The CPA REG (Regulation) exam is one of the most challenging sections of the CPA journey. It tests your knowledge of federal taxation, business law, professional responsibilities, and ethics. Success in REG requires not just memorization, but a strong grasp of real-world application.
In this post, we bring you 50 practice multiple-choice questions (MCQs) covering core topics such as individual and corporate taxation, business law fundamentals, and ethical responsibilities. Each question includes the correct answer and explanation so you can learn effectively.
👉 These MCQs are designed for candidates preparing for the CPA exam in the US and international students aiming to strengthen their accounting and taxation skills.
📘 CPA REG (Regulation) Practice MCQs – Part 1 (1–50)
1. Which of the following taxes is primarily imposed by the federal government in the U.S.?
A) Sales Tax
B) Income Tax
C) Property Tax
D) Excise Tax
Answer: B) Income Tax
Explanation: The U.S. federal government primarily collects income tax from individuals and corporations, while states/local governments levy sales and property taxes.
2. The Internal Revenue Code (IRC) is primarily enforced by which agency?
A) SEC
B) IRS
C) FASB
D) PCAOB
Answer: B) IRS
Explanation: The Internal Revenue Service (IRS) is responsible for enforcing the Internal Revenue Code, collecting taxes, and ensuring compliance.
3. Which filing status generally provides the lowest tax rate?
A) Married Filing Separately
B) Married Filing Jointly
C) Head of Household
D) Single
Answer: B) Married Filing Jointly
Explanation: Couples filing jointly usually benefit from lower tax rates and higher standard deductions compared to other filing statuses.
4. Which of the following is an excludable item from gross income under U.S. tax law?
A) Gambling winnings
B) Child support received
C) Salary from employer
D) Interest on corporate bonds
Answer: B) Child support received
Explanation: Child support payments are not taxable income to the recipient. Alimony (post-2019 divorce agreements) is also not taxable.
5. Which of the following is a refundable tax credit?
A) Lifetime Learning Credit
B) Child Tax Credit
C) Earned Income Tax Credit (EITC)
D) Foreign Tax Credit
Answer: C) Earned Income Tax Credit (EITC)
Explanation: EITC is a refundable credit designed to benefit low-to-moderate-income taxpayers. Refundable credits can reduce tax liability below zero.
6. In the U.S., which tax system is primarily used for corporations?
A) Progressive tax system
B) Proportional tax system
C) Flat tax system
D) Value-added tax system
Answer: C) Flat tax system
Explanation: U.S. corporations are subject to a flat federal income tax rate (21%), unlike individuals who face a progressive tax system.
7. Which of the following forms is used by corporations to file annual income tax returns?
A) Form 1120
B) Form 1065
C) Form 1040
D) Form W-2
Answer: A) Form 1120
Explanation: Form 1120 is the U.S. Corporate Income Tax Return, while 1040 is for individuals and 1065 for partnerships.
8. What is the primary ethical responsibility of a CPA under the AICPA Code of Conduct?
A) Maximize client refunds
B) Maintain independence, integrity, and objectivity
C) Always agree with client positions
D) Avoid IRS audits at all costs
Answer: B) Maintain independence, integrity, and objectivity
Explanation: The AICPA Code of Professional Conduct emphasizes CPAs must act with integrity, independence, and objectivity above client interests.
9. Which of the following is an example of a tax deduction?
A) Child Tax Credit
B) Mortgage Interest
C) Earned Income Tax Credit
D) Adoption Credit
Answer: B) Mortgage Interest
Explanation: Mortgage interest paid on qualifying loans is a deduction that reduces taxable income, while credits directly reduce tax liability.
10. Which tax principle ensures that taxpayers with greater ability to pay should bear a larger share of the tax burden?
A) Equity principle
B) Benefit principle
C) Matching principle
D) Neutrality principle
Answer: A) Equity principle
Explanation: The equity principle underlies the progressive tax system, meaning those with higher incomes should pay proportionally more in taxes.
11. Which of the following taxes is deductible for individuals who itemize?
A) Federal income tax
B) State and local income tax (SALT)
C) Gift tax
D) Social Security tax
Answer: B) State and local income tax (SALT)
Explanation: Taxpayers who itemize can deduct up to $10,000 ($5,000 if married filing separately) of state and local income, sales, and property taxes. Federal income and Social Security taxes are not deductible.
