on the sale?Federal Taxation of Property Transactions
  26. 176.A client, a tax-exempt organization under IRC Section 501(c)(3), receives a $500,000 grant from a private foundation. The grant specifies that the funds must be used to establish an endowment for a specific research program, and only the income generated from the endowment can be spent. The principal must remain intact indefinitely. How should this grant be classified in the organization's financial statements?Federal Taxation of Entities
  27. 177.A client, Ms. Chen, purchased a new machine for her manufacturing business on October 1, 2023, for $80,000. The machine is 7-year MACRS property. What is the allowable depreciation deduction for 2023? (Use the IRS provided MACRS depreciation tables. For 7-year property, the half-year convention percentages are: Year 1: 14.29%, Year 2: 24.49%, Year 3: 17.49%, Year 4: 12.49%, Year 5: 8.93%, Year 6: 8.92%, Year 7: 8.93%, Year 8: 4.46%.) Assume no Section 179 or bonus depreciation.Federal Taxation of Property Transactions
  28. 178.A client, Ms. Harris, received a gift of land from her aunt. At the time of the gift, the land had a fair market value (FMV) of $100,000, and her aunt's adjusted basis was $120,000. Ms. Harris later sold the land for $110,000. What is Ms. Harris's recognized gain or loss on the sale?Federal Taxation of Property Transactions
  29. 179.A general contractor, 'BuildWell Inc.', hires a subcontractor, 'ElectricFlow LLC', to handle all electrical work for a new commercial building project. During the project, one of 'ElectricFlow LLC's' employees, while installing wiring, negligently causes a fire that results in $200,000 in damages to the building. 'BuildWell Inc.' had no direct control over the day-to-day work methods of 'ElectricFlow LLC's' employees. Under what legal doctrine might 'BuildWell Inc.' be held liable for the damages caused by 'ElectricFlow LLC's' employee?Business Law
  30. 180.A tax preparer is assessed a penalty under IRC Sec. 6694(a) for an understatement of tax on a client's return due to an unreasonable position. The preparer wishes to appeal this penalty. Which of the following is the initial step in the administrative appeal process for such a penalty?Ethics, Professional Responsibilities, and Federal Tax Procedures
  31. 181.A principal, 'Healthy Foods Inc.', hires an agent, 'Procurement Solutions LLC', to purchase organic produce from various farms. The agency agreement explicitly states that 'Procurement Solutions LLC' can only enter into contracts for purchases up to $10,000 without prior written approval from 'Healthy Foods Inc.'. 'Procurement Solutions LLC' enters into a contract with 'Farm Fresh Organics' for a $15,000 order of specialty herbs without obtaining written approval. 'Healthy Foods Inc.' later refuses to accept the delivery, claiming the agent exceeded their authority. If 'Farm Fresh Organics' sues 'Healthy Foods Inc.', what is the likely outcome?Business Law
  32. 182.A CPA is preparing a federal income tax return for a client. During the preparation, the CPA identifies a potential tax shelter transaction taken by the client that lacks economic substance and appears to be designed solely for tax avoidance. The CPA determines that there is no reasonable basis for the position. Under AICPA Statements on Standards for Tax Services (SSTS), what is the CPA's appropriate action?Ethics, Professional Responsibilities, and Federal Tax Procedures
  33. 183.A consumer purchases a new smart refrigerator from 'Appliance World,' a retailer. The sales contract includes a prominent clause stating: 'ALL IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED.' Two weeks later, the refrigerator's cooling system fails completely due to a manufacturing defect. The consumer seeks to return the refrigerator and get a full refund based on a breach of the implied warranty of merchantability. Is the consumer likely to succeed?Business Law
  34. 184.A tax practitioner is representing a client before the Internal Revenue Service (IRS) in an examination. During the examination, the IRS agent requests certain documents from the client that the practitioner believes are privileged under attorney-client privilege. What is the practitioner's appropriate course of action?Ethics, Professional Responsibilities, and Federal Tax Procedures
  35. 185.A business, 'Green Valley Farms', purchased a used tractor for $75,000 and placed it in service on April 1, 2023. The tractor is 7-year MACRS property. What is the maximum Section 179 expense deduction 'Green Valley Farms' can claim for the tractor in 2023, assuming they have sufficient taxable income and no other asset purchases?Federal Taxation of Property Transactions
  36. 186.A client, Mr. Davies, sold a patent on August 1, 2023, for $150,000. He had purchased the patent on January 1, 2020, for $120,000. Mr. Davies had been amortizing the patent over 15 years using the straight-line method. What is the character of the gain Mr. Davies recognized on the sale of the patent?Federal Taxation of Property Transactions
  37. 187.A tax practitioner is preparing a federal income tax return for a client. The client provides the practitioner with information that appears to be implausible but does not seem intentionally misleading. Under Circular 230, what is the practitioner's primary responsibility regarding this information?Ethics, Professional Responsibilities, and Federal Tax Procedures
