Prepare for the American Institute of Certified Public Accountants (AICPA) Certified Public Accountant Taxation and Regulation (CPA REG) section with 24 free sample questions, a 72-question multiple-choice question (MCQ) diagnostic, topic drills, timed practice, and detailed explanations aligned to the 2026 blueprint.
Use this page when you are preparing for the Certified Public Accountant Taxation and Regulation section and want a direct practice route. The public preview gives you sample questions and a full-length MCQ diagnostic; the web app adds mixed sets, topic drills, timed mocks, progress tracking, and full practice.
Mastery Exam Prep is independent exam-prep software. These are original practice questions, not official CPA Exam questions from AICPA, NASBA, or any state board.
| Item | Detail |
|---|---|
| Provider | American Institute of Certified Public Accountants (AICPA) |
| Exam section | Certified Public Accountant Taxation and Regulation (CPA REG) |
| CPA Exam role | Core section |
| Current blueprint focus | 2026 AICPA REG blueprint |
| Practice reference on this site | 72-question multiple-choice question (MCQ) diagnostic plus topic drills and mixed practice |
| Time reference | 4 hours |
| Passing score reference | 75 |
| Important format note | The CPA REG section also involves task-based simulations and exhibit-heavy work. Use the free page as a multiple-choice diagnostic, then use the full practice route for broader repetition and review. |
| Abbreviation | Meaning | Why it matters for practice |
|---|---|---|
| CPA | Certified Public Accountant | This is the professional credential path. The page supports exam practice, not licensure advice. |
| REG | Taxation and Regulation | This section focuses on federal tax procedures, business law, property transactions, individual taxation, entity taxation, and professional responsibility. |
| MCQ | Multiple-choice question | The public full-length page is an MCQ diagnostic. Use it for concept and pacing review, not as a promise that every live item type is represented. |
| AICPA | American Institute of Certified Public Accountants | Use the sponsor’s current materials and your state-board requirements as the final authority before exam day. |
| REG blueprint area | Official weighting range |
|---|---|
| Ethics, Professional Responsibilities and Federal Tax Procedures | 10-20% |
| Business Law | 15-25% |
| Federal Taxation of Property Transactions | 5-15% |
| Federal Taxation of Individuals | 22-32% |
| Federal Taxation of Entities (including tax preparation) | 23-33% |
CPA REG rewards candidates who can apply tax authority and business-law rules to specific taxpayer facts. Strong answers identify taxpayer type, timing, basis, character, limitation, authority level, and required action before selecting the result.
| If the stem is mainly about… | It usually belongs here because… |
|---|---|
| federal tax procedures, business law, property transactions, individual taxation, entity taxation, and professional responsibility | CPA REG is the section built around this judgment area. |
| audit evidence, engagement risk, independence, or reporting | compare with CPA AUD before drilling more CPA REG questions. |
| recognition, measurement, presentation, or disclosure | compare with CPA FAR before drilling more CPA REG questions. |
| systems, controls, security, privacy, or SOC reporting | compare with CPA ISC before drilling more CPA REG questions. |
| business analysis, performance management, reporting analysis, or governmental accounting | compare with CPA BAR before drilling more CPA REG questions. |
Use multiple-choice practice to test rule selection, then pair it with document-style tax and law review. For CPA REG, that means reading short taxpayer facts, entity details, property-basis facts, filing-status clues, penalty notices, and contract or agency scenarios before deciding the consequence. When you miss an MCQ, mark whether the weakness was taxpayer identification, timing, basis, character, limitation, authority, or legal relationship.
| If your misses look like… | Drill next |
|---|---|
| You know tax terms but miss computations | drill property, individual, and entity tax calculation questions |
| You confuse procedure and authority | drill ethics, professional responsibilities, and federal tax procedure questions |
| You miss entity versus owner effects | drill entity taxation questions and write down who is taxed and when |
Need concept review before timed practice? Read the CPA REG guide on CPAExamsMastery.com, then return here for sample questions, topic drills, timed mocks, and the full practice route.
Use these child pages when you want focused Mastery Exam Prep practice before returning to mixed sets and timed mocks.
These are original Mastery Exam Prep practice questions aligned to the live CPA REG route and the main blueprint areas shown above. Use them to test readiness here, then continue in Mastery Exam Prep with mixed sets, topic drills, and timed mocks.
