Top 10 REG Exam Practice Questions (With Explanations)
Top 10 REG Exam Practice Questions | Master Basis, Deductions & Taxation
Use these high-yield REG questions to sharpen your tax logic, improve your basis calculations, and get faster on exam-day decisions.
REG is not just a memorization exam. It tests whether you understand how tax rules interact when multiple facts show up in the same problem. That is why candidates often struggle—not because they never saw the rule, but because they have trouble applying it under pressure.
In this guide, you will work through 10 high-yield REG practice questions covering some of the most tested areas on the exam, including S corporation basis, partnership basis, capital loss rules, itemized deductions, Section 121 home sale exclusion, and MACRS depreciation.
How to use this article: First, try the question on your own. Then study the explanation and focus on the reasoning pattern behind the answer. That is how REG starts to feel more mechanical and less overwhelming.
This guide is especially helpful if:
- You understand tax rules individually but get stuck when multiple rules appear in one question.
- You want cleaner explanations for basis, deductions, and separately stated items.
- You need better pattern recognition for the most common REG MCQ traps.
Interactive REG Quiz App
Want to solve the questions first before reviewing the explanations? Use the interactive quiz below, then come back to this article to see the logic step by step.
Video: Complete 10-Question REG Walkthrough
Prefer a guided explanation? Watch me solve all 10 REG questions step by step and explain the exact thought process I would use on exam day.
Jump to a Question:
- Question 1: S Corporation Stock Basis
- Question 2: Partnership Basis Calculation
- Question 3: Partnership Loss Limitation
- Question 4: Charitable Contributions
- Question 5: Medical Expense Deductions
- Question 6: Sale of Principal Residence
- Question 7: Gift of an Asset (Dual Basis)
- Question 8: Capital Gain/Loss Netting
- Question 9: MACRS Depreciation
- Question 10: Ordinary Business Income vs. Separately Stated
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Get My Free CPA 101 CourseQuestion 1: S Corporation Stock Basis Difficulty: 4/5
Jordan, a 40% shareholder in an S Corp, 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 basis in the stock at year-end?
Explanation: For S corporation stock basis, start with beginning basis, add your share of income items, subtract your share of deductions, then subtract distributions.
- Beginning basis: $15,000
- Add income: ($300,000 ordinary income + $20,000 LTCG) × 40% = +$128,000
- Subtract deductions: $5,000 × 40% = -$2,000
- Subtract distribution: -$45,000
Calculation: $15,000 + $128,000 - $2,000 - $45,000 = $96,000.
Important: Jordan’s wages do not affect stock basis.
Common trap: Students often add wages to basis. Wages are compensation, not a basis adjustment.
Question 2: Partnership Basis Calculation Difficulty: 3/5
Four equal partners formed a partnership. They each contributed $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 in the partnership at the end of the first year?
Explanation: Partnership basis includes not only contributed capital and income items, but also the partner’s share of partnership debt.
- Beginning basis: $150,000
- Add share of liabilities: 25% of $600,000 = +$150,000
- Add share of ordinary income: 25% of $50,000 = +$12,500
- Subtract share of capital loss: 25% of $20,000 = -$5,000
Calculation: $150,000 + $150,000 + $12,500 - $5,000 = $307,500.
Study tip: If you see a partnership debt fact pattern, pause and ask: Does this liability increase outside basis? Most of the time, yes.
Question 3: Partnership Loss Limitation Difficulty: 4/5
An individual is a 40% partner who actively participates in River Partnership. Their beginning-of-year 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 amount of loss is the individual allowed to claim in the current year?
Explanation: Before taking the loss, first determine how much basis the partner has available.
- Beginning basis: $10,000
- Add share of unpaid debt: $40,000 × 40% = +$16,000
- Adjusted basis before loss: $26,000
- Partner’s share of loss: $100,000 × 40% = $40,000
The partner may deduct only the amount supported by basis, so the allowed loss is $26,000. The remaining $14,000 is suspended.
Common trap: Students often deduct the full share of loss before checking basis. In REG, basis comes first.
Question 4: Charitable Contributions (Itemized Deductions) Difficulty: 3/5
James, an unmarried taxpayer, had $180,000 in AGI in Year 10. During the year, James donated a sculpture to a charity that he bought in Year 5 for $40,000. The fair market value on the date of donation was $100,000. What is the maximum amount of charitable contributions James may deduct as an itemized deduction for the donation in Year 10?
Explanation: Because James held the sculpture for more than one year, it is long-term capital gain property. That means the contribution is generally measured at fair market value.
However, the deduction is limited to 30% of AGI for this type of property donated to a public charity.
Calculation: $180,000 × 30% = $54,000.
James deducts $54,000 this year and carries forward the remaining $46,000.
