10 REG Practice Questions With Full Explanations
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
REG is not a memorization exam, which is why memorizing it does not work. Roughly two thirds of the section sits at application and analysis, and the questions are built to put three rules in one fact pattern and see whether you can tell which one governs. Candidates rarely fail because they never saw the rule. They fail because the rule arrived wrapped in two other rules and a distractor.
Below are ten REG questions across the areas that carry the most weight: S corporation and partnership basis, loss limitations, itemized deductions, gift basis, capital loss netting, MACRS and separately stated items. Every answer is hidden behind a toggle so you can actually attempt each one first.
Work them cold, then read the reasoning rather than the number. On REG especially, getting an answer right by luck is indistinguishable from getting it right by understanding until you meet the same pattern under time pressure.
Practice in the interactive quiz first
If you would rather answer all ten in one pass and see a score before reading anything, work through the quiz, then come back for the explanations.
Or watch the walkthrough
I work through all ten in the video below, talking through the reasoning I would use under exam conditions.
Prefer the app? Watch the REG walkthrough on YouTube.
The ten questions
- S corporation stock basis
- Partnership basis and liabilities
- Partnership loss limitation
- Charitable contribution of appreciated property
- Deductible medical expenses
- Sale of a principal residence
- Basis of gifted property
- Capital gain and loss netting
- MACRS on a commercial building
- Ordinary business income and separately stated items
How do you calculate S corporation stock basis?
Jordan, a 40% shareholder in an S corporation, had a stock basis of $15,000 at the beginning of the year. The corporation had ordinary income of $300,000, a long-term capital gain of $20,000, and an investment interest expense of $5,000. Jordan received wages from the corporation of $50,000 and a distribution of $45,000. What was Jordan's stock basis at year-end?
- A. $106,000
- B. $146,000
- C. $96,000
- D. $141,000
Show the answer and explanation
C. $96,000.
Ordinary income + 120,000 (300,000 × 40%)
Capital gain + 8,000 (20,000 × 40%)
Distribution − 45,000
Investment int. − 2,000 (5,000 × 40%)
─────────────────────────────
Ending stock basis 96,000
Wages are not a basis item. They are compensation to Jordan as an employee, deducted by the corporation on the way to that $300,000 of ordinary income. Adding them again would double-count.
Order matters, even when it does not change this answer. Stock basis is adjusted in a set sequence: increase for income items first, then decrease for distributions, then decrease for nondeductible expenses, then losses and deductions. Here the basis is comfortable so every order lands on $96,000, but on a question where basis runs out the sequence decides whether a distribution is taxable or a loss is suspended. Learn it in the right order now.
The trap: answer B is $146,000, which is what you get by adding the $50,000 of wages.
Does a partner's basis include partnership debt?
Four equal partners formed a partnership, each contributing $150,000. In the first year a $1,000,000 building was purchased with $400,000 of cash and a $600,000 nonrecourse obligation. The partnership earned net income of $50,000 and reported a separately stated capital loss of $20,000. What was each partner's basis at the end of the first year?
- A. $162,500
- B. $257,500
- C. $307,500
- D. $157,500
Show the answer and explanation
C. $307,500.
Share of debt + 150,000 (600,000 × 25%)
Share of income + 12,500 (50,000 × 25%)
Share of loss − 5,000 (20,000 × 25%)
─────────────────────────────
Ending basis 307,500
This is the single most tested difference between the two pass-through entities. A partner's share of partnership liabilities increases outside basis. An S corporation shareholder gets no equivalent increase from corporate-level debt.
Answer B, $257,500, is the trap: it treats the debt share as $100,000 rather than $150,000, or forgets a piece of it. Whenever a partnership fact pattern mentions borrowing, stop and ask whether the liability moves outside basis. For a partnership, it almost always does.
How much partnership loss can a partner actually deduct?
An individual is a 40% partner who actively participates in River Partnership. Their beginning basis is $10,000. The partnership incurred a $100,000 loss from operations. The partnership borrowed $50,000 from a bank, of which $40,000 remained unpaid at year-end. What loss may the individual claim this year?
- A. $40,000
- B. $26,000
- C. $30,000
- D. $10,000
Show the answer and explanation
B. $26,000.
Two steps, and the order is the whole question. Build basis first, then apply the loss against it.
