Preparing for the CPA Tax Compliance and Planning (TCP) section requires mastering taxation rules, compliance strategies, and planning for individuals and corporations. To help you excel, we’ve created 50 high-quality practice MCQs with detailed answers and explanations. These questions are carefully designed to reflect real exam scenarios, covering areas such as federal taxation, tax planning, corporate and individual tax compliance, and professional responsibilities. Whether you’re focusing on U.S. taxation concepts or strategic planning, this set will strengthen your knowledge and exam readiness. Practice consistently, review explanations, and use these MCQs as part of your complete CPA TCP study plan.
📘 CPA TCP Tax Compliance & Planning – MCQs (1–50)
1. Which of the following is deductible for AGI (Adjusted Gross Income)?
A) Charitable contributions
B) State income taxes
C) Student loan interest
D) Home mortgage interest
Answer: C) Student loan interest
Explanation: Student loan interest (up to $2,500 annually) is deductible for AGI. Charitable contributions and mortgage interest are deductible from AGI, while state income taxes are itemized deductions.
2. The child tax credit is available for qualifying children under what age?
A) 13
B) 16
C) 17
D) 19
Answer: C) 17
Explanation: A qualifying child must be under age 17 at the end of the tax year to claim the child tax credit. Dependents aged 17 and older may qualify for a different dependent credit.
3. Which type of income is subject to self-employment tax?
A) Wages from an employer
B) Interest income
C) Net profit from sole proprietorship
D) Capital gains
Answer: C) Net profit from sole proprietorship
Explanation: Self-employment tax applies to net earnings from self-employment, including sole proprietorships and partnerships. Wages are subject to payroll tax, not SE tax.
4. Which entity is a pass-through for federal tax purposes?
A) C Corporation
B) S Corporation
C) Trust
D) Estate
Answer: B) S Corporation
Explanation: An S Corporation’s income is passed through to shareholders and taxed on their individual returns. C corporations are taxed at the corporate level.
5. Which of the following is NOT considered taxable income?
A) Gambling winnings
B) Alimony (pre-2019 divorce)
C) Inheritance received
D) Jury duty pay
Answer: C) Inheritance received
Explanation: Inheritances are excluded from taxable income. Gambling winnings, alimony (before 2019), and jury duty pay are taxable.
6. What is the standard deduction for a single taxpayer in 2025?
A) $12,550
B) $13,850
C) $14,600
D) $15,200
Answer: C) $14,600
Explanation: For tax year 2025, the standard deduction is $14,600 for single taxpayers (indexed annually for inflation).
7. Which type of retirement account grows tax-free and allows tax-free withdrawals in retirement (if qualified)?
A) Traditional IRA
B) Roth IRA
C) SEP IRA
D) 401(k)
Answer: B) Roth IRA
Explanation: Roth IRAs are funded with after-tax dollars, grow tax-free, and withdrawals are tax-free if qualified. Traditional IRA/401(k) withdrawals are taxable.
8. Which of the following is an itemized deduction?
A) Student loan interest
B) Alimony paid
C) State property taxes
D) Health insurance premiums (self-employed)
Answer: C) State property taxes
Explanation: Property taxes are deductible as itemized deductions. Student loan interest is a deduction for AGI, alimony paid (post-2019) is not deductible, and self-employed health insurance is for AGI.
9. A capital asset held for more than one year is taxed at what type of rate?
A) Ordinary income tax rates
B) Long-term capital gains rates
C) Self-employment tax rate
D) Payroll tax rate
Answer: B) Long-term capital gains rates
Explanation: Long-term capital assets (held >1 year) are taxed at preferential long-term capital gains rates (0%, 15%, or 20% depending on income).
10. Which of the following taxpayers is required to file a tax return?
A) A single dependent under 65 earning $2,000 in wages
B) A married couple filing jointly with income below standard deduction
C) A self-employed person earning $500 net profit
D) A self-employed person earning $500 net profit
Answer: D) A self-employed person earning $500 net profit
Explanation: Self-employed individuals must file if net earnings ≥ $400, regardless of standard deduction.
