Welcome to CPA REG (Regulation) Part 3, covering MCQs 101–150 designed for the CPA Exam 2025 and beyond. This section tests your knowledge of taxation, ethics, business law, and IRS compliance rules, with a focus on real exam-style questions. Each multiple-choice question comes with a correct answer and detailed explanation to strengthen your understanding and improve your test-taking strategy.
Whether you are preparing for CPA Exam REG in the US, Canada, or international testing centers, these practice MCQs provide high-quality preparation that aligns with AICPA exam blueprints.
📘 CPA REG (Regulation) MCQs Part 3: Questions 101–150
101. Which of the following is deductible for federal income tax purposes?
A) Personal living expenses
B) State income taxes paid
C) Fines and penalties
D) Political contributions
Answer: B) State income taxes paid
Explanation: State and local income taxes are deductible as itemized deductions under the IRS rules, unlike personal expenses, fines, or political contributions.
102. In partnership taxation, guaranteed payments to partners are:
A) Treated as dividends
B) Deductible by the partnership
C) Tax-exempt to the partner
D) Considered as capital distribution
Answer: B) Deductible by the partnership
Explanation: Guaranteed payments are deductible expenses for the partnership and are taxable income to the partner receiving them.
103. The Alternative Minimum Tax (AMT) is primarily designed to:
A) Encourage charitable giving
B) Ensure taxpayers with high deductions pay a minimum tax
C) Exempt low-income individuals
D) Eliminate payroll taxes
Answer: B) Ensure taxpayers with high deductions pay a minimum tax
Explanation: AMT ensures individuals and corporations with many deductions still pay at least a minimum amount of tax.
104. Which of the following items is included in gross income?
A) Child support payments received
B) Gifts received from relatives
C) Gambling winnings
D) Life insurance proceeds
Answer: C) Gambling winnings
Explanation: Gambling winnings are fully taxable and must be reported as gross income, unlike gifts, child support, or insurance proceeds.
105. A corporation with accumulated earnings beyond reasonable business needs may be subject to:
A) Corporate Alternative Tax
B) Accumulated Earnings Tax
C) Capital Gains Tax
D) Excise Tax
Answer: B) Accumulated Earnings Tax
Explanation: To prevent corporations from avoiding shareholder taxation, IRS imposes an Accumulated Earnings Tax on unreasonable earnings retention.
106. Which of the following organizations qualifies as a tax-exempt entity under IRC §501(c)(3)?
A) Political campaign committees
B) Private foundations
C) For-profit hospitals
D) Credit unions
Answer: B) Private foundations
Explanation: Nonprofits organized for charitable, religious, or educational purposes (including private foundations) qualify under 501(c)(3).
107. When computing Adjusted Gross Income (AGI), which is an above-the-line deduction?
A) Charitable contributions
B) Mortgage interest
C) Student loan interest
D) State sales tax
Answer: C) Student loan interest
Explanation: Above-the-line deductions reduce AGI directly, and student loan interest is one of the commonly allowed above-the-line deductions.
108. The passive activity loss rules generally apply to:
A) Salaries and wages
B) Interest income
C) Real estate rental activities
D) Dividends
Answer: C) Real estate rental activities
Explanation: Rental activities are typically considered passive, and passive losses can only offset passive income.
109. Which of the following tax credits is refundable?
A) Child and dependent care credit
B) Earned Income Tax Credit (EITC)
C) Adoption credit
D) Lifetime Learning Credit
Answer: B) Earned Income Tax Credit (EITC)
Explanation: EITC is a refundable credit, meaning taxpayers can receive it even if their tax liability is zero.
110. If a taxpayer fails to file a tax return, the statute of limitations for IRS assessment is:
A) 3 years
B) 6 years
C) 10 years
D) No limit
Answer: D) No limit
Explanation: If no return is filed, there is no statute of limitations for IRS to assess tax.