Question 5: Medical Expense Deductions Difficulty: 2/5
Taylor had the following medical expenses: Doctor fees ($6,000), prescription glasses ($400), elective cosmetic surgery ($8,000), and premiums on a life insurance policy ($2,000). What is the total amount of Taylor's tax-deductible medical expenses before the AGI limitation?
Explanation: Deductible medical expenses generally must be medically necessary. Doctor fees and prescription glasses qualify.
- Doctor fees: deductible
- Prescription glasses: deductible
- Elective cosmetic surgery: not deductible
- Life insurance premiums: not deductible as medical expenses
Total deductible medical expenses before the AGI floor: $6,000 + $400 = $6,400.
Question 6: Sale of Principal Residence Difficulty: 2/5
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?
Explanation: Jessica qualifies for the Section 121 exclusion because she used the condo as her principal residence for at least 2 of the last 5 years.
- Adjusted basis: $300,000 + $30,000 = $330,000
- Realized gain: $400,000 - $330,000 = $70,000
A single taxpayer can exclude up to $250,000 of gain, so the full $70,000 is excluded. Gross income inclusion = $0.
Question 7: Gift of an Asset (Dual Basis) Difficulty: 4/5
Raven received a painting as a gift. At the time of the gift, the fair market value (FMV) was $12,000, but the original donor purchased it for $15,000. Raven later sells the painting for $14,000. What amount of gain or loss should be reported on the sale?
Explanation: Because FMV at the date of gift ($12,000) is below the donor’s basis ($15,000), the dual basis rule applies.
- If the asset is sold for more than $15,000, use donor basis for gain.
- If the asset is sold for less than $12,000, use FMV for loss.
- If the sale price falls between $12,000 and $15,000, there is no gain or loss.
Since Raven sold the painting for $14,000, the answer is $0.
Common trap: Students often automatically compare sale price to donor basis and miss the middle “no gain, no loss” zone.
Question 8: Capital Gain/Loss Netting Difficulty: 3/5
An individual with a gross income of $100,000 had the following gains and losses from capital transactions: A $8,000 gain from stock held 3 years. A $15,000 loss on the sale of a principal residence. A $12,000 loss on corporate bonds held 8 months. A $6,000 loss on a sculpture held 10 years. What amount of the capital loss should the individual carry forward?
Explanation: First remove the $15,000 loss on the principal residence because losses on personal-use property are not deductible.
- Net long-term: $8,000 gain - $6,000 loss = $2,000 net LTCG
- Net short-term: $12,000 STCL
- Overall net capital loss: $10,000
An individual may deduct only $3,000 of net capital loss against ordinary income each year, so the remaining $7,000 is carried forward.
Question 9: MACRS Depreciation (Mid-Month) Difficulty: 4/5
On March 1st, 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 commercial building in Year 1?
Explanation: Commercial real property is depreciated using 39-year straight-line and always uses the mid-month convention.
- Depreciable base: $500,000 - $50,000 land = $450,000
- Annual depreciation: $450,000 / 39 = $11,538.46
- Year 1 fraction: 9.5 / 12 because the asset is treated as placed in service in the middle of March
Calculation: $11,538.46 × (9.5 / 12) = $9,134.61, rounded to $9,134.
Study tip: For buildings, think mid-month. For personal property, think half-year or mid-quarter depending on the facts.
Question 10: Ordinary Business Income vs. Separately Stated Difficulty: 3/5
LMN Partnership reported: Gross sales ($1,500,000), COGS ($600,000), Operating expenses ($300,000), Guaranteed payments to partners ($50,000), Capital gain from an investment ($20,000), and Interest income from bonds ($40,000). What is the total amount of Ordinary Business Income?
Explanation: Ordinary business income includes only the partnership’s regular trade or business items. Capital gains and interest income are separately stated because they may receive different treatment on the partners’ returns.
Guaranteed payments are treated as an ordinary expense to the partnership, so they reduce OBI.
Calculation: $1,500,000 - $600,000 - $300,000 - $50,000 = $550,000.
Frequently Asked Questions (REG Exam Prep)
How is an S corporation’s stock basis calculated?
Stock basis starts with beginning basis, increases by the shareholder’s share of income items, decreases by the shareholder’s share of deductions and losses, and decreases by distributions. Wages paid to the shareholder do not affect stock basis.
What is the dual basis rule for gifted assets?
If the asset’s FMV at the gift date is lower than the donor’s basis, one basis is used for gain and another is used for loss. If the sale price falls between those two amounts, no gain or loss is recognized.
When do you use the MACRS mid-month convention?
The mid-month convention is used for real property, including commercial buildings and residential rental property. The building is treated as placed in service in the middle of the month, regardless of the exact purchase date.
What are separately stated items in a partnership or S corporation?
Separately stated items are items that must be reported separately to owners because they may be taxed differently at the owner level. Common examples include capital gains, charitable contributions, interest income, and certain deductions.
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