Topic: Federal Taxation of Property Transactions
A calendar-year corporation is reviewing its current-year tax depreciation schedule. All assets shown are 7-year MACRS personal property, no property is listed property, the corporation elected out of bonus depreciation, and no Section 179 deduction was elected. The tax department’s reminder states that if more than 40% of the basis of depreciable personal property placed in service during the year is placed in service in the last quarter, the mid-quarter convention applies to all covered personal property placed in service that year. Round each line to the nearest dollar.
Relevant first-year rates:
| Convention and quarter | Rate |
|---|---|
| Half-year | 14.29% |
| Mid-quarter, Q1 | 25.00% |
| Mid-quarter, Q3 | 10.71% |
| Mid-quarter, Q4 | 3.57% |
Depreciation schedule under review:
| Asset | Cost | Placed in service | Rate used | Depreciation claimed |
|---|---|---|---|---|
| Production equipment | $140,000 | March 10 | 14.29% | $20,006 |
| Office furniture | $50,000 | September 15 | 14.29% | $7,145 |
| Packaging line | $210,000 | November 20 | 14.29% | $30,009 |
| Total | $400,000 | $57,160 |
Which interpretation is best?
Best answer: A
Explanation: The cost-recovery schedule includes each asset from the source data, so the issue is accuracy rather than completeness. Because more than 40% of the personal property basis was placed in service in the last quarter, the schedule should use mid-quarter rates for all three assets. The last-quarter test compares Q4 placed-in-service basis with total covered personal property basis placed in service during the year. Here, the packaging line placed in service in Q4 has $210,000 of basis, which is 52.5% of the $400,000 total. Because that exceeds 40%, the mid-quarter convention replaces the half-year convention for all three assets. Correct depreciation is \(140,000 × 25.00% =\)35,000, plus \(50,000 × 10.71% =\)5,355, plus \(210,000 × 3.57% =\)7,497, for a total of $47,852. The schedule claimed $57,160, so current-year depreciation is overstated by $9,308.
Topic: Ethics, Professional Responsibilities and Federal Tax Procedures
A CPA represents an individual taxpayer in an IRS income tax examination. The CPA concludes that the IRS has moved from information gathering to proposed adjustments, and that the taxpayer’s next response option is to request an administrative Appeals conference by a timely written protest rather than immediately paying the tax or petitioning Tax Court. Which item in the file best supports that conclusion?
Best answer: C
Explanation: The 30-day letter is issued after the examiner proposes adjustments and gives the taxpayer an opportunity to seek administrative review. It supports the conclusion that the case is at the proposed-adjustment stage and that a timely protest can preserve access to IRS Appeals. In a typical IRS examination, the taxpayer first receives an audit contact or appointment notice. The examiner then may issue Information Document Requests to gather support. After reviewing the facts, the IRS may issue a proposed examination report with a 30-day letter, giving the taxpayer the option to agree or disagree and request an Appeals conference. A statutory notice of deficiency comes later if the disagreement is not resolved and gives the taxpayer the right to petition Tax Court before assessment.
Topic: Business Law
Marlow, Inc. filed a voluntary Chapter 7 bankruptcy petition. Before the filing, Riley Components sold goods to Marlow on unsecured credit and had not been paid. After receiving notice of the bankruptcy filing, Riley filed a state-court collection lawsuit and sought to garnish Marlow’s bank account for the unpaid invoice. How should Riley’s postpetition action be characterized?
Best answer: A
Explanation: Riley’s invoice is a prepetition unsecured claim, and the bankruptcy petition triggers an automatic stay against most collection actions. Riley generally must pursue payment through the bankruptcy claims process rather than a separate state-court lawsuit or garnishment. A voluntary bankruptcy petition creates a bankruptcy estate and generally triggers an automatic stay. The stay stops most actions to collect, assess, or recover prepetition claims against the debtor or estate property. An unsecured trade creditor is not allowed to improve its position by suing or garnishing after receiving notice of the bankruptcy filing. Instead, the creditor typically files a proof of claim and shares in distributions according to bankruptcy priority rules. Filing the petition does not immediately discharge all debts, and it does not convert an unsecured creditor into a secured or priority creditor.
Topic: Federal Taxation of Individuals
Nolan and Reese are married filing jointly. Their taxable income is $124,000. They have no alternative minimum tax, net investment income tax, additional taxes, or credits other than those listed below.
Tax rate schedule excerpt for married filing jointly: Taxable income over $94,300 but not over $201,050 is taxed as $10,852 plus 22% of the excess over $94,300.
Additional facts:
Assuming no penalties or interest, what amount is due with the federal income tax return?