111. Which of the following is subject to self-employment tax?
A) Dividends from stock
B) Partnership guaranteed payments
C) Interest income
D) Rental income
Answer: B) Partnership guaranteed payments
Explanation: Guaranteed payments to partners are treated as earned income and subject to self-employment tax.
112. Which of the following is considered a capital asset?
A) Inventory held for sale
B) Accounts receivable from clients
C) Land held for investment
D) Equipment used in business
Answer: C) Land held for investment
Explanation: Capital assets include property held for investment purposes, while inventory and business-use assets are excluded.
113. A taxpayer sells personal residence after living there for 3 of the last 5 years. The gain exclusion is:
A) $125,000
B) $250,000 for single, $500,000 for married filing jointly
C) $100,000
D) No exclusion
Answer: B) $250,000 for single, $500,000 for married filing jointly
Explanation: IRC §121 allows homeowners to exclude this amount if ownership and use tests are met.
114. Which type of business entity avoids double taxation?
A) C Corporation
B) S Corporation
C) Regular Corporation
D) Personal Holding Company
Answer: B) S Corporation
Explanation: S Corporations pass income directly to shareholders, avoiding the double taxation of C Corps.
115. Which of the following is NOT an itemized deduction?
A) Medical expenses exceeding 7.5% AGI
B) Charitable contributions
C) Mortgage interest
D) Moving expenses for a new job
Answer: D) Moving expenses for a new job
Explanation: Moving expenses are not itemized deductions; they are only deductible for active-duty military moves.
116. Which of the following penalties can the IRS impose for negligence?
A) 5% of unpaid tax per month
B) 20% accuracy-related penalty
C) 75% civil fraud penalty
D) 100% penalty
Answer: B) 20% accuracy-related penalty
Explanation: Negligence or substantial understatement results in a 20% accuracy-related penalty.
117. Which organization enforces federal securities laws?
A) IRS
B) SEC
C) PCAOB
D) FASB
Answer: B) SEC
Explanation: The Securities and Exchange Commission (SEC) enforces securities laws and regulates securities markets.
118. The kiddie tax applies to:
A) Earned income of minors
B) Unearned income of children under 19 (or 24 if student)
C) Scholarships for children
D) Gifts to minors
Answer: B) Unearned income of children under 19 (or 24 if student)
Explanation: Unearned income above a threshold is taxed at the parents’ marginal tax rate.
119. A tax shelter requires registration if it is expected to provide:
A) Economic substance
B) Significant federal tax benefits
C) Low audit risk
D) Government subsidy
Answer: B) Significant federal tax benefits
Explanation: Tax shelters must be registered with the IRS if they are designed to avoid or evade taxes.
120. Which of the following is an example of constructive receipt of income?
A) Receiving stock options not yet vested
B) Check available to taxpayer but not cashed
C) Inheritance
D) Future wages under contract
Answer: B) Check available to taxpayer but not cashed
Explanation: Income is constructively received when available without restriction.
121. Which trust income is taxed directly to beneficiaries?
A) Simple trust income
B) Complex trust retained income
C) Grantor trust income retained by grantor
D) Charitable trust income
Answer: A) Simple trust income
Explanation: In simple trusts, all income is distributed annually and taxed to beneficiaries.
122. Which of the following reduces corporate Alternative Minimum Tax (AMT)?
A) Foreign tax credit
B) AMT credit
C) Research & development credit
D) Investment tax credit
Answer: B) AMT credit
Explanation: AMT paid in prior years can be carried forward as an AMT credit to reduce future liability.
123. A taxpayer donates artwork to a museum. The deduction allowed is:
A) Fair market value if used for exempt purpose
B) Lower of basis or FMV
C) Limited to $1,000
D) No deduction allowed
Answer: A) Fair market value if used for exempt purpose
Explanation: If donation is related to museum’s charitable purpose, deduction is at FMV.
124. Which of the following is NOT a passive activity?
A) Limited partnership investment
B) Rental property
C) Personal service corporation income
D) Stock trading gains
Answer: D) Stock trading gains
Explanation: Passive activity rules apply to rentals and certain business interests, not portfolio income.