  38. 188.A small business owner, 'TechSolutions Inc.', enters into a contract with 'Software Innovations LLC' for the development of a custom inventory management system. The contract specifies a fixed price of $75,000 and a completion date of October 31. On October 15, 'Software Innovations LLC' informs 'TechSolutions Inc.' that due to unforeseen technical difficulties and staff turnover, they will not be able to complete the system until December 31, at the earliest. 'TechSolutions Inc.' is concerned about the delay. What is 'TechSolutions Inc.'s' best course of action?Business Law
  39. 189.A client, Mr. Wallace, purchased a new machine for his manufacturing business for $100,000. He paid $5,000 for sales tax, $2,000 for shipping, and $3,000 for installation. What is the depreciable basis of the machine?Federal Taxation of Property Transactions
  40. 190.A debtor, 'Financially Sound Corp.', is experiencing temporary cash flow issues but has significant assets and a viable business model. They are seeking protection from creditors while they reorganize their finances and develop a plan to repay debts over time. Which type of bankruptcy filing is most appropriate for 'Financially Sound Corp.'?Business Law
  41. 191.A client, Ms. Chen, exchanged her old business vehicle (adjusted basis $20,000, FMV $25,000) for a new business vehicle with a fair market value of $30,000. She also paid $5,000 in cash. What is Ms. Chen's recognized gain or loss on this exchange?Federal Taxation of Property Transactions
  42. 192.A client, 'Green Thumb Nurseries,' contracts with 'EcoFertilizer Co.' for the delivery of 50 tons of organic fertilizer. The contract specifies 'F.O.B. Seller's Plant.' During transit, and before reaching 'Green Thumb Nurseries,' a fire breaks out in the shipping truck, destroying 20 tons of the fertilizer. Who bears the risk of loss for the destroyed fertilizer?Business Law
  43. 193.A client, an S corporation, made a cash distribution of $80,000 to its sole shareholder. The S corporation has an Accumulated Adjustments Account (AAA) balance of $50,000 and no Accumulated Earnings and Profits (AE&P). The shareholder's stock basis before the distribution was $70,000. What is the shareholder's stock basis after the distribution?Federal Taxation of Entities
  44. 194.A client, a tax-exempt organization under IRC Section 501(c)(3), received a restricted grant of $500,000 from a foundation. The grant specifies that the funds must be used exclusively for a new educational outreach program over the next five years. The organization's board has full discretion over the specific activities within the program. How should this grant be classified in the organization's financial statements?Federal Taxation of Entities
  45. 195.A client, an S corporation, has $70,000 in its Accumulated Adjustments Account (AAA) and $20,000 in Accumulated Earnings and Profits (AE&P) from its prior C corporation years. The sole shareholder's stock basis is $100,000. The S corporation distributes $110,000 cash to its sole shareholder in the current year. What is the shareholder's taxable dividend income from this distribution?Federal Taxation of Entities
  46. 196.A client, a tax-exempt organization (501(c)(3)), operates a bookstore on its university campus. The bookstore primarily sells textbooks and academic supplies to students, which is considered substantially related to its educational mission. However, for a small portion of its inventory, the bookstore also sells general merchandise (e.g., t-shirts, mugs with logos, snacks) to the general public, generating a net profit of $12,000 from these non-academic sales. How should this $12,000 net profit be treated for Unrelated Business Income Tax (UBIT) purposes?Federal Taxation of Entities
  47. 197.A client, Partnership XYZ, has three equal partners, A, B, and C. The partnership has a nonrecourse liability of $300,000. Partner A's share of partnership minimum gain is $20,000. How much of the nonrecourse liability is allocated to Partner A for basis purposes?Federal Taxation of Entities
  48. 198.A client, a C corporation, has a net capital loss of $40,000 in the current year (2023). It had a net capital gain of $15,000 in 2020 and a net capital gain of $20,000 in 2021. The corporation had no other capital gains or losses in other years. How much of the 2023 net capital loss can be carried back to 2020?Federal Taxation of Entities
  49. 199.A client, a tax-exempt organization (501(c)(3)), operates a dining hall that serves meals primarily to its students and faculty. Occasionally, during the summer months when the campus is less active, the dining hall is rented out to host weddings and private events for the general public, generating a net income of $40,000. These events require the organization to hire additional staff and purchase extra supplies. Is the income from these private events subject to Unrelated Business Income Tax (UBIT)?Federal Taxation of Entities
  50. 200.A client, a C corporation, has current year taxable income of $1,200,000 before considering a charitable contribution of $150,000. The corporation also has a dividends received deduction (DRD) of $50,000. What is the maximum charitable contribution deduction the corporation can take in the current year?Federal Taxation of Entities