12. Which type of business entity is subject to “double taxation”?
A) Partnership
B) Sole Proprietorship
C) S Corporation
D) C Corporation
Answer: D) C Corporation
Explanation: C Corporations pay taxes at the corporate level, and shareholders pay again on dividends (double taxation). Partnerships, sole proprietorships, and S corps are pass-through entities.
13. Which tax form is used by partnerships to report income?
A) Form 1040
B) Form 1120
C) Form 1065
D) Form 990
Answer: C) Form 1065
Explanation: Partnerships file Form 1065 (U.S. Return of Partnership Income). The income “flows through” to partners, reported via Schedule K-1.
14. Which of the following would NOT be considered taxable income?
A) Jury duty pay
B) Scholarship funds for tuition
C) Unemployment compensation
D) Lottery winnings
Answer: B) Scholarship funds for tuition
Explanation: Scholarships used for qualified tuition/education expenses are excluded from taxable income. Jury duty pay, unemployment benefits, and lottery winnings are taxable.
15. The statute of limitations for the IRS to audit a tax return is generally:
A) 1 year
B) 3 years
C) 5 years
D) 7 years
Answer: B) 3 years
Explanation: Normally, the IRS has 3 years from the date a return is filed to audit. This period extends to 6 years if income is underreported by more than 25%, and no limit in cases of fraud.
16. Which of the following entities is exempt from federal income tax?
A) C Corporation
B) Partnership
C) Sole Proprietorship
D) Qualified 501(c)(3) Nonprofit
Answer: D) Qualified 501(c)(3) Nonprofit
Explanation: Nonprofits under Section 501(c)(3) are tax-exempt, provided they comply with IRS rules. Other business entities must pay or pass-through taxes.
17. Which of the following retirement plan contributions is tax-deductible for individuals?
A) Roth IRA contribution
B) Traditional IRA contribution (subject to limits)
C) 529 college savings plan contribution
D) Health Savings Account contribution
Answer: B) Traditional IRA contribution (subject to limits)
Explanation: Contributions to a traditional IRA are often tax-deductible (depending on income and retirement plan participation). Roth IRA and 529 contributions are not deductible, though they grow tax-free.
18. Which penalty applies if a taxpayer substantially understates their income tax liability?
A) Negligence penalty
B) Accuracy-related penalty
C) Fraud penalty
D) Civil penalty only
Answer: B) Accuracy-related penalty
Explanation: An accuracy-related penalty (20%) applies if the understatement exceeds 10% of the correct tax or $5,000. Fraud penalties are more severe (75%).
19. Which of the following is an above-the-line deduction?
A) Mortgage interest
B) Charitable contributions
C) Student loan interest
D) State income tax
Answer: C) Student loan interest
Explanation: Student loan interest (up to $2,500 per year) is an above-the-line deduction, meaning it reduces Adjusted Gross Income (AGI). Others are itemized deductions.
20. Which principle is violated when a CPA knowingly omits material information in a tax return to reduce a client’s liability?
A) Independence
B) Confidentiality
C) Integrity
D) Objectivity
Answer: C) Integrity
Explanation: Omitting material information violates the integrity principle of the AICPA Code of Conduct. CPAs must always present truthful and complete financial information.
21. Which of the following individuals is required to file a U.S. federal income tax return?
A) A dependent child with $500 of unearned income
B) A single individual earning $15,000 in wages
C) A retired person with only Social Security benefits
D) A student earning $2,000 from part-time work
Answer: B) A single individual earning $15,000 in wages
Explanation: Filing requirements depend on gross income thresholds. For 2024, a single filer under 65 must file if income exceeds $13,850. Option B exceeds the threshold.
22. Which of the following business structures provides limited liability AND pass-through taxation?
A) Sole Proprietorship
B) General Partnership
C) Limited Liability Company (LLC)
D) C Corporation
Answer: C) Limited Liability Company (LLC)
Explanation: An LLC offers limited liability protection and typically is taxed as a pass-through entity, unless it elects corporate taxation.
23. Which of the following taxes is a payroll tax?
A) Excise tax
B) FICA (Social Security & Medicare)
C) Capital gains tax
D) Estate tax
Answer: B) FICA (Social Security & Medicare)
Explanation: Payroll taxes include FICA and FUTA. Excise, capital gains, and estate taxes are separate categories.
24. Which of the following is NOT subject to self-employment tax?
A) Income from sole proprietorship
B) Income from partnership
C) Salary from a corporation
D) Freelance income
Answer: C) Salary from a corporation
Explanation: Salaries are subject to FICA withholding, not self-employment tax. Sole proprietors, partners, and freelancers must pay self-employment tax.