125. Which penalty is most severe?
A) Negligence penalty
B) Accuracy-related penalty
C) Civil fraud penalty
D) Failure-to-pay penalty
Answer: C) Civil fraud penalty
Explanation: Civil fraud penalty is 75% of underpayment due to fraud — the most severe among listed.
126. Which tax principle applies when taxpayers defer income recognition?
A) Matching
B) Conservatism
C) Deferral
D) Realization
Answer: C) Deferral
Explanation: Deferral principle allows postponement of tax liability until income is realized.
127. What is the maximum capital loss deduction against ordinary income for individuals?
A) $1,000
B) $3,000
C) $5,000
D) $10,000
Answer: B) $3,000
Explanation: Individuals can deduct up to $3,000 of net capital losses against ordinary income annually.
128. In tax law, “nexus” refers to:
A) Taxpayer’s reporting obligations
B) State’s connection to taxpayer sufficient to impose tax
C) Federal jurisdiction
D) IRS audit procedures
Answer: B) State’s connection to taxpayer sufficient to impose tax
Explanation: Nexus establishes when a state can tax a business or individual.
129. Which of the following is a refundable tax credit?
A) Lifetime learning credit
B) Child tax credit (partially)
C) Adoption credit
D) Foreign tax credit
Answer: B) Child tax credit (partially)
Explanation: Child tax credit is partially refundable, unlike adoption and foreign tax credits.
130. When are gifts subject to federal gift tax reporting?
A) If over $5,000
B) If over annual exclusion ($17,000 in 2023)
C) Always
D) If given to a spouse
Answer: B) If over annual exclusion ($17,000 in 2023)
Explanation: Gifts above annual exclusion require IRS Form 709 reporting.
131. A partner’s distributive share of partnership income is:
A) Taxed only when distributed
B) Taxed whether or not distributed
C) Not taxable until liquidation
D) Exempt from federal tax
Answer: B) Taxed whether or not distributed
Explanation: Partners are taxed on their share regardless of actual distributions.
132. Which of the following is included in gross estate for estate tax?
A) Life insurance proceeds payable to estate
B) Property transferred 10 years ago
C) Qualified charity donations
D) IRA rollover
Answer: A) Life insurance proceeds payable to estate
Explanation: Proceeds payable to estate or with incidents of ownership are included in gross estate.
133. Which of the following qualifies for like-kind exchange under IRC §1031?
A) Stocks
B) Real property held for business or investment
C) Personal-use property
D) Bonds
Answer: B) Real property held for business or investment
Explanation: Like-kind exchanges apply to real property used in trade, business, or investment.
134. Which tax concept prevents taxpayers from claiming the same deduction twice?
A) Consistency
B) Assignment of income
C) Double deduction disallowance
D) Constructive receipt
Answer: C) Double deduction disallowance
Explanation: IRS disallows duplicating deductions for the same expense.
135. Which type of entity pays tax at both corporate and shareholder level?
A) Sole proprietorship
B) C Corporation
C) Partnership
D) S Corporation
Answer: B) C Corporation
Explanation: C Corps are subject to double taxation (entity and shareholder dividends).
136. Which of the following is a requirement for a valid Section 351 transfer?
A) Property exchanged for services
B) Control of 80% or more by transferors
C) Transfer by one shareholder only
D) Nonrecognition applies to stock sales
Answer: B) Control of 80% or more by transferors
Explanation: Section 351 allows nonrecognition if transferors collectively control ≥80% after exchange.
137. Which of the following cannot file as head of household?
A) Unmarried taxpayer supporting parent
B) Married taxpayer living separately supporting child
C) Widower supporting dependent child
D) Married taxpayer filing jointly
Answer: D) Married taxpayer filing jointly
Explanation: Head of household applies only to unmarried or considered unmarried taxpayers.
138. Which of the following is an AMT adjustment?
A) Depreciation differences
B) Charitable contributions
C) Alimony paid
D) State tax refunds
Answer: A) Depreciation differences
Explanation: AMT adjustments include depreciation timing differences between regular and AMT rules.