Best answer: C
Explanation: The tax schedule determines the regular income tax before credits. Nonrefundable credits reduce tax, while refundable credits, withholding, and estimated payments reduce the remaining balance due or create an overpayment. Compute the regular income tax first: \(10,852 + 22% × (\)124,000 − \(94,300) =\)10,852 + \(6,534 =\)17,386. The $2,500 nonrefundable credit reduces tax to $14,886. Refundable credits and payments total $1,200 + $10,900 + \(2,400 =\)14,500. Therefore, the amount due with the return is $14,886 − \(14,500 =\)386.
Topic: Federal Taxation of Entities (Including Tax Preparation)
Vega, Inc., a calendar-year C corporation, has nexus in State A and other states. Based on the exhibit, what amount should Vega report as State A taxable income?
| State A return fact | Amount or rule |
|---|---|
| Federal taxable income before State A apportionment and allocation | $1,250,000 |
| Included in federal taxable income: net rent from State A real property | $60,000 |
| Included in federal taxable income: gain on sale of State B land | $140,000 |
| State A sales | $4,000,000 |
| Total everywhere sales | $10,000,000 |
| State A rule | Business income is apportioned using a single-sales factor; nonbusiness real property rent and real property sale gains are allocated to the state where the real property is located. No other State A modifications apply. |
Best answer: D
Explanation: State A first removes specifically allocated nonbusiness items from the apportionable base. The remaining business income is apportioned by the State A sales factor, and only the nonbusiness real property rent sourced to State A is then added. Federal taxable income of $1,250,000 includes two nonbusiness items: $60,000 of rent from State A real property and $140,000 of gain from State B land. These are removed from the apportionable business income base, leaving $1,050,000. State A’s single-sales factor is $4,000,000 ÷ $10,000,000, or 40%. Apportioned business income is therefore $420,000. The $60,000 rent is allocated to State A because the real property is located there, while the $140,000 land gain is allocated to State B. State A taxable income is $420,000 + \(60,000 =\)480,000.
Topic: Federal Taxation of Property Transactions
Lark LLC, a calendar-year manufacturer, acquired the following assets during 2026 and uses each asset 100% in its active trade or business. Section 179 dollar and taxable income limitations are not binding, and Lark made no election out of any available special depreciation allowance.
| Asset | Facts |
|---|---|
| Used CNC machine | $140,000; tangible personal property; 7-year MACRS class; acquired from an unrelated dealer; not previously used by Lark |
| Goodwill and customer list | $90,000; acquired in a taxable asset acquisition of an unrelated competitor’s operating business |
Lark’s controller proposes to deduct the full $230,000 currently under Section 179. Which interpretation is most appropriate?
Best answer: B
Explanation: The controlling distinction is the type of property being recovered. The machine is depreciable tangible personal property, so Section 179, special depreciation allowance, and MACRS may be relevant in order; the purchased goodwill and customer list are amortizable Section 197 intangibles. When more than one recovery concept appears plausible, first classify the asset. Section 179 generally applies to qualifying tangible personal property used in an active business and is applied before any special depreciation allowance. The special depreciation allowance, if available, applies after Section 179 to qualified depreciable property, and regular MACRS applies to remaining adjusted basis. Used property is not automatically disqualified if it is acquired in a qualifying purchase and was not previously used by the taxpayer. By contrast, goodwill and customer-based intangibles acquired in the purchase of a business are Section 197 intangibles, recovered through amortization rather than Section 179 expensing, special depreciation, or MACRS depreciation.
Topic: Ethics, Professional Responsibilities and Federal Tax Procedures
An IRS examination resulted in a 30-day letter proposing to disallow a deduction and impose an accuracy-related penalty. The taxpayer plans to request Appeals review and argue that, even if the deduction is disallowed, the penalty should not apply because the taxpayer reasonably relied in good faith on a competent tax adviser. Which item would best support that penalty-relief position?
Best answer: A
Explanation: Penalty relief based on reasonable cause and good faith is strongest when the taxpayer can show actual reliance on competent professional advice before filing. The best support is a contemporaneous advice memo tied to the specific position and based on the facts the taxpayer provided. In an audit or Appeals setting, a taxpayer seeking relief from an accuracy-related penalty must do more than show that a professional prepared the return. The taxpayer should be able to demonstrate reasonable cause and good faith, such as competent advice received before filing, full disclosure of relevant facts to the adviser, and actual reliance on that advice. A written prefiling memo analyzing the specific deduction is strong evidence because it documents timing, facts, advice, and reliance. After-the-fact statements or general preparation records are much weaker because they do not show that the taxpayer had a reasonable basis for relying on professional judgment when the return was filed.
