Welcome to CPA REG Part 4 (181–200) Practice MCQs. This set focuses on advanced topics in taxation, business law, ethics, partnerships, corporate taxation, bankruptcy, and exemptions. Each question is paired with a correct answer and detailed explanation, ensuring you don’t just memorize but understand the logic. Perfect for candidates preparing for the CPA Regulation Exam (REG) under AICPA guidelines.
Whether you are a CPA candidate in the United States, Canada, or international student, these MCQs will strengthen your exam readiness.
📘 CPA REG (Regulation) MCQs – Part 4 (151–200)
Q151. Which of the following taxpayers is required to use the accrual method of accounting for tax purposes?
A. A freelance graphic designer earning $60,000 annually.
B. A small retail store with $20 million in average annual gross receipts.
C. An individual landlord renting two residential apartments.
D. A partnership with annual receipts of $20,000.
✅ Answer: B
Explanation: The IRS generally requires businesses with average annual gross receipts over $27 million (2022 adjustment) to use the accrual method. Smaller taxpayers, service businesses, and landlords can often use the cash method.
Q152. Which tax entity is eligible for the Qualified Business Income (QBI) deduction under IRC §199A?
A. C-Corporation
B. S-Corporation shareholder
C. Tax-exempt nonprofit
D. Government entity
✅ Answer: B
Explanation: The QBI deduction applies to pass-through entities like S-Corp shareholders, partnerships, and sole proprietors. C-Corps and exempt organizations are not eligible.
Q153. Which of the following is considered a “separately stated item” on a partnership’s Schedule K-1?
A. Depreciation expense
B. Rental income
C. Tax-exempt interest
D. All of the above
✅ Answer: D
Explanation: Partnerships must report separately stated items (e.g., depreciation, interest, rental income, tax-exempt income, capital gains) on Schedule K-1 for each partner.
Q154. Which of the following penalties applies if a taxpayer fails to file their return by the due date?
A. 0.5% of unpaid tax per month (up to 25%)
B. 5% of unpaid tax per month (up to 25%)
C. 10% of unpaid tax flat fee
D. $1,000 minimum per year
✅ Answer: B
Explanation: The failure-to-file penalty is 5% per month (up to 25%) of the unpaid tax. By contrast, the failure-to-pay penalty is 0.5% per month (up to 25%).
Q155. Which of the following is deductible as a business expense?
A. Fines paid to a government agency
B. Bribes paid to foreign officials
C. Meals provided to employees at office premises
D. Personal commuting expenses
✅ Answer: C
Explanation: Ordinary and necessary business expenses are deductible. Meals provided at the employer’s premises for employee convenience may be 50% or 100% deductible, while fines, bribes, and personal expenses are nondeductible.
Q156. A self-employed taxpayer is allowed to deduct health insurance premiums for:
A. Themselves only
B. Themselves and their dependents
C. Their employees only
D. Not deductible
✅ Answer: B
Explanation: Self-employed individuals may deduct 100% of health insurance premiums paid for themselves, their spouse, and dependents, subject to income limits.
Q157. Which of the following is NOT considered a capital asset under U.S. tax law?
A. Stock held for investment
B. Personal residence
C. Accounts receivable for a business
D. Land purchased as an investment
✅ Answer: C
Explanation: Capital assets exclude inventory, accounts receivable, and depreciable business property. Stocks, land, and residences are considered capital assets.
Q158. Which of the following is a requirement for forming a valid S-Corporation?
A. Unlimited number of shareholders
B. Only U.S. citizens or residents as shareholders
C. Can issue preferred stock
D. Must be listed on a stock exchange
✅ Answer: B
Explanation: S-Corporations must have ≤100 shareholders, who must be U.S. citizens or residents. They can issue only one class of stock and cannot be publicly traded.
Q159. Which of the following is considered passive income for tax purposes?
A. Salary from employment
B. Rental income from real estate
C. Consulting fees from freelance work
D. Guaranteed payments to a partner
✅ Answer: B
Explanation: Passive income generally includes rental activities and business activities in which the taxpayer does not materially participate. Salary and consulting income are active; guaranteed payments are ordinary income.
Q160. Which of the following is subject to the Alternative Minimum Tax (AMT)?
A. State and local income tax deductions
B. Charitable contributions
C. Mortgage interest on acquisition debt
D. Student loan interest
✅ Answer: A
Explanation: State and local tax (SALT) deductions are disallowed for AMT purposes. Charitable contributions, mortgage interest, and student loan interest remain deductible.
Q161. Which type of trust allows income to be taxed directly to the beneficiaries?