11. Which of the following is subject to the Alternative Minimum Tax (AMT) adjustment?
A) Child tax credit
B) Private activity bond interest
C) Charitable contributions
D) Student loan interest
Answer: B) Private activity bond interest
Explanation: Interest on private activity bonds is a tax preference item under AMT rules. Charitable contributions and student loan interest are not AMT adjustments.
12. Which of the following filing statuses generally results in the lowest tax liability?
A) Married filing jointly
B) Married filing separately
C) Head of household
D) Single
Answer: A) Married filing jointly
Explanation: MFJ typically provides the lowest overall tax liability due to higher standard deduction and wider brackets.
13. Which expense is deductible as a medical expense?
A) Vitamins for general health
B) Cosmetic surgery (elective)
C) Prescription eyeglasses
D) Gym membership
Answer: C) Prescription eyeglasses
Explanation: Qualified medical expenses include prescription glasses, dental, and certain medical care, but not general health expenses like vitamins or gyms.
14. Which type of trust is subject to income taxation?
A) Simple trust
B) Grantor trust
C) Complex trust
D) All of the above
Answer: D) All of the above
Explanation: Trusts may pay taxes on undistributed income. A grantor trust is taxed to the grantor, but simple and complex trusts are also subject to tax depending on distributions.
15. Which of the following is deductible for business purposes?
A) Penalties paid to the IRS
B) Meals with clients (50% deductible)
C) Political contributions
D) Fines paid to government agencies
Answer: B) Meals with clients (50% deductible)
Explanation: Business meals are 50% deductible if ordinary, necessary, and directly related to the business. Penalties and political contributions are never deductible.
16. Which of the following must use the accrual method of accounting?
A) A small personal service business with <$25M revenue
B) A qualified farmer
C) A large C corporation with $30M gross receipts
D) A sole proprietor with $200k revenue
Answer: C) A large C corporation with $30M gross receipts
Explanation: C corporations (other than small exceptions) with gross receipts over the threshold ($29M in 2025) must use the accrual method.
17. Which of the following reduces a taxpayer’s basis in S corporation stock?
A) Additional capital contributions
B) Share of income
C) Cash distributions
D) Tax-exempt income
Answer: C) Cash distributions
Explanation: S corp stock basis is reduced by losses, deductions, and distributions. It increases with capital contributions and allocated income.
18. Which of the following is a refundable tax credit?
A) Child tax credit (excess portion)
B) Lifetime learning credit
C) Adoption credit
D) Saver’s credit
Answer: A) Child tax credit (excess portion)
Explanation: The refundable portion of the child tax credit is called the Additional Child Tax Credit (ACTC).
19. Which type of income is subject to preferential tax rates?
A) W-2 wages
B) Long-term capital gains
C) Short-term capital gains
D) Rental income
Answer: B) Long-term capital gains
Explanation: LTCG and qualified dividends are taxed at lower preferential rates (0%, 15%, 20%).
20. Which of the following is NOT included in gross income?
A) Lottery winnings
B) Employer-paid health insurance premiums
C) Illegal income
D) Alimony received (pre-2019 divorce)
Answer: B) Employer-paid health insurance premiums
Explanation: Employer-provided health coverage is excluded from gross income. Lottery winnings and even illegal income are taxable.
21. What is the annual gift tax exclusion per donee for 2025?
A) $14,000
B) $15,000
C) $18,000
D) $20,000
Answer: C) $18,000
Explanation: For 2025, the annual exclusion is $18,000 per recipient (adjusted annually).
22. Which retirement account requires minimum distributions (RMDs) starting at age 73?
A) Roth IRA
B) Traditional IRA
C) 529 plan
D) HSA
Answer: B) Traditional IRA
Explanation: Traditional IRAs and most employer retirement plans require RMDs. Roth IRAs (during owner’s lifetime) do not.
23. Which type of income is subject to the Net Investment Income Tax (NIIT)?
A) Salary
B) Net rental income
C) SE income
D) IRA withdrawals
Answer: B) Net rental income
Explanation: NIIT applies to investment income like interest, dividends, capital gains, and rental income for high earners.