25. Which of the following is considered a refundable tax credit?
A) Child and dependent care credit
B) Lifetime learning credit
C) Earned Income Tax Credit (EITC)
D) Adoption credit
Answer: C) Earned Income Tax Credit (EITC)
Explanation: EITC is refundable, meaning taxpayers can receive a refund even if their tax liability is zero. Most other credits are non-refundable.
26. Which of the following is a capital asset?
A) Accounts receivable from customers
B) Inventory held for sale
C) Personal automobile
D) Copyright in the hands of the creator
Answer: C) Personal automobile
Explanation: Capital assets include personal property and investments, but not inventory, accounts receivable, or self-created intangibles.
27. Which of the following is NOT a penalty that may be imposed on a taxpayer for noncompliance?
A) Accuracy-related penalty
B) Late filing penalty
C) Late payment penalty
D) Punitive damages penalty
Answer: D) Punitive damages penalty
Explanation: Tax penalties include accuracy-related, late filing, and late payment, but punitive damages apply in civil lawsuits, not tax law.
28. What is the maximum contribution limit to a Roth IRA in 2024 for individuals under age 50?
A) $4,000
B) $6,000
C) $6,500
D) $7,000
Answer: D) $7,000
Explanation: For 2024, the Roth IRA contribution limit is $7,000 ($8,000 if age 50+). However, income phase-outs may reduce eligibility.
29. Which of the following business entities is NOT eligible to elect S corporation status?
A) Domestic corporation with 50 shareholders
B) Corporation with foreign shareholders
C) Corporation with only one class of stock
D) Corporation with all U.S. resident shareholders
Answer: B) Corporation with foreign shareholders
Explanation: S corporations cannot have foreign shareholders. They must be domestic, with ≤100 shareholders, and only one class of stock.
30. Which of the following is the primary purpose of the Alternative Minimum Tax (AMT)?
A) To raise additional revenue for the IRS
B) To ensure taxpayers with high income pay a minimum level of tax
C) To tax only corporations
D) To replace the regular income tax system
Answer: B) To ensure taxpayers with high income pay a minimum level of tax
Explanation: The AMT prevents high-income taxpayers from avoiding taxes through excessive deductions/credits. It runs parallel to the regular tax system.
31. Which of the following expenses is deductible for adjusted gross income (AGI)?
A) Medical expenses
B) Mortgage interest
C) Alimony paid (divorce before 2019)
D) State income taxes
Answer: C) Alimony paid (divorce before 2019)
Explanation: Certain deductions are above-the-line (for AGI). Alimony under pre-2019 agreements qualifies. Medical, mortgage interest, and state taxes are itemized (from AGI).
32. A taxpayer sells personal residence and realizes a $200,000 gain. What portion is excluded under Section 121 (single filer)?
A) $100,000
B) $150,000
C) $200,000
D) $250,000
Answer: C) $200,000
Explanation: Section 121 allows up to $250,000 exclusion for single filers ($500,000 for joint) if ownership/use test is met.
33. Which of the following tax credits encourages low-income individuals to work?
A) Child tax credit
B) Earned Income Tax Credit (EITC)
C) Lifetime learning credit
D) American Opportunity Credit
Answer: B) Earned Income Tax Credit (EITC)
Explanation: EITC provides a refundable credit based on earned income and dependents, incentivizing employment.
34. Which of the following entities is taxed as a separate legal entity?
A) Sole proprietorship
B) Partnership
C) S Corporation
D) C Corporation
Answer: D) C Corporation
Explanation: C corporations are subject to double taxation (corporate tax and shareholder dividend tax). Sole proprietorships, partnerships, and S corps are pass-throughs.
35. Which type of bankruptcy involves liquidation of assets?
A) Chapter 7
B) Chapter 11
C) Chapter 13
D) Chapter 15
Answer: A) Chapter 7
Explanation: Chapter 7 is liquidation. Chapter 11 is reorganization (businesses). Chapter 13 is repayment plan (individuals). Chapter 15 is cross-border cases.
36. Which of the following business entities is most restricted in ownership requirements?
A) Partnership
B) LLC
C) C Corporation
D) S Corporation
Answer: D) S Corporation
Explanation: S corps require ≤100 shareholders, U.S. residents only, and one class of stock, making them more restricted.
37. Which of the following taxes is levied on the transfer of property at death?
A) Gift tax
B) Estate tax
C) Capital gains tax
D) Excise tax
Answer: B) Estate tax
Explanation: The federal estate tax applies to transfers of assets at death, while the gift tax applies during life.