Topic: Business Law
Stone LLC borrowed $75,000 from Metro Bank to buy business inventory. Stone already owned equipment and inventory. Stone’s authorized manager signed a document titled “Security Agreement” stating: “Stone grants Metro Bank a security interest in all of Stone’s personal property.” Metro advanced the loan proceeds the same day. Stone did not sign or authenticate any other collateral document. Metro then filed a UCC-1 financing statement in the correct filing office using Stone’s exact legal name and identifying the collateral as “inventory and equipment.” Metro did not take possession or control of any collateral. Which is the best interpretation of Metro’s secured position?
Best answer: D
Explanation: Metro gave value and Stone had rights in the collateral, but attachment also requires an authenticated security agreement that reasonably identifies the collateral. “All personal property” is too generic for a security agreement, so filing a UCC-1 cannot perfect a security interest that has not attached. A security interest in personal property generally attaches when three requirements are met: the secured party gives value, the debtor has rights in the collateral, and the debtor authenticates a security agreement that reasonably identifies the collateral. A description by UCC collateral type, such as “inventory” or “equipment,” is usually adequate in a security agreement, but a supergeneric phrase such as “all personal property” is not. Perfection normally requires attachment plus an additional step, such as filing a financing statement for goods like inventory and equipment. Metro filed in the correct place with a sufficient financing statement, but the filing does not cure the inadequate collateral description in the security agreement. Because attachment failed, perfection also failed.
Topic: Federal Taxation of Individuals
Mia, a cash-method, calendar-year individual taxpayer, received the following items during the year. Based on the exhibit, what amount should Mia include in gross income from these items on her Form 1040?
| Item | Amount/description |
|---|---|
| Form W-2 wages, box 1 | $96,000 |
| Bank certificate of deposit interest | $1,800 |
| Interest on state municipal bonds | $1,200 |
| Ordinary dividends from a domestic corporation, of which $2,800 are qualified dividends | $4,500 |
| Guaranteed payment from an LLC taxed as a partnership for services | $18,000 |
| Employer-paid group accident and health insurance premiums, not included in W-2 wages | $7,200 |
| Traditional IRA distribution; Form 1099-R taxable amount is $9,000 | $12,000 gross distribution |
| Compensatory damages for personal physical injury | $30,000 |
| Punitive damages from the same lawsuit | $8,000 |
Best answer: B
Explanation: The includible amount is $137,300. Gross income includes taxable wages, bank interest, all ordinary dividends, guaranteed payments, the taxable portion of retirement-plan distributions, and punitive damages. Qualified dividends are still included in gross income; they may only receive preferential tax rates. Compute the includible items as $96,000 wages + $1,800 bank interest + $4,500 ordinary dividends + $18,000 guaranteed payment + $9,000 taxable IRA distribution + \(8,000 punitive damages =\)137,300. Interest on state municipal bonds is generally excluded from federal gross income. Employer-paid group accident and health insurance premiums are excludable employee fringe benefits when not included in W-2 wages. Compensatory damages received on account of personal physical injury are excluded, but punitive damages are taxable even when related to the same lawsuit.
Topic: Federal Taxation of Entities (Including Tax Preparation)
Northstar, Inc., a calendar-year C corporation, has no prior-year carryovers. The controller prepared the following current-year tax workpaper. For this year, charitable contributions are deductible only up to 10% of taxable income computed before the charitable contribution deduction and any NOL deduction; any unused contribution is not deducted currently. Corporate capital losses may offset capital gains only.
| Current-year item | Amount |
|---|---|
| Net sales | $900,000 |
| Cost of goods sold | (620,000) |
| Interest income | 12,000 |
| Deductible operating expenses, excluding separately listed items | (310,000) |
| Federal income tax expense accrued | (8,000) |
| Qualified cash charitable contributions paid | (15,000) |
| Long-term capital gain | 5,000 |
| Long-term capital loss | (28,000) |
What conclusion is supported by the exhibit for Northstar’s current-year taxable income or NOL, before considering any carrybacks to other years?