139. Which of the following is exempt from federal income tax?
A) Child support payments received
B) Alimony received (pre-2019)
C) Gambling winnings
D) Salary from nonprofit
Answer: A) Child support payments received
Explanation: Child support is not taxable income.
140. Which penalty is assessed for failure to file?
A) 5% of tax due per month (max 25%)
B) 0.5% per month
C) 20% accuracy penalty
D) 75% fraud penalty
Answer: A) 5% of tax due per month (max 25%)
Explanation: Failure-to-file penalty is harsher than failure-to-pay.
141. Which of the following items is deductible for AGI?
A) Alimony paid (pre-2019 divorces)
B) Charitable donations
C) Mortgage interest
D) Medical expenses
Answer: A) Alimony paid (pre-2019 divorces)
Explanation: Alimony paid under pre-2019 agreements is deductible for AGI.
142. Which of the following is NOT a tax preference item for AMT?
A) Percentage depletion
B) Accelerated depreciation
C) Private activity bond interest
D) State income tax deduction
Answer: D) State income tax deduction
Explanation: It’s a regular tax deduction, not an AMT preference.
143. What is the maximum number of shareholders in an S Corporation?
A) 50
B) 75
C) 100
D) Unlimited
Answer: C) 100
Explanation: S Corps are limited to 100 shareholders.
144. Which income is exempt under foreign earned income exclusion?
A) Passive investment income
B) Salary earned abroad (up to limit)
C) Dividends from U.S. companies
D) Capital gains
Answer: B) Salary earned abroad (up to limit)
Explanation: IRS allows exclusion of up to ~$120,000 (2023) of foreign earned income.
145. What is the statute of limitations for claiming a refund?
A) 1 year
B) 2 years
C) 3 years
D) 5 years
Answer: C) 3 years
Explanation: Refund claims generally must be made within 3 years from filing.
146. Which of the following expenses is deductible as an itemized deduction?
A) Commuting costs
B) Home office expenses for employees
C) Casualty losses in federally declared disaster areas
D) Clothing suitable for work but adaptable to general use
Answer: C) Casualty losses in federally declared disaster areas
Explanation: Only federally declared disaster losses are deductible.
147. Which entity type is subject to “double taxation”?
A) Sole proprietorship
B) Partnership
C) S Corporation
D) C Corporation
Answer: D) C Corporation
Explanation: C Corps pay taxes on profits and shareholders on dividends.
148. Which of the following is true of installment sales?
A) Entire gain recognized in year of sale
B) Gain recognized proportionally as payments received
C) No gain recognized until fully paid
D) Only losses can be deferred
Answer: B) Gain recognized proportionally as payments received
Explanation: Installment method spreads gain recognition over payment years.
149. Which of the following credits is available for education expenses?
A) Child tax credit
B) Lifetime learning credit
C) Adoption credit
D) Saver’s credit
Answer: B) Lifetime learning credit
Explanation: Lifetime Learning Credit applies to tuition and fees for higher education.
150. Which of the following applies to tax return preparers?
A) Unlimited liability protection
B) Subject to preparer penalties for understatement of liability
C) Exempt from penalties if client signs
D) Not subject to IRS regulation
Answer: B) Subject to preparer penalties for understatement of liability
Explanation: Tax preparers face penalties for negligence, understatement, or willful misconduct.
You’ve now completed CPA REG Part 3 (MCQs 101–150). These questions focused on key topics like taxation principles, corporate entities, deductions, IRS penalties, and AMT rules — all essential areas for success in the REG exam.
👉 Next, check out:
- CPA REG Batch 1
- CPA REG Batch 2
- CPA REG Batch 4
- CPA AUD (Auditing and Attestation)
- CPA FAR (Financial Accounting and Regulation)
👉 Don’t forget to bookmark and revisit for daily practice. Consistency is key to mastering the CPA Exam.