A. Simple trust
B. Complex trust
C. Grantor trust
D. Testamentary trust
✅ Answer: A
Explanation: A simple trust must distribute all income annually, and the income is taxed directly to the beneficiaries. Complex trusts can accumulate income, and grantor trusts tax income to the grantor.
Q162. A shareholder contributes property to a corporation in exchange for stock. No gain or loss is recognized if:
A. The shareholder owns less than 50% after the transfer
B. The shareholder is in control of at least 80% immediately after the exchange
C. The stock is preferred stock only
D. The shareholder receives cash and stock
✅ Answer: B
Explanation: Under IRC §351, no gain/loss is recognized if property is transferred to a corporation solely in exchange for stock, and the transferors are in control (≥80%) immediately after the exchange.
Q163. Which of the following taxes is deductible as an itemized deduction?
A. Federal income tax
B. State and local income tax
C. Federal estate tax
D. Gift tax
✅ Answer: B
Explanation: State and local income taxes (SALT) are deductible (subject to a $10,000 limit), while federal income tax, estate tax, and gift tax are not deductible.
Q164. Which of the following is considered “earned income” for purposes of the Earned Income Credit (EIC)?
A. Interest income
B. Dividends
C. Wages and salaries
D. Rental income
✅ Answer: C
Explanation: Earned income includes wages, salaries, and self-employment income. Interest, dividends, and rental income are unearned income.
Q165. Which type of bankruptcy allows for reorganization of debts and continued operation of the business?
A. Chapter 7
B. Chapter 11
C. Chapter 13
D. Chapter 9
✅ Answer: B
Explanation: Chapter 11 bankruptcy allows businesses to reorganize and continue operations. Chapter 7 involves liquidation, Chapter 13 is for wage earners’ repayment plans, and Chapter 9 applies to municipalities.
Q166. Which of the following retirement plans is available only to self-employed individuals?
A. 401(k)
B. SEP IRA
C. SIMPLE IRA
D. Keogh plan
✅ Answer: D
Explanation: Keogh plans are qualified retirement plans specifically for self-employed individuals and unincorporated businesses. SEP IRAs and SIMPLE IRAs can also cover small businesses, but Keogh is exclusive.
Q167. Which of the following is a “listed transaction” under IRS rules?
A. Municipal bond purchase
B. Normal charitable donation
C. IRS-identified abusive tax shelter
D. Regular depreciation deduction
✅ Answer: C
Explanation: A listed transaction is an IRS-designated abusive tax avoidance transaction. These must be reported with Form 8886, and failure to do so may trigger penalties.
Q168. Which of the following items is subject to self-employment tax?
A. Dividends
B. Wages received as an employee
C. Net income from a sole proprietorship
D. Capital gains
✅ Answer: C
Explanation: Self-employment tax applies to net earnings from self-employment (sole proprietorships, partnerships). Dividends, wages, and capital gains are not subject to SE tax.
Q169. Which of the following taxpayers can elect head of household filing status?
A. Married couple with no children living separately
B. Single individual with no dependents
C. Unmarried parent providing home for child
D. Married couple filing jointly
✅ Answer: C
Explanation: Head of Household applies when an unmarried taxpayer provides over half the cost of maintaining a home for a qualifying dependent.
Q170. A tax shelter must be disclosed to the IRS if it:
A. Is listed or reportable
B. Generates ordinary wage income
C. Involves only municipal bonds
D. Provides small capital losses
✅ Answer: A
Explanation: Listed or reportable transactions must be disclosed to the IRS. They typically involve schemes identified as potentially abusive.
Q171. Which of the following is included in a decedent’s gross estate?
A. Life insurance proceeds payable to spouse
B. Property transferred 10 years before death
C. Retirement account balances
D. Both A and C
✅ Answer: D
Explanation: Gross estate includes life insurance proceeds (if incidents of ownership exist) and retirement accounts. Property transferred long before death is excluded unless within 3 years of death.
Q172. Which of the following is subject to the federal gift tax?
A. Gifts between spouses who are U.S. citizens
B. Annual gifts under $17,000 per donee (2023 limit)
C. Tuition paid directly to an educational institution
D. Cash gift of $50,000 to a friend
✅ Answer: D
Explanation: Cash gifts above the annual exclusion ($17,000 per donee in 2023) are subject to federal gift tax. Spousal gifts, tuition, and medical payments are exempt.
Q173. Which is an example of a “specific bequest” in a will?
A. “All my real estate goes to my children.”
B. “$10,000 to my niece, Sarah.”
C. “Everything I own goes to my spouse.”
D. “Divide my estate equally among my heirs.”
✅ Answer: B
Explanation: A specific bequest refers to a particular item or sum of money given to a named beneficiary. General and residuary clauses cover the remainder of the estate.