Share of debt + 16,000 (40,000 outstanding × 40%)
─────────────────────────────
Basis before loss 26,000
Share of loss 40,000 (100,000 × 40%)
Deductible 26,000 limited to basis
Suspended 14,000 carried forward
Note the debt figure. It is the $40,000 still outstanding at year-end, not the $50,000 originally borrowed, because basis reflects the partner's share of liabilities as they stand at the measurement date.
The trap: answer A takes the full $40,000 share of the loss without checking basis. On REG, basis comes first, every time. The suspended $14,000 is not lost, it waits for basis to be restored.
How much of an appreciated charitable donation is deductible?
James, an unmarried taxpayer, had $180,000 of AGI in Year 10. During the year he donated a sculpture to a public charity for use related to its exempt purpose. He bought the sculpture in Year 5 for $40,000, and its fair market value on the date of donation was $100,000. What is the maximum charitable contribution James may deduct as an itemized deduction in Year 10?
- A. $100,000
- B. $40,000
- C. $54,000
- D. $30,000
Show the answer and explanation
C. $54,000.
Three decisions stacked into one question.
First, the holding period. Bought in Year 5, donated in Year 10, so it is long-term capital gain property and the starting measure is fair market value rather than cost.
Second, the use. This is tangible personal property, and that only gets fair market value treatment if the charity's use relates to its exempt purpose. Unrelated use would cap the deduction at the $40,000 basis instead. The stem tells you it is related use, and on the exam that phrase is doing real work rather than decorating the sentence.
Third, the ceiling.
30% of AGI limit 54,000 (180,000 × 30%)
─────────────────────────────
Deducted this year 54,000
Carried forward 46,000
Capital gain property given to a public charity is limited to 30% of AGI. The unused $46,000 carries forward for up to five years.
The traps: answer A ignores the ceiling entirely, and answer B is the unrelated-use answer. Both are there to catch you skipping one of the three decisions.
Which medical expenses are deductible?
Taylor had the following medical expenses: doctor fees of $6,000, prescription glasses of $400, elective cosmetic surgery of $8,000, and premiums on a life insurance policy of $2,000. What is the total of Taylor's deductible medical expenses before the AGI limitation?
- A. $14,400
- B. $6,000
- C. $6,400
- D. $16,400
Show the answer and explanation
C. $6,400.
The test is medical necessity, applied item by item.
| Item | Amount | Deductible |
|---|---|---|
| Doctor fees | $6,000 | Yes |
| Prescription glasses | $400 | Yes, corrective and prescribed |
| Elective cosmetic surgery | $8,000 | No, not medically necessary |
| Life insurance premiums | $2,000 | No, not a medical expense |
Total is $6,400 before applying the AGI floor. Note what the question asked for. It wants the figure before the floor, so applying the percentage here would be answering a question that was not asked, which is a common way to lose a point you had earned.
Watch cosmetic surgery. Elective is not deductible, but reconstructive surgery following an accident, disfiguring disease or congenital abnormality is. The exam does test that distinction.
How does the Section 121 home sale exclusion work?
Jessica purchased a condo for $300,000. During her ownership she made improvements totaling $30,000. After living in it for four years as her primary home, she sold it for $400,000. What amount from this transaction should be included in Jessica's gross income?
- A. $70,000
- B. $40,000
- C. $100,000
- D. $0
Show the answer and explanation
D. $0.
Improvements + 30,000
─────────────────────────────
Adjusted basis 330,000
Sale price 400,000
Realized gain 70,000
Section 121 − 70,000 (up to 250,000 excluded)
─────────────────────────────
Included in income 0
Jessica meets the ownership and use tests, having lived there as her principal residence for at least two of the previous five years. A single filer excludes up to $250,000 of gain, or $500,000 filing jointly, so the entire $70,000 disappears.
Improvements are the point of the question. Answer C, $100,000, is what you get by ignoring them and using the $300,000 purchase price as basis. Capital improvements increase basis. Repairs and maintenance do not, and the exam will mix both into a list to see whether you separate them.
What is the basis of gifted property?
Raven received a painting as a gift. At the time of the gift the fair market value was $12,000, but the donor had purchased it for $15,000. Raven later sells the painting for $14,000. What gain or loss should be reported on the sale?
