TCP CPA FINAL EXAM QUESTIONS WITH ANSWERS
2025/2026 GRADED A+
EE Taxation Readily Determinable Value - EE recognizes ordinary compensation
income in that amount in the year granted
no taxation on the date of exercise (bc @ granted)
Basis of stock is exercise price plus any amount previously taxed on the date of the
grant
Holding period begins with the exercise date
If EE allows the option to lapse (not exercised) there is a capital loss based on the value
of the options previously taxed
EE Taxation No Readily Determinable Value - Taxable event is the exercise date
EE recognizes ordinary compensation income equal to the bargain element- difference
between the fair market value of the stock and the stock option price exercised
Basis of stock is the fair value of the stock when stock option was exercised
Holding period begins with the exercise date
If the option lapse, the EE can deduct a capital loss equal to the price the EE paid for
the option (if any). No other income tax consequences
Statutory Stock Options - Qualified - eligible to receive favorable tax treatment under the
IRC
Two Types - Incentive Stock Options (ISO) and Employee Stock Purchase Plans
(ESPP)
Incentive Stock Options (ISO) - Right given to EE to buy stock in the company at a
discount
Written plan document
EE may not own more than 10% of combined voting power
EE remain EE from date option is granted until 3 months before exercised
Exercisable within 10 years of the grant date
Exercise price may not be less than FMV of the stock @ grant date
Once exercised, held 2 years after grant and 1 year after exercise
EE may exercise up to $100,000 a year
Employee Stock Purchase Price (ESPP) - Allows EE to purchase company stock at a
discounted price & participating EEs contribute to the plan through payroll deductions
Written
EE may not own %5 or more combined voting power
Available to all full time EE aside from highly compensated & not those with than 2
years employment
Option can't be exercised more than 27 months after grant date
No EE can acquire more than $25,000 of stock per year
Once exercised, held 2 years after grant and 1 year after exercise
EE remain EE from date option is granted until 3 months before exercised
, Taxation of Statutory Stock Options - GR - no taxation of the option as compensation
Basis of stock is exercise price plus any amount paid for the option
Gain or Loss on sale of stock is capital if held for 2 years after grant and 1 year after
exercise, if not gain is ordinary up to amount FMV exceeds option price, any excess is
capital gain and any loss os capital loss
If option lapse, GR no deduction
EE may exercise up to $100,000 ISOs a year (excess treated at nonstatutory)
ESPP opinion price is less than FMC ordinary income is recognized when stock is sold
at lesser of difference bw FMV of the stock when sold and exercise price OR difference
between exercise price and FMV of stock on grant date
Excess FMV over purchase price at exercise is a preference item for alternative
minimum tax
Restricted Stock - EE receives actual shares of the ER stock
EE restricted to see until vesting date with restrictions lapse
EE Taxation Restricted Stock - EE recognizes ordinary compensation income for the
FMV of stock on the day it vests and the restrictions lapserestictions
EE basis in stock is the FMV of the vesting date and EE's holding period for the stock
begins on the vesting date
*has option to elect to recognize ordinary compensation income for the FMV of stock on
the grant date
Imputed Interest - Excess of... interest based on the applicable federal rate (AFR)
published regularly by the IRS over any interest actually payable on the loan
Taxpayer - interest income (makes) & may deduct if not personal interest (receives)
Loans Subject to Imputed Interest Rules - Gift Loans
Compensation - Related Loans
Corporation - Shareholder Loans
Tax-Avoidance Loans
Loans to Qualified Continuing Care Facilities
Foreign Income Exclusion - up to $126,500 income earned while residing in a foreign
country
Qualifications:
1. Bona Fide Residence Test - uninterrupted period that6 includes the entire taxable
year
2. Physical Presence Test - Physically present for 330 full days during any 12
consecutive month period.
