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REG-000001REG-IIIGross income
While preparing a client tax file, an employee receives wages for services performed during the year. How are the wages generally treated for federal tax purposes?
- A.The wages are included in gross income unless a specific exclusion applies.
- B.Excluded from gross income unless the employer separately reports the amount on an information return
- C.Deferred until the taxpayer uses the cash for personal expenses
- D.Taxable only to the extent the wages exceed the employee's unreimbursed work-related expenses
Answer: A. The wages are included in gross income unless a specific exclusion applies.The wages are included in gross income unless a specific exclusion applies.
Why the other answers are wrong
- B. The choice "The wages are excluded because they were earned through labor" misses the issue because compensation for services is generally taxable.
- C. The choice "The wages are deferred until the employee spends the cash" misses the issue because taxation is not based on when the cash is spent.
- D. The choice "Only half of the wages are taxable" misses the issue because there is no general rule taxing only half of wages.
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REG-000001REG-IIIGross income
While preparing a client tax file, an employee receives wages for services performed during the year. How are the wages generally treated for federal tax purposes?
- A.The wages are included in gross income unless a specific exclusion applies.
- B.Excluded from gross income unless the employer separately reports the amount on an information return
- C.Deferred until the taxpayer uses the cash for personal expenses
- D.Taxable only to the extent the wages exceed the employee's unreimbursed work-related expenses
Answer: A. The wages are included in gross income unless a specific exclusion applies.The wages are included in gross income unless a specific exclusion applies.
Why the other answers are wrong
- B. The choice "The wages are excluded because they were earned through labor" misses the issue because compensation for services is generally taxable.
- C. The choice "The wages are deferred until the employee spends the cash" misses the issue because taxation is not based on when the cash is spent.
- D. The choice "Only half of the wages are taxable" misses the issue because there is no general rule taxing only half of wages.
REG-000002REG-IIIProperty transactions
While preparing a client tax file, a taxpayer sells property for more than adjusted basis. What is the general tax result?
- A.Loss is recognized because the property was sold
- B.Gain is recognized as amount realized minus adjusted basis unless a nonrecognition rule applies.
- C.No tax effect occurs until replacement property is purchased
- D.The entire sales price is taxable income
Answer: B. Gain is recognized as amount realized minus adjusted basis unless a nonrecognition rule applies.Gain is recognized as amount realized minus adjusted basis unless a nonrecognition rule applies.
Why the other answers are wrong
- A. The choice "Loss is recognized because the property was sold" misses the issue because a sale above basis creates gain, not loss.
- C. The choice "No tax effect occurs until replacement property is purchased" misses the issue because gain is generally recognized unless a specific nonrecognition rule applies.
- D. The choice "The entire sales price is taxable income" misses the issue because basis is recovered before measuring gain.
REG-000003REG-IIIAccounting methods
While preparing a client tax file, a cash-basis taxpayer pays a deductible business expense by credit card before year-end. When is the expense generally deductible?
- A.Only when the taxpayer later pays the credit card bill
- B.Only when the related revenue is collected
- C.It is generally deductible in the year charged if the expense is otherwise deductible.
- D.Treat that factor as outside accounting methods unless management requests a different treatment
Answer: C. It is generally deductible in the year charged if the expense is otherwise deductible.It is generally deductible in the year charged if the expense is otherwise deductible.
Why the other answers are wrong
- A. The choice "Only when the taxpayer later pays the credit card bill" misses the issue because credit card charges are generally treated as payment for cash-basis taxpayers.
- B. The choice "Only when the related revenue is collected" misses the issue because cash-basis deductions are not matched this way.
- D. The choice "Never, because credit cards are debt" misses the issue because using credit does not automatically deny a deduction.
REG-000004REG-IFederal tax procedures
While preparing a client tax file, a taxpayer omits a substantial amount of gross income from a filed return. What may happen to the IRS assessment period?
- A.Treat that factor as conclusive for federal tax procedures without considering the rest of the fact pattern
- B.Treat that factor as outside federal tax procedures unless management requests a different treatment
- C.The taxpayer automatically avoids penalties
- D.The assessment period may be extended beyond the normal period.
Answer: D. The assessment period may be extended beyond the normal period.The assessment period may be extended beyond the normal period.
Why the other answers are wrong
- A. The choice "The IRS assessment period is always shortened" misses the issue because substantial omissions can extend the period.
- B. The choice "The return is automatically treated as never filed" misses the issue because an omission does not necessarily mean no return was filed.
- C. The choice "The taxpayer automatically avoids penalties" misses the issue because omissions can increase exposure rather than remove it.