Best answer: B
Explanation: Northstar has a current-year NOL of $18,000. The net capital loss beyond capital gains is not currently deductible, federal income tax expense is nondeductible, and the charitable contribution deduction is limited to zero because the pre-contribution taxable income base is negative. Compute taxable income using only currently deductible items. Net sales of $900,000 less cost of goods sold of $620,000, plus $12,000 interest income, less $310,000 deductible operating expenses, equals a $18,000 loss before separately listed items. The $28,000 capital loss is deductible only to the extent of the $5,000 capital gain, so capital transactions have no net current taxable income effect and the remaining capital loss is not part of the NOL. Federal income tax expense is not deductible. Because the charitable contribution limitation base is already negative, none of the $15,000 charitable contribution is deductible currently. Therefore, Northstar reports a current-year NOL of $18,000.
Topic: Federal Taxation of Property Transactions
A CPA is reviewing a draft first-year MACRS depreciation schedule for a calendar-year taxpayer. The taxpayer made no Section 179 election, claimed no bonus depreciation, uses the half-year convention, and rounds deductions to the nearest dollar.
| Asset | Source data | Tax classification and rate | Draft schedule |
|---|---|---|---|
| CNC machine | Invoice $90,000; sales tax $5,400; installation $4,600 | 7-year MACRS; year 1 rate 14.29% | Basis $90,000; depreciation $12,861 |
| Computer server | Invoice $30,000; delivery $2,000 | 5-year MACRS; year 1 rate 20.00% | Basis $32,000; depreciation $6,400 |
| Office shelving | Invoice $18,000 | 7-year MACRS; year 1 rate 14.29% | Not included |
What net adjustment to the draft tax depreciation deduction should be proposed?
Best answer: C
Explanation: The draft schedule understated depreciation because it excluded capitalized costs for the CNC machine and omitted the office shelving. Sales tax and installation are included in the depreciable basis, and the omitted shelving must be added using its MACRS rate. Depreciable basis generally includes the asset’s purchase price plus costs necessary to acquire and place the asset in service, such as sales tax, delivery, and installation. The CNC machine’s correct basis is $100,000, so first-year depreciation is $14,290, compared with $12,861 on the draft schedule, an increase of $1,429. The office shelving was omitted, so its first-year depreciation is \(18,000 × 14.29% =\)2,572. The computer server is already correct. The total proposed adjustment is a $4,001 increase.
Topic: Ethics, Professional Responsibilities and Federal Tax Procedures
A CPA firm is paid to prepare Apex Corp.’s federal income tax return. The engagement includes the following participants:
Which participant should be characterized as a nonsigning tax return preparer for federal tax purposes?
Best answer: B
Explanation: Morgan is a nonsigning tax return preparer because Morgan is compensated and prepares a substantial portion of the return. Signing is not required when the person’s compensated work on the return is substantial. For federal tax purposes, a tax return preparer generally includes a person who prepares all or a substantial portion of a return or refund claim for compensation. The signing preparer is the individual with primary responsibility for the overall accuracy of the return and who signs it. A nonsigning preparer can still be treated as a preparer if compensated work on a substantial portion of the return is used. Purely clerical assistance is not enough, and a taxpayer’s regular employee preparing or reviewing the employer’s return is not treated the same as an outside compensated preparer.
Topic: Business Law
A CPA is helping a client evaluate whether it can compel a landowner to close on a planned purchase of commercial land. The client and the landowner orally agreed to a $750,000 purchase price, but neither party signed any memorandum identifying the property and price. The client has not paid any purchase price, taken possession, or made improvements to the property. Which business-law conclusion is most appropriate?
Best answer: D
Explanation: A contract for the sale of real property is subject to the statute of frauds. Because there is no signed writing and no facts showing an exception such as part performance, the oral agreement is not enforceable against the landowner. The statute of frauds does not make every oral agreement invalid, but it does require certain agreements to be evidenced by a signed writing before they can be enforced in court. Contracts for the sale of real property are a classic category covered by the rule. A writing typically must identify the parties, the property, and the essential terms, and be signed by the party against whom enforcement is sought. Here, no memorandum was signed, and the buyer did not take possession, pay the purchase price, or make improvements that could support a part-performance exception. Therefore, the client generally cannot compel the landowner to close based only on the oral agreement.