38. Which of the following best describes the “kiddie tax”?
A) A tax credit for children under 17
B) A tax on a child’s unearned income taxed at parent’s rate
C) A tax benefit for dependent care expenses
D) A tax deduction for child medical expenses
Answer: B) A tax on a child’s unearned income taxed at parent’s rate
Explanation: The kiddie tax prevents income shifting by taxing a child’s unearned income at parent’s marginal rate.
39. Which of the following is deductible for AMT purposes?
A) State income taxes
B) Home mortgage interest on acquisition debt
C) Miscellaneous itemized deductions
D) Personal exemptions
Answer: B) Home mortgage interest on acquisition debt
Explanation: AMT disallows many deductions, but mortgage interest on acquisition debt remains deductible.
40. Which of the following penalties is calculated at 0.5% per month?
A) Accuracy-related penalty
B) Late payment penalty
C) Late filing penalty
D) Civil fraud penalty
Answer: B) Late payment penalty
Explanation: Late payment penalty = 0.5% per month (max 25%). Late filing = 5% per month. Fraud = 75% of underpayment.
41. Which of the following is NOT subject to federal income tax?
A) Lottery winnings
B) Scholarships used for tuition
C) Dividends received
D) Rental income
Answer: B) Scholarships used for tuition
Explanation: Scholarships used for qualified tuition/fees are tax-free. Winnings, dividends, and rental income are taxable.
42. Which of the following is considered passive activity income?
A) Salary
B) Rental real estate (unless exception applies)
C) Dividend income
D) Interest income
Answer: B) Rental real estate (unless exception applies)
Explanation: Passive activities include rentals and limited partnerships, unless the taxpayer qualifies as a real estate professional.
43. Which of the following items is subject to gift tax?
A) Gift to spouse
B) Tuition payment directly to an educational institution
C) Gift to a qualified charity
D) Cash gift to a friend
Answer: D) Cash gift to a friend
Explanation: Transfers to spouse, education (paid directly), and charities are exempt. Cash to a friend is subject to gift tax rules (exceeds annual exclusion).
44. Which of the following types of income is considered portfolio income?
A) Wages
B) Rental real estate
C) Dividends and interest
D) Self-employment income
Answer: C) Dividends and interest
Explanation: Portfolio income includes dividends, interest, and capital gains from investments.
45. Which of the following business deductions is subject to a 50% limitation?
A) Charitable contributions
B) Entertainment expenses
C) Business meals
D) Depreciation
Answer: C) Business meals
Explanation: Business meals are 50% deductible. Entertainment is generally nondeductible.
46. A corporation distributes appreciated property to a shareholder. What is the tax consequence to the corporation?
A) No gain or loss is recognized
B) Gain is recognized as if sold at FMV
C) Loss is recognized as if sold at FMV
D) Deduction is allowed for distribution
Answer: B) Gain is recognized as if sold at FMV
Explanation: Corporations recognize gain but not loss when distributing appreciated property.
47. Which of the following individuals can contribute to a Roth IRA?
A) A single filer with $200,000 income
B) A married couple with $250,000 income
C) A single filer with $120,000 income
D) A minor child with no earned income
Answer: C) A single filer with $120,000 income
Explanation: Roth IRA contributions phase out for singles at $146,000–161,000 (2024). $120,000 is eligible. Must have earned income.
48. Which of the following expenses is deductible as a casualty loss?
A) Normal wear and tear on property
B) Sudden storm damage to a home
C) Gradual termite damage
D) Depreciation of business equipment
Answer: B) Sudden storm damage to a home
Explanation: Casualty losses must be sudden, unexpected, or unusual. Gradual deterioration does not qualify.
49. Which of the following business structures is not subject to double taxation?
A) C Corporation
B) S Corporation
C) Foreign Corporation
D) None of the above
Answer: B) S Corporation
Explanation: S corps are pass-through entities, avoiding double taxation. C corps face double tax.
50. Which of the following is NOT considered gross income under the Internal Revenue Code?
A) Gambling winnings
B) Child support received
C) Rents received
D) Salary
Answer: B) Child support received
Explanation: Child support is excluded from gross income, while alimony (pre-2019), wages, rents, and winnings are taxable.
You’ve just completed Part 1 of CPA REG (1–50 MCQs). These questions covered taxation basics, ethics, and professional responsibilities.
📌 Up next: Part 2 (51–100 MCQs) – Business Law & Advanced Taxation.
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