Alternative Minimum Taxable Income Equation (AMT) - *Pay if more than taxpayer's
regular tax liability
Regular taxable income
2025/2026 GRADED A+
EE Taxation Readily Determinable Value - EE recognizes ordinary compensation
income in that amount in the year granted
no taxation on the date of exercise (bc @ granted)
Basis of stock is exercise price plus any amount previously taxed on the date of the
grant
Holding period begins with the exercise date
If EE allows the option to lapse (not exercised) there is a capital loss based on the value
of the options previously taxed
EE Taxation No Readily Determinable Value - Taxable event is the exercise date
EE recognizes ordinary compensation income equal to the bargain element- difference
between the fair market value of the stock and the stock option price exercised
Basis of stock is the fair value of the stock when stock option was exercised
Holding period begins with the exercise date
If the option lapse, the EE can deduct a capital loss equal to the price the EE paid for
the option (if any). No other income tax consequences
Statutory Stock Options - Qualified - eligible to receive favorable tax treatment under the
IRC
Two Types - Incentive Stock Options (ISO) and Employee Stock Purchase Plans
(ESPP)
Incentive Stock Options (ISO) - Right given to EE to buy stock in the company at a
discount
Written plan document
EE may not own more than 10% of combined voting power
EE remain EE from date option is granted until 3 months before exercised
Exercisable within 10 years of the grant date
Exercise price may not be less than FMV of the stock @ grant date
Once exercised, held 2 years after grant and 1 year after exercise
EE may exercise up to $100,000 a year
Employee Stock Purchase Price (ESPP) - Allows EE to purchase company stock at a
discounted price & participating EEs contribute to the plan through payroll deductions
Written
EE may not own %5 or more combined voting power
Available to all full time EE aside from highly compensated & not those with than 2
years employment
Option can't be exercised more than 27 months after grant date
No EE can acquire more than $25,000 of stock per year
Once exercised, held 2 years after grant and 1 year after exercise
EE remain EE from date option is granted until 3 months before exercised
, Taxation of Statutory Stock Options - GR - no taxation of the option as compensation
Basis of stock is exercise price plus any amount paid for the option
Gain or Loss on sale of stock is capital if held for 2 years after grant and 1 year after
exercise, if not gain is ordinary up to amount FMV exceeds option price, any excess is
capital gain and any loss os capital loss
If option lapse, GR no deduction
EE may exercise up to $100,000 ISOs a year (excess treated at nonstatutory)
ESPP opinion price is less than FMC ordinary income is recognized when stock is sold
at lesser of difference bw FMV of the stock when sold and exercise price OR difference
between exercise price and FMV of stock on grant date
Excess FMV over purchase price at exercise is a preference item for alternative
minimum tax
Restricted Stock - EE receives actual shares of the ER stock
EE restricted to see until vesting date with restrictions lapse
EE Taxation Restricted Stock - EE recognizes ordinary compensation income for the
FMV of stock on the day it vests and the restrictions lapserestictions
EE basis in stock is the FMV of the vesting date and EE's holding period for the stock
begins on the vesting date
*has option to elect to recognize ordinary compensation income for the FMV of stock on
the grant date
Imputed Interest - Excess of... interest based on the applicable federal rate (AFR)
published regularly by the IRS over any interest actually payable on the loan
Taxpayer - interest income (makes) & may deduct if not personal interest (receives)
Loans Subject to Imputed Interest Rules - Gift Loans
Compensation - Related Loans
Corporation - Shareholder Loans
Tax-Avoidance Loans
Loans to Qualified Continuing Care Facilities
Foreign Income Exclusion - up to $126,500 income earned while residing in a foreign
country
Qualifications:
1. Bona Fide Residence Test - uninterrupted period that6 includes the entire taxable
year
2. Physical Presence Test - Physically present for 330 full days during any 12
consecutive month period.
Alternative Minimum Taxable Income Equation (AMT) - *Pay if more than taxpayer's
regular tax liability
Regular taxable income
