CPA REG Regulation Exam 2026/2027 –
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Domain 1 – Federal Taxation of Individuals (Questions 1–35)
Question 1
A taxpayer operates a sole proprietorship and purchases new equipment for
$50,000, placed in service this year. The taxpayer elects Section 179 expensing.
Which statement about the §179 deduction is correct?
A) §179 deduction is unlimited for all taxpayers
B) §179 deduction is only available for corporations
C) §179 deduction is subject to a dollar limitation and taxable income limitation
D) §179 deduction must be amortized over 15 years
Correct Answer: C
Rationale: Section 179 allows immediate expensing of qualifying property, but the
deduction is limited both by an annual statutory dollar cap (adjusted for inflation;
e.g., $1,160,000 for 2024, reduced dollar-for-dollar over a $2,890,000 threshold)
and by the taxpayer’s taxable income from active trades or businesses .
,Question 2
A taxpayer sells a capital asset held for investment for a gain after 10 months. How
is the gain classified?
A) Long-term capital gain
B) Short-term capital gain
C) Ordinary income
D) Section 1231 gain
Correct Answer: B
Rationale: Assets held for one year or less generate short-term capital gains, taxed
at ordinary income rates regardless of asset type .
Question 3
Which expense is generally deductible as an adjustment to gross income (above-
the-line) for an individual taxpayer?
A) Personal grocery expenses
B) Alimony paid under a pre-2019 divorce agreement
C) Capital losses on personal-use property
D) Political contributions
Correct Answer: B
Rationale: Alimony paid under a divorce or separation agreement executed before
2019 is deductible above the line (for AGI) by the payor spouse and included in
gross income by the payee. This treatment was repealed for agreements after 2018 .
,Question 4
A taxpayer contributes appreciated property to a qualified charity. What is the
general rule for the charitable deduction?
A) Deduction limited to cost basis only
B) Deduction always disallowed
C) Deduction equals fair market value (FMV) subject to limitations
D) Deduction treated as ordinary income
Correct Answer: C
Rationale: Charitable contributions of appreciated capital gain property are
generally deductible at FMV, subject to percentage limitations based on the type of
charity (e.g., 30% of AGI for capital gain property donated to public charities, 50%
for cash) .
Question 5
Which filing status generally provides the lowest tax rates for a qualifying taxpayer
with dependents?
A) Single
B) Married filing separately
C) Head of household
D) Qualifying surviving spouse
Correct Answer: C
Rationale: Head of Household (HOH) status offers more favorable (wider) tax
brackets than Single or MFS when eligibility requirements are met (unmarried,
paying more than half the cost of maintaining a home for a qualifying person) .
, Question 6
A taxpayer materially participates in a rental real estate activity. What is the tax
consequence?
A) Losses are always passive
B) Losses may be deductible against non-passive income
C) Income is exempt from tax
D) Activity is automatically classified as a corporation
Correct Answer: B
Rationale: Material participation can convert rental losses from passive to non-
passive for certain taxpayers (e.g., real estate professionals), allowing the losses to
offset active income like wages or business income .
Question 7
Which tax is deductible for an individual taxpayer when itemizing deductions?
A) Federal income tax
B) State and local income taxes (subject to $10,000 cap)
C) Social Security tax
D) Federal estate tax
Correct Answer: B
Rationale: State and local income taxes (SALT) may be deducted as itemized
deductions, but they are subject to a combined annual cap of $10,000 ($5,000
MFS) for all state and local property and income taxes .
Complete Exam-Style Questions | 100%
Verified Answers | Detailed Rationales –
Pass Guaranteed – A+ Graded
Domain 1 – Federal Taxation of Individuals (Questions 1–35)
Question 1
A taxpayer operates a sole proprietorship and purchases new equipment for
$50,000, placed in service this year. The taxpayer elects Section 179 expensing.
Which statement about the §179 deduction is correct?
A) §179 deduction is unlimited for all taxpayers
B) §179 deduction is only available for corporations
C) §179 deduction is subject to a dollar limitation and taxable income limitation
D) §179 deduction must be amortized over 15 years
Correct Answer: C
Rationale: Section 179 allows immediate expensing of qualifying property, but the
deduction is limited both by an annual statutory dollar cap (adjusted for inflation;
e.g., $1,160,000 for 2024, reduced dollar-for-dollar over a $2,890,000 threshold)
and by the taxpayer’s taxable income from active trades or businesses .
,Question 2
A taxpayer sells a capital asset held for investment for a gain after 10 months. How
is the gain classified?
A) Long-term capital gain
B) Short-term capital gain
C) Ordinary income
D) Section 1231 gain
Correct Answer: B
Rationale: Assets held for one year or less generate short-term capital gains, taxed
at ordinary income rates regardless of asset type .
Question 3
Which expense is generally deductible as an adjustment to gross income (above-
the-line) for an individual taxpayer?
A) Personal grocery expenses
B) Alimony paid under a pre-2019 divorce agreement
C) Capital losses on personal-use property
D) Political contributions
Correct Answer: B
Rationale: Alimony paid under a divorce or separation agreement executed before
2019 is deductible above the line (for AGI) by the payor spouse and included in
gross income by the payee. This treatment was repealed for agreements after 2018 .
,Question 4
A taxpayer contributes appreciated property to a qualified charity. What is the
general rule for the charitable deduction?
A) Deduction limited to cost basis only
B) Deduction always disallowed
C) Deduction equals fair market value (FMV) subject to limitations
D) Deduction treated as ordinary income
Correct Answer: C
Rationale: Charitable contributions of appreciated capital gain property are
generally deductible at FMV, subject to percentage limitations based on the type of
charity (e.g., 30% of AGI for capital gain property donated to public charities, 50%
for cash) .
Question 5
Which filing status generally provides the lowest tax rates for a qualifying taxpayer
with dependents?
A) Single
B) Married filing separately
C) Head of household
D) Qualifying surviving spouse
Correct Answer: C
Rationale: Head of Household (HOH) status offers more favorable (wider) tax
brackets than Single or MFS when eligibility requirements are met (unmarried,
paying more than half the cost of maintaining a home for a qualifying person) .
, Question 6
A taxpayer materially participates in a rental real estate activity. What is the tax
consequence?
A) Losses are always passive
B) Losses may be deductible against non-passive income
C) Income is exempt from tax
D) Activity is automatically classified as a corporation
Correct Answer: B
Rationale: Material participation can convert rental losses from passive to non-
passive for certain taxpayers (e.g., real estate professionals), allowing the losses to
offset active income like wages or business income .
Question 7
Which tax is deductible for an individual taxpayer when itemizing deductions?
A) Federal income tax
B) State and local income taxes (subject to $10,000 cap)
C) Social Security tax
D) Federal estate tax
Correct Answer: B
Rationale: State and local income taxes (SALT) may be deducted as itemized
deductions, but they are subject to a combined annual cap of $10,000 ($5,000
MFS) for all state and local property and income taxes .
