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CPA REGFree CPA — Regulation practice test
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Which of the following best describes the tax treatment of a C corporation's earnings that are distributed to shareholders as dividends?
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Q1. Which of the following best describes the tax treatment of a C corporation's earnings that are distributed to shareholders as dividends?
Correct answer: A. Earnings are taxed at the corporate level and again at the shareholder level when distributed
C corporations are subject to double taxation: the corporation pays tax on its taxable income, and shareholders pay tax again on dividends received from after-tax earnings.
Q2. Which of the following would disqualify a corporation from making or maintaining a valid S corporation election?
Correct answer: B. Having a nonresident alien as a shareholder
S corporations may not have nonresident alien shareholders. Up to 100 shareholders, one class of stock, and domestic status are all permitted or required conditions, not disqualifiers.
Q3. A partner contributes property with a fair market value of $50,000 and an adjusted basis of $30,000 to a partnership in exchange for a 25% capital interest. No partnership liabilities are involved. What is the partner's initial basis in the partnership interest?
Correct answer: C. $30,000
Under Section 721, no gain or loss is recognized on a contribution of property for a partnership interest, and the partner's basis carries over from the contributed property, which was $30,000.
Q4. A shareholder's basis in S corporation stock is $10,000 at the beginning of the year, and the shareholder also has $5,000 of basis in a direct loan made to the corporation. The shareholder's allocable share of the S corporation's ordinary loss for the year is $18,000. How much of the loss can the shareholder deduct this year, and how much is suspended?
Correct answer: D. Deduct $15,000; $3,000 suspended
A shareholder may deduct pass-through losses only to the extent of combined stock and debt basis ($10,000 + $5,000 = $15,000). The remaining $3,000 of loss is suspended and carried forward until additional basis is available.
Q5. A C corporation's deduction for charitable contributions in a given year is generally limited to what percentage of the corporation's taxable income (computed before certain deductions)?
Correct answer: A. 10%
C corporation charitable contribution deductions are generally limited to 10% of taxable income computed before the charitable deduction and certain other items, with excess amounts eligible for a five-year carryforward.
Q6. How is a guaranteed payment made to a partner for services rendered to the partnership generally treated for tax purposes?
Correct answer: B. Ordinary income to the partner and deductible by the partnership as if paid to a nonpartner
Guaranteed payments are made without regard to partnership income and are treated as ordinary income to the recipient partner, while the partnership generally deducts the payment as an expense.
Q7. A partner's basis in a partnership interest is $40,000 immediately before a nonliquidating distribution. The partnership distributes $25,000 cash and property with an adjusted basis to the partnership of $20,000, with no liabilities involved. What gain, if any, must the partner recognize, and what is the partner's basis in the distributed property?
Correct answer: C. No gain recognized; property basis to the partner is $15,000
Cash distributed first reduces basis ($40,000 - $25,000 = $15,000) with no gain recognized because cash does not exceed basis. The distributed property then takes a basis equal to the partner's remaining basis of $15,000, since carryover basis is limited to basis remaining after the cash distribution.
Q8. A shareholder transfers property with an adjusted basis of $20,000 and a fair market value of $50,000 to a corporation solely in exchange for stock worth $45,000 and $5,000 cash. Immediately after the exchange, the shareholder is in control of the corporation as required under Section 351. How much gain must the shareholder recognize?
Correct answer: D. $5,000
Realized gain is $30,000 ($50,000 minus $20,000 basis), but recognized gain under Section 351 is limited to the lesser of realized gain or boot received, which is the $5,000 cash.
Q9. Which of the following items is included in an individual taxpayer's gross income?
Correct answer: A. Wages and salary
Wages and salary are compensation for services and are included in gross income. Municipal bond interest, life insurance proceeds paid by reason of death, and gifts are generally excluded from gross income.
Q10. To qualify for long-term capital gain treatment, a capital asset generally must be held for a period exceeding:
Correct answer: B. 1 year
A capital asset must be held for more than one year for any gain or loss on its sale to be treated as long-term; a holding period of one year or less results in short-term treatment.
Exam facts and objectives sourced from the official AICPA certification page. Last reviewed June 2026.
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