Q174. A corporation’s charitable contributions deduction is limited to:
A. 10% of taxable income
B. 25% of taxable income
C. 50% of taxable income
D. Unlimited if to a qualified charity
✅ Answer: B
Explanation: Corporate charitable contributions are limited to 25% of taxable income (post-2020 rule). Excess may be carried forward.
Q175. Which of the following is deductible for Alternative Minimum Tax (AMT) purposes?
A. State income tax
B. Home mortgage interest on acquisition debt
C. Miscellaneous itemized deductions
D. Property taxes
✅ Answer: B
Explanation: For AMT, mortgage interest on acquisition debt remains deductible. SALT, miscellaneous deductions, and property taxes are disallowed.
Q176. Which of the following is considered an involuntary conversion under IRC §1033?
A. Property destroyed by fire
B. Sale of stock
C. Voluntary real estate exchange
D. Gift of property
✅ Answer: A
Explanation: Involuntary conversions occur due to casualty, theft, condemnation, or destruction. Taxpayers may defer gain if replacement property is purchased.
Q177. Which of the following does NOT terminate a Subchapter S election?
A. Having more than 100 shareholders
B. Issuing a second class of stock
C. A shareholder transferring stock to a foreign person
D. Earning more than $1 million profit
✅ Answer: D
Explanation: An S-election terminates if it exceeds 100 shareholders, issues more than one class of stock, or has ineligible shareholders. Profit levels do not terminate S-status.
Q178. A taxpayer is considered materially participating in a business if they:
A. Participate for 500+ hours during the year
B. Own 10% or more of the business
C. Are passive investors
D. Participate in meetings only
✅ Answer: A
Explanation: Material participation generally requires 500+ hours annually or meeting other IRS tests. Ownership percentage alone does not guarantee material participation.
Q179. Which of the following can be depreciated for tax purposes?
A. Land
B. Personal residence
C. Buildings used in business
D. Inventory
✅ Answer: C
Explanation: Depreciation applies to tangible property used in business (except land). Personal residences and inventory are not depreciable.
Q180. Which of the following is subject to Unrelated Business Income Tax (UBIT)?
A. Church donations
B. Investment dividends earned by a nonprofit
C. Coffee shop operated by a university
D. Charitable grants
✅ Answer: C
Explanation: UBIT applies when a tax-exempt organization runs a business unrelated to its exempt purpose, such as a university coffee shop. Donations and grants are exempt.
Q181. Which of the following is deductible as a medical expense for individual taxpayers?
A. Over-the-counter vitamins
B. Cosmetic surgery for non-medical reasons
C. Insulin without prescription
D. Health club dues
✅ Answer: C
Explanation: Insulin (even without prescription) is deductible. Cosmetic surgery and health clubs are only deductible if medically necessary. Vitamins are personal expenses.
Q182. Which of the following is an excise tax?
A. Federal income tax
B. Estate tax
C. Gasoline tax
D. State sales tax
✅ Answer: C
Explanation: Excise taxes are imposed on specific goods (fuel, alcohol, tobacco). Federal income tax, estate, and sales tax are not excise taxes.
Q183. Which type of partnership must file Form 1065 with the IRS?
A. Sole proprietorship
B. General partnership
C. S corporation
D. Single-member LLC
✅ Answer: B
Explanation: General partnerships and multi-member LLCs must file Form 1065 (information return). Sole proprietorships file Schedule C.
Q184. Which type of corporation must use the accrual method of accounting?
A. Small service corporation
B. Large C corporation with gross receipts over $25M
C. Sole proprietorship
D. S corporation with under $10M
✅ Answer: B
Explanation: C corporations with average annual gross receipts > $25M are required to use the accrual method. Smaller businesses can use cash.
Q185. Which of the following is deductible as a casualty loss for individuals?
A. Loss due to theft of jewelry
B. Loss due to market value decline in stocks
C. Loss due to termite damage
D. Normal wear and tear
✅ Answer: A
Explanation: Casualty/theft losses are deductible if sudden, unexpected, or unusual. Termite damage and wear/tear are excluded. Stock market losses are capital losses.
Q186. The penalty for substantial understatement of income tax is generally:
A. 5% of underpayment
B. 10% of underpayment
C. 20% of underpayment
D. 50% of underpayment
✅ Answer: C
Explanation: The IRS may impose a 20% penalty on substantial understatements (greater of 10% of tax liability or $5,000 for individuals).
Q187. Which type of organization is eligible for tax exemption under IRC §501(c)(3)?
A. Political campaign organization
B. Charitable organization
C. For-profit corporation
D. Trade association
✅ Answer: B
Explanation: Charitable, religious, educational, and scientific organizations qualify under 501(c)(3). Political orgs and trade associations fall under other categories.