24. Which of the following is deductible as qualified business income (QBI)?
A) Wages received from an S corp
B) Partnership income share
C) Guaranteed payments to partners
D) Dividend income
Answer: B) Partnership income share
Explanation: QBI applies to pass-through business income (S corp, partnership, sole proprietorship). Guaranteed payments and wages are excluded.
25. Which of the following is a tax-free exchange?
A) Sale of stock
B) 1031 real estate exchange
C) Sale of inventory
D) Sale of collectibles
Answer: B) 1031 real estate exchange
Explanation: 1031 allows deferral of gain on like-kind real estate exchanges. Stocks and inventory are taxable.
26. Which penalty applies for failure to file a tax return on time?
A) 0.5% per month of unpaid tax
B) 5% per month of unpaid tax
C) 25% flat fee
D) $500 per return
Answer: B) 5% per month of unpaid tax
Explanation: Failure-to-file penalty is 5% per month (up to 25%) of unpaid taxes. Failure-to-pay is 0.5% per month.
27. What is the corporate tax rate in the U.S. (2025)?
A) 15%
B) 21%
C) 28%
D) 35%
Answer: B) 21%
Explanation: The U.S. corporate tax rate is a flat 21% (post-2017 reform).
28. Which of the following is subject to payroll (FICA) tax?
A) Salary
B) Qualified dividends
C) Capital gains
D) Municipal bond interest
Answer: A) Salary
Explanation: FICA applies to earned wages. Investment income is not subject to FICA.
29. Which of the following is deductible for AGI?
A) Moving expenses for military members
B) Child support paid
C) Mortgage insurance premiums
D) Gambling losses
Answer: A) Moving expenses for military members
Explanation: Only active-duty military can deduct moving expenses (post-2017 law changes).
30. Which of the following is taxable as ordinary income?
A) Qualified dividends
B) Long-term capital gains
C) Traditional IRA withdrawals
D) Municipal bond interest
Answer: C) Traditional IRA withdrawals
Explanation: IRA withdrawals are taxed as ordinary income (unless Roth). Qualified dividends and LTCG get preferential rates, municipal bonds are tax-free.
31. Which of the following is a tax credit, not a deduction?
A) Mortgage interest
B) Child and dependent care credit
C) Charitable donations
D) Student loan interest
Answer: B) Child and dependent care credit
Explanation: Tax credits directly reduce liability, while deductions reduce taxable income.
32. Which of the following is deductible as an education expense (Lifetime Learning Credit)?
A) Tuition and fees
B) Room and board
C) Transportation costs
D) Student loan repayment
Answer: A) Tuition and fees
Explanation: The Lifetime Learning Credit applies to tuition and required enrollment fees, not personal living expenses.
33. Which of the following reduces a taxpayer’s passive activity loss?
A) Material participation
B) Capital contributions
C) Passive income
D) Both A and C
Answer: D) Both A and C
Explanation: Passive losses can only offset passive income. If taxpayer materially participates, activity is reclassified as non-passive.
34. Which penalty applies for substantial understatement of income tax?
A) 10% of tax due
B) 20% of underpayment
C) $1,000 per return
D) 25% flat fee
Answer: B) 20% of underpayment
Explanation: A substantial understatement penalty is 20% of the underpayment.
35. Which of the following must file Form 1120?
A) Partnership
B) Sole proprietorship
C) C Corporation
D) S Corporation
Answer: C) C Corporation
Explanation: C corps file Form 1120. Partnerships file 1065, S corps file 1120-S, and sole proprietors report on Schedule C.
36. Which of the following is deductible as an ordinary business expense?
A) Key-person life insurance premiums (company is beneficiary)
B) Illegal bribes
C) Advertising costs
D) Political lobbying
Answer: C) Advertising costs
Explanation: Advertising is deductible. Life insurance where business is beneficiary, bribes, and lobbying are non-deductible.
37. Which of the following is NOT taxable income?
A) Cancelled debt (unless excluded)
B) Life insurance proceeds (upon death)
C) Alimony (pre-2019 divorce)
D) Prizes and awards
Answer: B) Life insurance proceeds (upon death)
Explanation: Life insurance proceeds are generally excluded from income if received due to death.
