CPA Regulation (REG) : CPA Regulation (REG)
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #5 : Individual Income Tax Sources Of Taxable Income
On January 1, Year 2, ABC acquired a 50% interest in DEF Partnership by contributing property with an adjusted basis of $7,000 and a fair market value of $9,000, subject to a mortgage of $3,000. What was ABC’s basis in DEF at January 1, Year 2?
$3,500
$5,500
$7,500
$4,000
$5,500
Basis $7,000 – Debt relief ($3,000 * 50%) $1,500 = $5,500 of basis.
Example Question #1 : Flow Through Income Items
A gain that represents a partner’s share of “hot assets” would be treated as:
Ordinary income
Both
Neither
Capital gains
Ordinary income
An exception to the sale of capital asset sales in partnerships would be when a “hot asset” is sold. The treatment here would be as ordinary income.
Example Question #7 : Individual Income Tax Sources Of Taxable Income
Passive activity losses of an individual taxpayer can generally be used to offset
Dividends income from a foreign corporation.
A guaranteed payment received from a partnership.
Income from the rental of a residence.
Interest income on U.S. Treasury notes.
Income from the rental of a residence.
Income from the rental of residence is considered passive activity, and as such passive activity losses may be taken up to the extent of passive activity gains. None of the other items are regarded as passive activity income: guaranteed payments are treated as ordinary income; dividends and interest are treated as portfolio income (a distinct category from passive income).
Example Question #8 : Individual Income Tax Sources Of Taxable Income
A partner in a real estate partnership had a basis of $5,000 at the beginning of the year and a basis of $10,000 at year end. The partner's at-risk amount at year end was $8,000. The partner's Form K-1 listed $12,000 as the partner's share of the partnership's ordinary loss. What amount can the partner deduct on the partner's tax return?
$5,000
$8,000
$12,000
$10,000
$8,000
For flow-through entities issuing Schedule K-1 to its partners, an individual partner’s loss limitation cannot exceed the at-risk amount. Any excess loss may be carried forward by the partner indefinitely. Since this partner’s at-risk amount is $8,000, the deducted loss cannot exceed $8,000
Example Question #1 : Individual Income Tax Sources Of Taxable Income
Alan created a trust for the benefit of his son, George. Alan does not have the right to change any terms of the trust once established and has no right to income. All trust income is to be distributed to George on an annual basis. How should the trust income be reported?
Reported on Form 1041, with a Schedule K-1 issued to Alan.
Reported on Form 1041, with a Schedule K-1 issued to George.
To George, reported only on his Form 1040.
To Alan, reported only on his Form 1040.
Reported on Form 1041, with a Schedule K-1 issued to George.
For estates and trusts, only income to beneficiaries is report on Form 1041 and Schedule K-1. Since George is the beneficiary, he is the recipient of the Schedule K-1, not his father.
Example Question #2 : Individual Income Tax Sources Of Taxable Income
A and B are equal members in AB LLC which has not elected to be treated as a corporation. A contributes cash of $7,000 and B contributes a machine with an adjusted basis of $5,000 and FMV of $10,000, subject to a liability of $3,000. What is B’s basis in AB LLC?
$2,000
$10,000
$5,000
$3,500
$3,500
The LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership. B’s basis will be the adjusted basis of the contributed property minus 50% of the liability which is assumed by the other partner. $5,000 - $1,500 = $3,500.
Example Question #41 : Cpa Regulation (Reg)
ABC Inc is an S corporation that pays single coverage health insurance premiums of $4,8000 per year and family coverage premiums of $7,200 per year. A is a 10% shareholder in the S corp. On A’s behalf, ABC pays A’s family coverage under the health insurance plan. What amount of insurance premiums is includable in A’s gross income?
$4,800
$720
$0
$7,200
$7,200
Fringe benefits paid by an S corp are deductible by the S corp only for non-shareholder employees and those employee-shareholders owning 2% or less of the S corp.
Example Question #42 : Cpa Regulation (Reg)
In a complete liquidation of a partnership, a partner would recognize a gain:
Only to the extent that money received exceeds the partner’s adjusted basis
Only if that partner had been a partner since formation
No matter what
Only if that partner had a majority interest
Only to the extent that money received exceeds the partner’s adjusted basis
The partner would likely not recognize a gain or loss in complete liquidation unless the money received exceeds the partner’s basis.
Example Question #44 : Cpa Regulation (Reg)
On January 1, Smith sold land to Baker for $100,000 cash plus a note for $200,000 plus adequate interest with a $30,000 principal payment due in the second year. Smith's basis in the property was $100,000. What is the amount of the gain recognized in the second year under the installment method?
$30,000
$20,000
$200,000
$100,000
$20,000
Smith’s basis in the land was $100,000, and he sold the land for $300,000 (cash plus the note). As a result, under the installment method, 2/3 of all cash received is treated as a gain (with the other 1/3 a return of Smith’s original basis in the land). With the receipt of $30,000 in the second year, 2/3 (=$20,000) is treated as a gain.
Example Question #43 : Cpa Regulation (Reg)
Which of the following is taxable as gross income?
Alimony received based on a divorce agreement executed in 2015.
Child support received based on a divorce agreement executed in 2019.
Child support received based on a divorce agreement executed in 2015.
Alimony received based on a divorce agreement executed in 2019.
Alimony received based on a divorce agreement executed in 2015.
For a divorce finalized on or before Dec. 31, 2018, alimony received is included in gross income. For divorces finalized after this date, alimony is not included in gross income. Child support is never included in gross income.
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