Q188. Which of the following is not subject to self-employment tax?
A. Income from a sole proprietorship
B. Partner’s share of partnership income
C. Wages earned as an employee
D. Independent contractor income
✅ Answer: C
Explanation: Wages are subject to FICA, not self-employment tax. Sole proprietors, partners, and independent contractors pay SE tax.
Q189. Which of the following is considered a capital asset?
A. Accounts receivable from trade
B. Inventory
C. Personal automobile
D. Equipment used in business
✅ Answer: C
Explanation: Capital assets include personal use property (car, home, investments). Inventory, receivables, and business property are not capital assets.
Q190. Which type of bankruptcy is primarily used by municipalities?
A. Chapter 7
B. Chapter 9
C. Chapter 11
D. Chapter 13
✅ Answer: B
Explanation: Chapter 9 bankruptcy is exclusively for municipalities. Chapter 7 = liquidation, Chapter 11 = reorganization, Chapter 13 = wage earners’ plan.
Q191. Which of the following is considered passive income?
A. Salary from a job
B. Dividends
C. Income from rental property
D. Income from sole proprietorship
✅ Answer: C
Explanation: Passive income includes rental activities and limited partnerships. Salary and sole proprietorship are active; dividends are portfolio income.
Q192. Which of the following is allowed as a like-kind exchange (IRC §1031)?
A. Exchange of real estate held for business use
B. Exchange of corporate stock
C. Exchange of partnership interests
D. Exchange of inventory
✅ Answer: A
Explanation: Post-2018, §1031 applies only to real estate held for business/investment use. Stocks, partnership interests, and inventory don’t qualify.
Q193. Which type of corporation is subject to double taxation?
A. Sole proprietorship
B. Partnership
C. S corporation
D. C corporation
✅ Answer: D
Explanation: C corporations are taxed at the corporate level and again at the shareholder level (dividends). Sole props, partnerships, and S corps are pass-through.
Q194. Which of the following is a nondeductible expense for corporations?
A. Charitable contributions
B. Federal income taxes
C. Business meals (50%)
D. Interest expense on business loans
✅ Answer: B
Explanation: Federal income tax is not deductible. Corporations may deduct business expenses, interest, and limited charitable contributions.
Q195. The Alternative Minimum Tax (AMT) applies to corporations if:
A. Their income exceeds $1M
B. They claim excess depreciation
C. They file as an S corporation
D. AMT was repealed for corporations
✅ Answer: D
Explanation: Corporate AMT was repealed in 2017 (TCJA). Individuals may still be subject, but corporations are no longer.
Q196. Which of the following is true regarding Section 1245 property?
A. Includes land and buildings
B. Includes tangible personal property subject to depreciation
C. Gain is always treated as capital gain
D. Never subject to recapture
✅ Answer: B
Explanation: Section 1245 property = depreciable personal property (equipment, machinery). Gains up to depreciation taken are recaptured as ordinary income.
Q197. Which of the following can elect S corporation status?
A. Foreign corporation
B. Partnership
C. Domestic corporation with 100 or fewer eligible shareholders
D. Publicly traded corporation
✅ Answer: C
Explanation: S corp requirements: domestic, ≤100 shareholders, one class of stock, only eligible individuals/entities as shareholders.
Q198. A gift of appreciated property to charity is generally deductible at:
A. Fair market value
B. Adjusted basis
C. Lower of FMV or basis
D. Not deductible
✅ Answer: A
Explanation: Donations of long-term appreciated property are deductible at FMV (if to public charities). For short-term or private charities, deduction is limited to basis.
Q199. Which of the following taxpayers is subject to kiddie tax rules?
A. 25-year-old full-time student with $5,000 wages
B. 17-year-old with $3,000 investment income
C. 19-year-old with $20,000 wages
D. 21-year-old independent worker
✅ Answer: B
Explanation: Kiddie tax applies to children under 19 (or under 24 if full-time students) with unearned income > $2,500 (2023).
Q200. Which of the following is included in “gross income” under the Internal Revenue Code?
A. Life insurance death benefits
B. Municipal bond interest
C. Alimony received (pre-2019 divorce)
D. Qualified scholarships
✅ Answer: C
Explanation: Alimony received (pre-2019 agreements) is taxable. Death benefits, municipal bond interest, and qualified scholarships are excluded.
You’ve now completed CPA REG MCQs Part 4 (181–200). With these detailed explanations, you are better prepared for scenario-based REG exam questions.
👉 Next, check out:
- CPA REG Batch 1
- CPA REG Batch 2
- CPA REG Batch 3
- CPA AUD (Auditing and Attestation)
- CPA FAR (Financial Accounting and Regulation)
With consistent practice, your CPA exam success is within reach!