Topic: Federal Taxation of Individuals
A single taxpayer operates a sole proprietorship and asks for the qualified business income (QBI) deduction supported by the following tax return workpaper. What QBI deduction should be claimed?
| Fact | Amount / status |
|---|---|
| Taxable income before QBI deduction | $330,000 |
| Net capital gain included in taxable income | $30,000 |
| Sole proprietorship QBI | $280,000 |
| W-2 wages paid by the business | $90,000 |
| UBIA of qualified property | $400,000 |
| Business type | Not a specified service trade or business |
| Threshold status | Taxable income exceeds the top of the applicable phase-in range |
| Qualified REIT dividends and PTP income | $0 |
Best answer: D
Explanation: The taxpayer is above the full phase-in range, so the W-2 wage and UBIA limitation applies. The allowable QBI deduction is the lesser of the QBI component after that limitation and 20% of taxable income reduced by net capital gain. For a non-SSTB when taxable income exceeds the top of the phase-in range, the QBI component for the business is the lesser of 20% of QBI or the greater of two wage/property limits. Here, 20% of QBI is \(56,000. The wage/property limit is the greater of 50% of W-2 wages, or\)45,000, and 25% of W-2 wages plus 2.5% of UBIA, or $22,500 + \(10,000 =\)32,500. Thus, the QBI component is limited to $45,000. The overall taxable income limit is 20% × ($330,000 − \(30,000) =\)60,000, so it does not further reduce the deduction.
Topic: Federal Taxation of Entities (Including Tax Preparation)
Triad Corp has nexus in State X and is preparing its State X corporate income tax return. State X apportions business income using a single sales factor and allocates nonbusiness gains from real property to the state where the property is located. For the year, Triad has $1,300,000 of pre-apportionment taxable income, including a $100,000 nonbusiness gain from selling land located in State X; the remaining $1,200,000 is apportionable business income. Triad’s State X sales are $3,000,000, and its everywhere sales are $10,000,000. What amount is included in Triad’s State X taxable income?
Best answer: D
Explanation: Business income is apportioned using State X’s single sales factor, while the nonbusiness real property gain is specifically allocated to State X. The sales factor is 30%, so $1,200,000 of business income produces $360,000 of State X income, plus the $100,000 allocated gain. State taxable income for a multistate corporation often separates apportionable business income from specifically allocated nonbusiness income. Here, State X uses a single sales factor: State X sales of $3,000,000 divided by everywhere sales of $10,000,000, or 30%. Only the $1,200,000 of business income is multiplied by that factor, resulting in $360,000 apportioned to State X. The $100,000 gain is nonbusiness income from real property located in State X, so it is allocated entirely to State X rather than apportioned. Total State X taxable income is $360,000 + \(100,000 =\)460,000.
Topic: Federal Taxation of Property Transactions
Marin, an individual investor, sold stock at a loss and then bought substantially identical stock:
What is Marin’s total tax basis in the 60 replacement shares?
Best answer: A
Explanation: A wash sale disallows the loss on the sale to the extent substantially identical replacement stock is acquired within the wash sale window. The disallowed loss is not lost permanently; it is added to the basis of the replacement shares. When stock is sold at a loss and substantially identical stock is acquired within 30 days before or after the sale date, the wash sale rules can disallow all or part of the realized loss. The disallowed loss is deferred by adding it to the basis of the replacement shares. Here, Marin bought substantially identical stock 20 days after the sale, which is within the wash sale period. The stem provides that $900 of the loss is disallowed. Therefore, the total basis in the 60 replacement shares is their $2,700 purchase cost plus the $900 disallowed loss, or $3,600.
Topic: Ethics, Professional Responsibilities and Federal Tax Procedures
After a field audit of Park’s 2024 Schedule C, the revenue agent issued a 30-day letter and examination report proposing to disallow Park’s vehicle expense deduction. Park has already provided the requested mileage log, repair invoices, and client calendar. Park does not plan to submit additional records, but believes the agent drew the wrong conclusion from those records and wants an independent administrative review before going to court. How should Park’s current dispute be characterized?
Best answer: D
Explanation: This is an appeals issue. The facts have been developed, the examiner has proposed a conclusion, and Park is disputing that conclusion through independent administrative review. An examination issue generally involves developing the facts, responding to information document requests, substantiating return items, and working with the examiner before a proposed determination is finalized. An appeals issue arises when the IRS has proposed an adjustment and the taxpayer disputes the conclusion based on the developed record, legal interpretation, or hazards of litigation. Here, Park has already provided the requested records and is not trying to submit more evidence. Park is challenging the agent’s proposed disallowance in the 30-day letter, so the matter is properly characterized as an appeals issue.
Topic: Business Law
Ridge Supply sold equipment in three separate authorized purchases. No agent signed a personal guaranty, and no contract term alters ordinary agency liability rules. Ridge has not been paid and is preparing pre-suit demand letters.
| Transaction | Facts known to Ridge when the contract was made |
|---|---|
| A | Nora signed ‘Nora Lee, agent for Harbor LLC,’ and Ridge knew Harbor LLC was the principal. |
| B | Omar signed ‘Omar Patel, purchasing agent’ and told Ridge he was buying for a principal, but he did not identify the principal. Ridge later learned the principal was Pine Inc. |
| C | Mia signed in her own name and did not tell Ridge she was acting for anyone else. Ridge later learned she was acting for Quinn LLC. |
What should Ridge do next to identify the parties bound on these contracts?