- A. $2,000 loss
- B. $0
- C. $1,000 gain
- D. $3,000 loss
Show the answer and explanation
B. $0.
Fair market value at the date of gift, $12,000, is below the donor's basis of $15,000, which triggers the dual basis rule. Two different bases apply depending on which direction the eventual sale goes.
| Sale price | Basis used | Result |
|---|---|---|
| Above $15,000 | Donor's basis of $15,000 | Gain |
| Below $12,000 | FMV at gift of $12,000 | Loss |
| Between the two | Neither applies | No gain and no loss |
Raven sold at $14,000, inside the corridor, so the answer is zero.
Why the rule exists is worth knowing, because it makes the mechanics stick. Congress did not want taxpayers gifting depreciated property to shift a built-in loss to someone else. The rule blocks the transfer of that loss without denying a genuine gain, and the dead zone between the two figures is the seam where both protections meet.
The trap: answer C compares the $14,000 sale to the $12,000 FMV and reports a $1,000 gain. Answer A compares it to the donor's $15,000 and reports a loss. Both use one basis where the rule requires you to test both.
How do you net capital gains and losses?
An individual with gross income of $100,000 had the following capital transactions: an $8,000 gain on stock held three years, a $15,000 loss on the sale of a principal residence, a $12,000 loss on corporate bonds held eight months, and a $6,000 loss on a sculpture held for investment for ten years. What amount of capital loss carries forward?
- A. $10,000
- B. $22,000
- C. $3,000
- D. $7,000
Show the answer and explanation
D. $7,000.
Discard the disallowed item first, then net within holding periods, then apply the annual limit.
Long-term + 8,000 stock, 3 years
− 6,000 sculpture, 10 years
Net long-term + 2,000
Net short-term − 12,000 bonds, 8 months
─────────────────────────────
Net capital loss 10,000
Deducted − 3,000 annual limit
Carried forward 7,000
The residence loss is the whole point of the question. Losses on personal-use property are never deductible, even though a gain on the same property would have been taxable. That asymmetry is deliberate and it is tested constantly.
Watch the sculpture. The stem specifies it was held for investment, which makes the loss a genuine long-term capital loss. Had it been part of a personal collection, that loss would have been disallowed too, exactly like the residence. One word in the fact pattern moves the answer.
The traps: answer A stops at the $10,000 net loss and forgets the $3,000 deduction. Answer B includes the residence loss.
How do you calculate MACRS on a commercial building?
On March 1, Kelly purchased and placed into service a commercial building costing $500,000, including $50,000 for land. What was Kelly's MACRS deduction for the building in Year 1?
- A. $11,538
- B. $9,134
- C. $9,615
- D. $12,820
Show the answer and explanation
B. $9,134.
Three things have to be right: strip out the land, use the correct recovery period, and apply the correct convention.
Land − 50,000 never depreciated
─────────────────────────────
Depreciable base 450,000
Annual 450,000 / 39 = 11,538.46
Year 1 11,538.46 × 9.5/12 = 9,134.62
Nonresidential real property runs 39 years straight line, and real property always uses the mid-month convention. Placed in service in March, the building is treated as though it went into service at the middle of March, giving 9.5 months of the first year rather than 10.
The traps are the other three answers. A is a full year of depreciation with no convention. C is 10/12 of a year, forgetting the half-month. D depreciates the full $500,000 including land.
The shortcut worth memorizing: buildings get mid-month. Personal property gets half-year, unless more than 40% of the year's additions land in the fourth quarter, which switches you to mid-quarter.
Which partnership items are separately stated?
LMN Partnership reported gross sales of $1,500,000, cost of goods sold of $600,000, operating expenses of $300,000, guaranteed payments to partners of $50,000, a capital gain from an investment of $20,000, and interest income from bonds of $40,000. What is total ordinary business income?
- A. $610,000
- B. $550,000
- C. $1,500,000
- D. $590,000
Show the answer and explanation
B. $550,000.
COGS − 600,000
Operating exp. − 300,000
Guaranteed pmts − 50,000
─────────────────────────────
Ordinary income 550,000
Separately stated:
Capital gain 20,000
Interest income 40,000
The organizing question is whether an item would be taxed differently in a partner's hands than ordinary income would. Capital gains carry preferential rates, and interest income can affect investment interest limitations, so both must flow through separately rather than being buried in one net figure.