REG-000005REG-IIITax credits
While preparing a client tax file, a client asks whether a tax credit is better than an equal-dollar deduction. Which explanation is most accurate?
- A.A credit reduces tax liability dollar for dollar, while a deduction reduces taxable income.
- B.Treat that factor as conclusive for tax credits without considering the rest of the fact pattern
- C.A credit reduces taxable income but not tax liability
- D.Credits and deductions have identical effects
Answer: A. A credit reduces tax liability dollar for dollar, while a deduction reduces taxable income.A credit reduces tax liability dollar for dollar, while a deduction reduces taxable income.
Why the other answers are wrong
- B. The choice "A deduction always reduces tax more than a credit" misses the issue because an equal-dollar credit usually has a more direct tax effect.
- C. The choice "A credit reduces taxable income but not tax liability" misses the issue because that describes a deduction more closely.
- D. The choice "Credits and deductions have identical effects" misses the issue because they affect different parts of the tax calculation.
REG-000006REG-IVEntity taxation
A partner begins the year with outside basis of $70,000. During the year, the partner's share of partnership liabilities increases $20,000, the partner is allocated $25,000 of ordinary income, and the partner receives a $15,000 cash distribution. What is the partner's ending outside basis under these facts?
- A.$60,000
- B.$80,000
- C.$100,000
- D.$130,000
Answer: C. $100,000Ending basis is $70,000 + $20,000 liability increase + $25,000 income - $15,000 cash distribution = $100,000.
Why the other answers are wrong
- A. This treats the liability increase or income as a reduction rather than an increase, and does not apply the full roll-forward.
- B. This omits one of the basis increases or applies the distribution before all increases are considered.
- D. The choice "$130,000" does not satisfy the controlling entity taxation requirement. The correct result is "$100,000" because Ending basis is $70,000 + $20,000 liability increase + $25,000 income - $15,000 cash distribution = $100,000.
REG-000007REG-IIIProperty transactions
A taxpayer exchanges business real property with an adjusted basis of $140,000 and a fair market value of $210,000 for qualifying replacement real property plus $20,000 cash. Assume no liabilities and no other recognized items. What gain is recognized currently?
- A.$0
- B.$20,000
- C.$70,000
- D.$90,000
Answer: B. $20,000Realized gain is $70,000, but the recognized gain is limited to the $20,000 cash boot received under the stated exercise facts.
Why the other answers are wrong
- A. Nonrecognition does not defer all gain when boot is received.
- C. $70,000 is the realized gain, not the currently recognized amount when boot is $20,000.
- D. The cash boot is not added to the realized gain to determine recognized gain.
REG-000008REG-IVEntity taxation
Under a simplified exercise rule, a corporation has $300,000 of taxable income before an NOL deduction and a $160,000 NOL carryforward. The exercise applies an 80% limitation and assumes no other restriction. What taxable income remains after the NOL deduction?
- A.$60,000
- B.$100,000
- C.$140,000
- D.$240,000
Answer: C. $140,000The 80% limit would allow a deduction of up to $240,000, so the full $160,000 NOL is deductible. Taxable income is $300,000 - $160,000 = $140,000.
Why the other answers are wrong
- A. This subtracts the full 80% limit rather than the actual NOL carryforward available.
- B. This does not apply the stated NOL amount to the pre-deduction taxable income.
- D. This is the maximum deduction under the exercise limitation, not the taxable income after the available NOL.
High-value REG topics
Individual income tax, entity taxation, basis, property transactions, tax procedure, professional responsibilities, contracts, agency, debtor-creditor relationships, and business structures.
Best study rhythm
Keep a running rule list. When you miss a question, write the rule in plain English and rework a similar question before moving to the next topic.
REG topic guides
Build REG strength with focused topic guides.
REGBasis explained for REG CPA candidatesThe tax scorecard behind gain, loss, deductions, distributions, and depreciation.
REGTax basis for REG CPA candidatesAdjusted basis, property basis, entity basis, distributions, and loss-limit logic.
REGLike-kind exchanges for REG CPA candidatesReal-property nonrecognition, boot, deferred exchange facts, and carryover basis.
REGIndividual tax for REG CPA candidatesGross income, deductions, credits, filing status, dependents, and individual tax calculation traps.
REGCorporation tax for REG CPA candidatesC corporations, S corporations, distributions, shareholder basis, book-tax differences, and loss limits.
REGMACRS depreciation for REG CPA candidatesRecovery periods, conventions, bonus depreciation, Section 179, and basis adjustments.
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