Best answer: A
Explanation: Harbor LLC was a disclosed principal, so Nora is generally not personally bound absent a guaranty or contrary agreement. Pine Inc. was partially disclosed and Quinn LLC was undisclosed, so both the agent and the authorized principal are bound in those transactions. Agency contract liability depends on what the third party knew when the contract was made. If the principal is disclosed, the third party knows both that the agent is acting for a principal and the principal’s identity; the principal is bound and the agent generally is not. If the principal is partially disclosed, the third party knows an agency exists but not the principal’s identity; both the agent and principal are bound. If the principal is undisclosed, the third party believes the agent is acting personally; both the agent and principal are bound when the agent had authority and no contract term changes that result. Ridge should therefore proceed against Harbor LLC only for Transaction A, and against both the agents and principals for Transactions B and C.
Topic: Federal Taxation of Individuals
A CPA is reviewing a taxpayer’s draft Form 1040 for income completeness. The source documents show the following receipts for the year:
| Receipt | Amount |
|---|---|
| W-2 wages | $78,000 |
| Form 1099-G unemployment compensation | $3,600 |
| Interest on municipal bonds | $900 |
| Cash gift from the taxpayer’s aunt | $10,000 |
The draft Form 1040 reports $78,000 of wages, $0 of unemployment compensation, and $0 of tax-exempt interest. Which conclusion is correct?
Best answer: C
Explanation: The draft return omits taxable unemployment compensation, so gross income is understated by $3,600. Municipal bond interest is excluded from federal gross income but should still be shown as tax-exempt interest on Form 1040, and the cash gift is excluded from the recipient’s income. A completeness review compares source documents to the income amounts reported on the return and distinguishes taxable receipts from excluded receipts. Wages and unemployment compensation are taxable gross income. Interest on municipal bonds is generally excluded from federal gross income, but it is reported separately on Form 1040 as tax-exempt interest. A gift received from an individual is excluded from the recipient’s gross income. Therefore, the only omitted taxable receipt is the $3,600 unemployment compensation, although the draft should also be updated to report the $900 municipal bond interest as tax-exempt interest.
Topic: Federal Taxation of Entities (Including Tax Preparation)
Maple Ridge, Inc. has used a valid calendar-year S corporation election for several years. On May 15 of the current year, 20% of its stock was transferred to Brook Fund, LP, a domestic limited partnership. Before the transfer, all shareholders were U.S. individuals, and the corporation did not request relief for an inadvertent termination. The preparer concluded that the S election terminated on May 15, so the year must be reported as an S termination year: S short-year items pass through to shareholders, while items allocated to the C corporation short year are taxed at the entity level.
Which authority excerpt best supports the preparer’s conclusion?
Best answer: A
Explanation: Brook Fund, LP is an ineligible S corporation shareholder, so Maple Ridge’s S election terminates when the partnership becomes a shareholder. A midyear eligibility termination creates an S termination year, with C corporation short-year items taxed at the entity level rather than passed through. An S corporation must continuously meet eligibility requirements. Eligible shareholders generally include U.S. individuals, certain estates or trusts, and certain exempt organizations; partnerships are not eligible shareholders. When stock is transferred to an ineligible shareholder, the S election terminates on the transfer date unless relief for an inadvertent termination is obtained. The tax year containing the termination is divided into an S short year and a C corporation short year. Items allocated to the S short year retain pass-through treatment, while items allocated to the C corporation short year are reported by and taxed to the corporation.
Topic: Federal Taxation of Property Transactions
A calendar-year taxpayer purchased machinery for $96,000 and placed it in service on November 18, Year 1. The machinery is 5-year MACRS property depreciated using the 200% declining-balance method, and the mid-quarter convention applies. No Sec. 179 deduction or bonus depreciation is claimed.
Use this MACRS rate table for 5-year property under the mid-quarter convention:
| Tax year | Q1 placed in service | Q2 placed in service | Q3 placed in service | Q4 placed in service |
|---|---|---|---|---|
| Year 1 | 35.00% | 25.00% | 15.00% | 5.00% |
| Year 2 | 26.00% | 30.00% | 34.00% | 38.00% |
What is the MACRS depreciation deduction for Year 2?