Guaranteed payments are the interesting one. They reduce partnership ordinary income like any other business deduction, and they are also separately reported to the receiving partner as ordinary income. Two things at once, which is why they show up so often.
The trap: answer A, $610,000, adds the interest income back into ordinary income. Answer D adds the capital gain.
Where does Maxwell CPA Review fit?
Concessions first. If you want the largest question bank available, that goes to Gleim or UWorld. If your firm sponsors a course, it is usually Becker, and there is no reason to decline something already paid for. If you want adaptive software that scores your readiness, Surgent does that better than I do.
What Maxwell CPA Review does is different. Every other option in this category answers a shortage: more questions, longer explanations, more visuals. Maxwell answers a surplus. Ten thousand tax questions do not help if nobody has shown you that basis answers three separate questions, or why the dual basis rule has a dead zone in the middle. The explanations above are the format the whole course uses.
Here is what is in the REG section:
| Video lessons | 8 hours |
|---|---|
| Practice MCQs | 750 |
| Task-based simulations | 35 |
| Textbook | 120 pages |
| Study outlines | 80 pages |
| Also included | Final review and 6 mini exams |
Across the whole course: 50 hours of video content, 5,000 practice MCQs and 150 task-based simulations, covering all six sections, FAR, AUD, REG, BAR, ISC and TCP, with no discipline upcharge. Built to the current AICPA Blueprint, with every lecture, textbook and outline created by one CPA who scored a 91 on this section.
Best for candidates who know the rules but freeze when three of them arrive together: Maxwell CPA Review, with bite-sized lessons focused on the concepts that matter most, at $49 per month, billed monthly, cancel anytime.
Use it as your primary course. Use it to retake a section you failed. Use it alongside what you already bought.
Start free with CPA 101
Practice all 25 of the 2026 AICPA released MCQs, plus a free study outline. FAR, AUD and REG tracks available. No credit card required.
Frequently asked questions
How is S corporation stock basis calculated?
Start with beginning basis, increase for the shareholder's share of income items, then decrease for distributions, then for nondeductible expenses, then for losses and deductions. That order matters when basis runs short. Wages paid to a shareholder do not affect stock basis.
Why does a partner's basis include debt when an S corporation shareholder's does not?
A partner is treated as bearing the economic burden of partnership liabilities, so a share of that debt increases outside basis. An S corporation shareholder gets no increase from corporate-level debt. Lending directly to the corporation creates separate debt basis, tracked apart from stock basis.
What is the dual basis rule for gifted property?
When fair market value at the date of gift is below the donor's basis, the donor's basis applies for computing a gain and the lower fair market value applies for computing a loss. If the sale price lands between the two figures, no gain or loss is recognized.
When does the MACRS mid-month convention apply?
To real property, meaning commercial buildings at 39 years and residential rental property at 27.5 years. The property is treated as placed in service at the middle of the month regardless of the actual date. Personal property uses half-year, or mid-quarter when more than 40% of the year's additions fall in the fourth quarter.
What are separately stated items?
Items that must be reported to owners individually because they may be taxed differently in the owner's hands than ordinary business income. Common examples are capital gains and losses, charitable contributions, interest and dividend income, and Section 179 expense.
How much capital loss can an individual deduct each year?
$3,000 of net capital loss against ordinary income per year, with the remainder carried forward indefinitely. Losses on personal-use property, such as a principal residence or a personal collection, are not deductible at all.
Can I use Maxwell CPA Review alongside Becker, UWorld, Gleim or Surgent?
Yes. It is built to the current AICPA Blueprint and covers the same sections, so it works alongside a course you already own. Most candidates use it for the video lessons and outlines and keep their existing question bank.
Ready for more than ten questions?
Start with the 2026 AICPA released questions and the free study outline, and see whether the explanations work the way you need them to.
Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 91 on REG and a 95 on FAR. He is the founder and sole instructor of Maxwell CPA Review, where he creates every lecture, textbook and study outline himself.
Reach him at MaxwellCPAreview@gmail.com.
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