CPA Exam — Taxation and Regulation (REG) — All Questions

Harbor LLC buys a machine for its business for $50,000. It also pays $4,000 of state sales tax on the purchase, $1,500 of freight to get the machine to its plant, and $2,500 to install it before it is placed in service. What is the machine's tax basis?

• a.$58,000✓
• b.$54,000
• c.$56,000
• d.$50,000

Basis is cost (IRC 1012). Section 164(a) treats sales tax paid in connection with acquiring property as part of the cost, and Treas. Reg. 1.263(a)-2(d) requires capitalizing amounts paid to acquire property, including delivery and installation before it is placed in service. $50,000 + $4,000 + $1,500 + $2,500 = $58,000. $54,000 omits freight and installation, and $56,000 omits installation.

Nell bought a house for $300,000, of which $60,000 was for the land, and lived in it for years. This year she converts it to a rental. At conversion the building's adjusted basis is $240,000 and its fair market value is $210,000; the land is worth $70,000. What is the building's depreciable basis?

• a.$210,000✓
• b.$280,000
• c.$300,000
• d.$240,000

When personal-use property is converted to business or income-producing use, Treas. Reg. 1.168(i)-4(b) sets depreciable basis at the lesser of fair market value or adjusted depreciable basis at the time of conversion. For the building that is the lesser of $210,000 and $240,000. Land is never depreciable, so the $280,000 and $300,000 figures, which include land, are wrong.

Ruth received stock as a gift from her uncle, whose adjusted basis was $40,000. The stock was worth $30,000 on the date of the gift, and no gift tax was paid. Ruth later sells it for $34,000. What gain or loss does she recognize?

• a.$10,000 capital loss
• b.$6,000 capital loss
• c.$4,000 capital gain
• d.No gain or loss✓

Under IRC 1015(a), a donee takes the donor's basis ($40,000), except that for determining loss the basis is the lower fair market value at the date of the gift ($30,000). Using $40,000, the $34,000 sale shows no gain; using $30,000, it shows no loss. A sale price between the two bases produces neither gain nor loss.

Theo inherited stock when his father died in March 2025. His father had bought it for $20,000; it was worth $90,000 at death, and no alternate valuation was elected. Theo sold it in July 2025 for $95,000. What does Theo report?

• a.$5,000 short-term capital gain
• b.$75,000 short-term capital gain
• c.$5,000 long-term capital gain✓
• d.$75,000 long-term capital gain

Property acquired from a decedent takes a basis equal to its fair market value at the date of death (IRC 1014(a)), here $90,000, so the gain is $95,000 - $90,000 = $5,000. Under IRC 1223(9), a person whose basis is determined under section 1014 and who sells within one year after the death is treated as having held the property for more than one year, so the gain is long-term. The father's $20,000 cost does not carry over.

On December 10, Jo sells 100 shares of Delta stock with a basis of $10,000 for $7,000. On December 28 she buys 100 shares of Delta for $7,500. What is her basis in the new shares?

• a.$7,500
• b.$10,000
• c.$10,500✓
• d.$7,000

Buying substantially identical stock within 30 days before or after a loss sale makes it a wash sale, so the $3,000 loss is disallowed (IRC 1091(a)). Under IRC 1091(d), the new shares take the basis of the shares sold ($10,000) increased by the excess of the purchase price over the sale price ($500), giving $10,500. That equals the $7,500 cost plus the $3,000 disallowed loss.

Sol, a calendar-year taxpayer, pays $53,000 of start-up expenditures and opens his business on April 1, 2025. He elects to deduct and amortize them under IRC section 195. What is his total 2025 deduction?

• a.$2,000
• b.$4,550✓
• c.$7,400
• d.$2,650

Section 195(b) allows an immediate deduction of $5,000 reduced by the amount by which start-up costs exceed $50,000: $5,000 - $3,000 = $2,000. The remaining $51,000 is amortized over 180 months from the month the business begins: $51,000 / 180 x 9 months (April-December) = $2,550. Total $4,550. $2,000 omits amortization, $2,650 amortizes all $53,000 with no immediate deduction, and $7,400 ignores the $50,000 phase-down.

On July 1, 2025, a calendar-year company buys a business and allocates $180,000 of the price to goodwill and $36,000 to the seller's 3-year covenant not to compete. What is the 2025 amortization of these intangibles?