Best answer: C
Explanation: Because the machinery was placed in service on November 18, it falls in the fourth quarter under the mid-quarter convention. The Year 2 rate for Q4 placed-in-service 5-year property is 38.00%, so the deduction is $96,000 multiplied by 38.00%. MACRS depreciation uses the applicable recovery period, convention, and placed-in-service date to select the correct table rate. Here, the property is 5-year MACRS property and the mid-quarter convention applies. Since the machinery was placed in service on November 18, it is treated as placed in service in the fourth quarter. For the second tax year, the table gives a 38.00% rate for property placed in service in Q4. Therefore, Year 2 depreciation is $96,000 × 38.00%, or $36,480. Sec. 179 and bonus depreciation are ignored because the facts state they are not claimed.
Topic: Ethics, Professional Responsibilities and Federal Tax Procedures
Riley, a CPA authorized to practice before the IRS, is reviewing proposed engagement terms. Assume each fee is reasonable in amount and state law imposes no additional restriction. Under IRS practice standards, a fee based on a percentage of the tax refund obtained or taxes saved is a contingent fee. Which engagement term is acceptable without creating a contingent-fee issue?
Best answer: B
Explanation: IRS practice standards generally prohibit contingent fees for preparing original returns and ordinary refund claims. An exception applies to services connected with an IRS examination or challenge, so the exam-representation arrangement is acceptable under the stated facts. A contingent fee includes a fee based on a percentage of a refund or tax savings. Under IRS practice standards, practitioners generally may not charge contingent fees for preparing original tax returns or for routine amended returns or refund claims. However, a contingent fee is allowed for services connected with an IRS examination or challenge to a return, such as representing a taxpayer after the IRS has proposed a deficiency. Written client consent does not convert an otherwise prohibited contingent fee into an acceptable one.
Topic: Business Law
Crestline Corp. asks whether it is bound by an equipment lease signed by its purchasing clerk. The documented facts are:
| Fact | Detail |
|---|---|
| Authority at signing | The clerk had neither actual nor apparent authority to sign equipment leases for Crestline. |
| Unauthorized contract | The clerk signed a $48,000 equipment lease with Delta Systems in Crestline’s name. |
| Management response | After an officer with authority to approve leases learned all material terms and the clerk’s lack of authority, Crestline kept the equipment, used it for two months, and made the first lease payment. |
| Third-party action | Delta did not withdraw from the transaction before Crestline used the equipment or made the payment. |
Which conclusion is best supported by these facts?
Best answer: C
Explanation: Crestline likely ratified the unauthorized lease. Once an authorized officer knew the material facts and Crestline kept, used, and paid for the equipment, Crestline impliedly accepted the transaction’s benefits and became bound. Ratification occurs when a principal later affirms an agent’s unauthorized act. The affirmation can be express or implied, including by knowingly accepting benefits from the transaction. The principal must have knowledge of the material facts, and the third party must not have withdrawn before ratification. Here, the clerk lacked authority at signing, but an authorized officer later learned the key facts and Crestline kept and used the equipment and made a payment. That conduct supports implied ratification of the entire lease, not merely the favorable parts.
Topic: Federal Taxation of Individuals
A CPA is advising Lynn, a single taxpayer, about avoiding the federal individual estimated tax underpayment penalty. Lynn’s prior-year adjusted gross income was $180,000, and her prior-year total tax was $28,000 on a 12-month return that showed a tax liability. Lynn’s current-year total tax is expected to be $38,000, and she will have no withholding. If Lynn pays timely equal estimated tax installments, what is the smallest total current-year estimated tax payment amount that satisfies a safe harbor?
Best answer: B
Explanation: Lynn can satisfy the estimated tax safe harbor by paying the lesser of 90% of current-year tax or 110% of prior-year tax because her prior-year AGI exceeded the high-income threshold. The smaller amount is 110% of $28,000, or $30,800. For an individual, timely estimated tax payments generally avoid the underpayment penalty if they equal at least the required annual payment. That amount is generally the lesser of 90% of the current-year tax or 100% of the prior-year tax. However, for a higher-income taxpayer, the prior-year tax safe harbor increases to 110% of prior-year tax. Lynn’s prior-year AGI was $180,000, so the 110% rule applies. Her prior-year safe harbor is \(28,000 × 110% =\)30,800. Her current-year safe harbor is \(38,000 × 90% =\)34,200. The smaller safe harbor amount is $30,800.