REG Sample CPA Exam Questions

Weekly Review Quiz – REG: Federal Taxation

Thank you for taking our Regulation (REG) review quiz. Check back again for five new sample REG CPA questions to help you prepare for the exam.

Question 1

1) In 2016, Jeff Sippy won $6,000 in a state lottery. Also in 2016, Jeff spent $1,400 for the purchase of lottery tickets. Jeff elected to take the standard deduction on his 2016 income tax return. The amount of lottery winnings that should be included in Jeff’s 2016 taxable income is

  1. $6,000
  2. $4,600
  3. $3,000
  4. $0

The correct answer is: A.

A. This answer is correct. Lottery winnings are gambling winnings and must be included in gross income. Gambling losses are deductible from AGI as a miscellaneous deduction (to the extent of winnings) not subject to the 2% of AGI floor if a taxpayer itemizes deduction. Since Jeff elected to take the standard deduction for 2016, the $1,400 spent on lottery tickets is not deductible. All $6,000 of Jeff’s lottery winnings are included in his taxable income.

B. This answer is incorrect. The losses cannot be offset against winnings.

C. This answer is incorrect because $6,000 must be included in gross income.

D. This answer is incorrect. Lottery prizes must be included in gross income.

Question 2

Which of the following items should be included on the Schedule M‐1, Reconciliation of Income (Loss) per Books with Income per Return, of Form 1120, US Corporation Income Tax Return to reconcile book income to taxable income?

  1. Cash distributions to shareholders.
  2. Premiums paid on key‐person life insurance policy.
  3. Corporate bond interest.
  4. Ending balance of retained earnings.

The correct answer is: B.

A. This answer is incorrect since cash distributions to shareholders are excluded from the computation of both book income and taxable income.

B. This answer is correct. The requirement is to determine which item should be included on Schedule M‐1 of Form 1120 to reconcile a corporation’s book income to taxable income. Generally, Schedule M‐1 includes items whose treatment for computing book income differs from their treatment in computing taxable income. This answer is correct since the premiums paid on a key‐person life insurance policy would be deducted per books, but would not be deductible for tax purposes because it is an expense of producing tax‐exempt income (i.e., the life insurance proceeds if the person dies). The amount of premium would be added back to book income in order to arrive at taxable income on Schedule M‐1.

C. This answer is incorrect since corporate bond interest would be included in income for purposes of both book income and taxable income and would require no adjustment.

D. This answer is incorrect since the ending balance of retained earnings is excluded from the computation of both book income and taxable income.

Question 3

In which of the following situations may taxpayers file as married filing jointly?

  1. Taxpayers who were married but lived apart during the year.
  2. Taxpayers who were married but lived under a legal separation agreement at the end of the year.
  3. Taxpayers who were divorced during the year.
  4. Taxpayers who were legally separated but lived together for the entire year.

The correct answer is: A.

A. This answer is correct. Taxpayers can choose married filing jointly as their filing status if they are married on the last day of the year and both spouses agree to file a joint return. It doesn’t matter if they lived apart during the year. Taxpayers are considered unmarried for the whole year if, on the last day of the year, they are divorced or are legally separated under a divorce or legal separate maintenance decree. It does not matter if they lived together for the entire year.

B. This answer is incorrect because taxpayers who were married but lived apart may file a joint return.

C. This answer is incorrect. Taxpayers who were married but lived apart may file a joint return.

D. This answer is incorrect because taxpayers who were married but lived apart may file a joint return.

Question 4

No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if

  1. The tax for that year is less than $500.
  2. Estimated tax payments for the year equal at least 93% of the tax shown on the return for that year.
  3. The corporation is a personal holding company.
  4. The alternative minimum tax is at least $1,000.

The correct answer is: A.

A. This answer is correct. The requirement is to determine the correct statement regarding the penalty imposed on a corporation for underpayment of estimated tax. No penalty will be imposed on a corporation for underpayment of estimated tax for a particular year if the tax for that year is less than $500.

B. This answer is incorrect because a corporation with $1 million or more of taxable income in any of its 3 preceding tax years must pay at least 100% of its current year’s tax liability as estimated tax to avoid penalty.

C. This answer is incorrect because personal holding companies are subject to penalty if they underpay their estimated tax payments.

D. This answer is incorrect because any tax liability resulting from the alternative minimum tax is subject to the same estimated tax payment requirements as a corporation’s regular tax liability.

Question 5

Tau Corp. which has been operating since 2012, has an October 31 year‐end, which coincides with its natural business year. On May 15, 2016, Tau filed the required form to elect S corporation status. All of Tau’s stockholders consented to the election, and all other requirements were met. The earliest date that Tau can be recognized as an S corporation is

  1. November 1, 2015.
  2. May 15, 2016.
  3. November 1, 2016.
  4. January 1, 2017.

The correct answer is: C.

A. The election would become effective on the first day of its next fiscal year.

B. The election would become effective on the first day of its next fiscal year.

C. A subchapter S election that is filed on or before the 15th day of the third month of a corporation’s taxable year is generally effective as of the beginning of the taxable year in which filed. If the S election is filed after the 15th day of the third month, the election is generally effective as of the first day of the corporation’s next taxable year. Tau Corp. uses a fiscal year which begins November 1 and ends October 31 of each year. Here, its S election was filed on May 15, 2016, which is beyond the 15th day of the third month of its taxable year (January 15th). Therefore, Tau Corp.’s Subchapter S election will become effective as of the first day of its next taxable year, November 1, 2016.

D. The election would become effective on the first day of its next fiscal year.

End of Quiz

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