38. Which 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, with K-1s issued to partners.
39. Which of the following qualifies for like-kind exchange treatment (1031)?
A) Stock
B) Real estate rental property
C) Collectibles
D) Bonds
Answer: B) Real estate rental property
Explanation: Only real estate qualifies post-2017 (stocks, bonds excluded).
40. Which of the following can trigger capital gains tax?
A) Sale of primary residence
B) Sale of inherited property
C) Sale of collectibles
D) All of the above
Answer: D) All of the above
Explanation: All can trigger gains, though primary residences may exclude up to $250k/$500k.
41. Which is subject to self-employment tax?
A) Partnership guaranteed payments
B) Dividend income
C) Rental income
D) Capital gains
Answer: A) Partnership guaranteed payments
Explanation: Guaranteed payments are subject to SE tax, unlike passive investment income.
42. Which of the following reduces taxable income but not AGI?
A) Standard deduction
B) Student loan interest deduction
C) Self-employed SEP IRA contributions
D) HSA deduction
Answer: A) Standard deduction
Explanation: Standard deduction reduces taxable income but not AGI.
43. Which penalty applies for failure to pay estimated taxes?
A) 5% per month
B) 20% underpayment
C) Interest-based penalty
D) Flat $500
Answer: C) Interest-based penalty
Explanation: The penalty is interest-based for underpayment of estimated taxes.
44. Which of the following is a refundable tax credit?
A) Earned Income Tax Credit (EITC)
B) Saver’s credit
C) Lifetime learning credit
D) Foreign tax credit
Answer: A) Earned Income Tax Credit (EITC)
Explanation: EITC is refundable, meaning taxpayers can receive it even if liability is zero.
45. Which type of loss has a $3,000 annual deduction limit?
A) Passive activity losses
B) Capital losses
C) Casualty losses
D) Business losses
Answer: B) Capital losses
Explanation: Individuals may deduct up to $3,000 in capital losses annually against ordinary income.
46. Which type of taxpayer cannot use the cash method of accounting?
A) C corporation with $10M gross receipts
B) Partnership with $5M revenue
C) Sole proprietor with $100k revenue
D) S corporation with $15M receipts
Answer: A) C corporation with $10M gross receipts
Explanation: C corps generally cannot use cash method if revenue exceeds threshold.
47. Which form reports income from an S corporation?
A) Schedule K-1 (Form 1120-S)
B) Schedule C
C) Form 1040 only
D) Form 1065
Answer: A) Schedule K-1 (Form 1120-S)
Explanation: S corp shareholders report income via K-1 from Form 1120-S.
48. Which of the following qualifies for the foreign earned income exclusion?
A) Capital gains from foreign investments
B) Salary earned abroad by a U.S. citizen
C) Dividends from foreign corporations
D) Rental income from foreign property
Answer: B) Salary earned abroad by a U.S. citizen
Explanation: U.S. citizens may exclude foreign-earned salary/wages under IRC §911.
49. Which of the following is a requirement for Head of Household status?
A) Must be unmarried on last day of year
B) Must pay over half cost of home
C) Must have qualifying dependent
D) All of the above
Answer: D) All of the above
Explanation: All are required for HOH status.
50. Which penalty applies for willful tax evasion?
A) Civil penalty only
B) Criminal penalties including fines and imprisonment
C) Interest penalty only
D) NoneAnswer: B) Criminal penalties including fines and imprisonment
Explanation: Tax evasion can result in severe criminal penalties (fines + jail).
You’ve completed Part 1 of our CPA TCP Tax Compliance & Planning MCQs (1–50). Each question was designed to improve your understanding of core taxation and compliance topics tested on the CPA exam. Continue practicing with upcoming parts to cover the full 200 MCQs and build exam confidence. Don’t forget to revisit explanations to strengthen weak areas. 🚀 Stay tuned for Part 2 (51–100), where we’ll dive deeper into advanced compliance and tax planning strategies.
👉 Next Steps:
- Next Part: Part 2 (51-100)
- Next Part: Part 3 (101-150)
- Next Part: Part 4 (151-200)
- Explore our CPA FAR, REG , AUD , BAR, & ISC Master Sets