• a.$18,000
• b.$14,400
• c.$7,200✓
• d.$12,000

Goodwill and a covenant not to compete entered into with the acquisition of a business are both section 197 intangibles (IRC 197(d)(1)(A), (E)), amortized ratably over 15 years (180 months) starting with the month acquired, regardless of the covenant's shorter term. ($180,000 + $36,000) / 180 x 6 months = $7,200. $14,400 is a full year of amortization, $12,000 is a full year for goodwill alone, and $18,000 wrongly writes the covenant off over its 3-year term ($6,000 for six months) and takes a full year on goodwill ($12,000).

In 2025 a calendar-year company places in service machinery costing $100,000 in February, computers costing $80,000 in November, and an office building costing $500,000 in December. It elects out of bonus depreciation and claims no section 179 deduction. Which MACRS conventions apply?

• a.Mid-quarter for all three assets, since most cost came in the last quarter
• b.Mid-quarter for the machinery and computers; mid-month for the building✓
• c.Half-year for all three assets, since each was bought in the same year
• d.Half-year for the machinery and computers; mid-month for the building

Nonresidential real property uses the mid-month convention and is excluded from the 40 percent test (IRC 168(d)(2), (d)(3)(B)). Of the other property, $80,000 of $180,000 (44 percent) was placed in service in the last three months, which exceeds 40 percent, so the mid-quarter convention applies to all of that property (IRC 168(d)(3)(A)). The building never uses half-year or mid-quarter.

While reviewing a client's depreciation schedule, a preparer sees that a warehouse bought for $900,000 is being depreciated over 39 years on its full cost. The closing statement allocates $200,000 of the price to land. What correction is needed?

• a.Switch the building to the half-year convention instead
• b.Remove the $200,000 of land cost from the depreciable basis✓
• c.Depreciate the land cost separately over 15 years instead
• d.Change the recovery period from 39 years to 27.5 years

Depreciation does not apply to land apart from improvements (Treas. Reg. 1.167(a)-2), so only the $700,000 allocated to the building is depreciable. A warehouse is nonresidential real property with a 39-year recovery period and the mid-month convention (IRC 168(c), (d)(2)); 27.5 years is for residential rental property, and land has no recovery period at all.

For property placed in service in tax years beginning in 2025, the section 179 dollar limit is $2,500,000, reduced by the cost of section 179 property placed in service above $4,000,000. A company places $4,300,000 of qualifying property in service in 2025 and has $1,500,000 of taxable income from the active conduct of its business. What is its 2025 section 179 deduction and carryover?

• a.$2,200,000 deducted; nothing carried forward
• b.$2,500,000 deducted; nothing carried forward
• c.$1,500,000 deducted; $1,000,000 carried forward
• d.$1,500,000 deducted; $700,000 carried forward✓

The dollar limit is reduced by the $300,000 of cost above $4,000,000, to $2,200,000 (IRC 179(b)(1)-(2)). The deduction then cannot exceed taxable income from the active conduct of a trade or business, $1,500,000 (IRC 179(b)(3)(A)), and the $700,000 disallowed by that income limit carries forward (IRC 179(b)(3)(B)). The $1,000,000 figure measures the carryover from the unreduced $2,500,000.

Under a contract signed in February 2025, a company acquires new 7-year MACRS equipment for $200,000 and places it in service in March 2025. It does not elect out of bonus depreciation and claims no section 179 deduction. What is its 2025 depreciation on the equipment?

• a.$200,000✓
• b.$120,000
• c.$80,000
• d.$28,580

As amended by Pub. L. 119-21, IRC 168(k)(1) allows a special allowance of 100 percent of the adjusted basis of qualified property, and the amendment applies to property acquired after January 19, 2025. Equipment with a 7-year recovery period is qualified property, so the full $200,000 is deducted. $80,000 (40 percent) reflects the phase-down that applied to property acquired before January 20, 2025, and $28,580 is regular first-year MACRS with no bonus.

Kay's aunt, who had owned stock for three years with a basis of $10,000, gives it to Kay when it is worth $25,000; no gift tax is paid. Two months later Kay sells it for $22,000. What does Kay report?

• a.$12,000 long-term capital gain✓
• b.$12,000 short-term capital gain
• c.$3,000 short-term capital loss
• d.No gain or loss on the sale

Because the donor's $10,000 basis is below the value at the gift, Kay uses it for gain (IRC 1015(a)): $22,000 - $10,000 = $12,000. Because her basis is determined by reference to the donor's, she adds the aunt's holding period to her own (IRC 1223(2)), so the gain is long-term. The $25,000 value is used only to measure a loss when the donor's basis exceeds value, which is not the case here.