CA Taxation & Regulatory Compliance 4 — Questions and Answers
Question 1: A taxpayer sells rental property for $500,000 with an adjusted basis of $200,000. The depreciation previously deducted was $80,000. Under Section 1250, the recaptured depreciation on residential real property is taxed at a maximum rate of:
- 37%
- 20%
- 25% (Correct answer)
- 15%
Correct answer: 25%
Unrecaptured Section 1250 gain (depreciation on real property) is taxed at a maximum federal rate of 25% for individual taxpayers.
Question 2: Which form is used to report the foreign bank and financial account holdings (FBAR) required by FinCEN?
- Form 8938
- Form 5471
- FinCEN Form 114 (Correct answer)
- Form 3520
Correct answer: FinCEN Form 114
The FBAR is filed on FinCEN Form 114 (not a tax form) and is required when aggregate foreign account balances exceed $10,000 at any point during the year.
Question 3: Under the Sarbanes-Oxley Act (SOX), how long must audit workpapers be retained by public accounting firms?
- 3 years
- 5 years
- 7 years (Correct answer)
- 10 years
Correct answer: 7 years
SOX Section 802 requires auditors to retain audit records, including workpapers, for a minimum of 7 years from the date of the audit report.
Question 4: A partnership allocates losses to a partner who has a partnership basis of zero and no at-risk amount. Where does this loss go?
- It is permanently disallowed
- It is suspended and carried forward until basis increases (Correct answer)
- It is deducted against the partner's other passive income
- It is deducted by the partnership at the entity level
Correct answer: It is suspended and carried forward until basis increases
Losses that exceed a partner's basis are suspended and carried forward; they can be deducted in future years when the partner's basis (and at-risk amount) increases.
Question 5: Under the AICPA Code of Professional Conduct, which threat to independence arises when a CPA has a financial interest in a client?
- Advocacy threat
- Familiarity threat
- Self-interest threat (Correct answer)
- Intimidation threat
Correct answer: Self-interest threat
A self-interest threat occurs when a CPA could benefit financially from a relationship with a client, potentially compromising objectivity.
Question 6: Which method of inventory valuation generally results in the LOWEST taxable income during a period of rising prices?
- FIFO (First-In, First-Out)
- LIFO (Last-In, First-Out) (Correct answer)
- Weighted Average
- Specific Identification
Correct answer: LIFO (Last-In, First-Out)
LIFO matches the most recently purchased (higher-cost) inventory against revenues, resulting in higher COGS and lower taxable income during inflationary periods.
Question 7: Which Internal Revenue Code section governs the deductibility of business meals and entertainment expenses?
- IRC Section 162
- IRC Section 274 (Correct answer)
- IRC Section 212
- IRC Section 263
Correct answer: IRC Section 274
IRC Section 274 specifically governs the limitations on deductions for business meals (50% limit) and disallows most entertainment expenses since the 2017 TCJA.
CA Taxation & Regulatory Compliance 4
A taxpayer sells rental property for $500,000 with an adjusted basis of $200,000.
The depreciation previously deducted was $80,000.
Under Section 1250, the recaptured depreciation on residential real property is taxed at a maximum rate of: