CPA Exam — REG (Regulation) flashcards

A depreciation convention under MACRS that assumes all property placed in service or disposed of during a tax year was placed in service or disposed of at the midpoint of that year, regardless of the actual date.

• Applies to most personal property.
• Results in half of a full year's depreciation in the first and last year.
• Built into MACRS depreciation tables.
• Mid-quarter convention applies if more than 40% of property is placed in service in Q4.

Memory trick: MACRS is 'MA'gical 'C'alculations 'R'educe 'S'ales.

Taxpayers can avoid underpayment penalties by paying at least 90% of their current year's tax liability or 100% of their prior year's tax liability (110% if prior year AGI was over $150,000).

• General rule: 90% of current year or 100% of prior year.
• High-income rule (AGI > $150,000): 90% of current year or 110% of prior year.
• Payments are typically made in four equal quarterly installments.

Memory trick: To avoid penalties, take the 'Safe Harbor' route for estimated taxes.

A scholarship or fellowship grant is generally excludable from gross income if it is for qualified education expenses at an eligible educational institution.

• Qualified expenses include tuition, fees, books, supplies, and equipment required for courses.
• Amounts for room and board, travel, and optional equipment are taxable.
• The recipient must be a candidate for a degree.

Memory trick: Scholarship funds for 'Qualified' studies, tax-free they're seen, but 'Non-Qualified' uses, tax liability they glean.

UBIT is a tax on the net income of an unrelated trade or business regularly carried on by an otherwise tax-exempt organization. An unrelated trade or business is one not substantially related to the performance of the organization's exempt purpose.

• Applies to income from an unrelated trade or business.
• Business must be regularly carried on.
• Must not be substantially related to the exempt purpose.
• Subject to a $1,000 specific deduction.

Memory trick: UBIT: Unrelated, Business, Regularly!

The amount realized from the disposition of property is the sum of any money received plus the fair market value of any other property received, reduced by selling expenses.

• Selling price is the starting point.
• Selling expenses reduce the amount realized.
• Used to calculate realized gain or loss.

Memory trick: Amount Realized: 'Price Minus Selling Fees, That's What You See.'

A C corporation recognizes gain on the distribution of appreciated property in a nonliquidating distribution, as if it sold the property at its fair market value.

• Gain = FMV - Adjusted Basis
• No loss recognized on depreciated property distributions
• The gain increases the corporation's E&P

Memory trick: C-Corp's gift, if it's high, a taxable gain, it can't deny.

AMTI is a taxpayer's taxable income refigured by adding back certain tax preference items and making various adjustments, primarily to broaden the tax base for AMT calculation.

• Starts with regular taxable income (or AGI for some calculations).
• Common additions include state and local taxes, miscellaneous itemized deductions (not currently allowable), and certain tax-exempt interest.
• Also includes the bargain element from ISOs and accelerated depreciation differences.

Memory trick: AMTI is your 'Adjusted Income' for the 'Minimum Tax' test.

A shareholder's basis in S corporation stock is increased by income items and decreased by loss/deduction items and distributions.

• Increases for ordinary income, capital gains, tax-exempt income
• Decreases for losses, deductions, nondeductible expenses, distributions
• Basis cannot go below zero

Memory trick: Basis: up for income, down for loss, down for cash out, that's the boss.

The American Opportunity Tax Credit (AOTC) is subject to AGI phase-outs, reducing or eliminating the credit for taxpayers above certain income thresholds.

• Maximum credit is $2,500 per eligible student.
• For MFJ, the AGI phase-out begins at $160,000 and is fully phased out at $180,000 (2023 figures).
• The credit is 100% of first $2,000 and 25% of next $2,000 of expenses.

Memory trick: Education credit: Check AGI, then expenses, then credit limits.

A tax-deferred exchange of real property for other real property of a like-kind. 'Boot' is non-like-kind property (e.g., cash) received, which triggers recognition of gain up to the amount of boot or realized gain, whichever is less.

• Gain is generally deferred, not eliminated.
• Boot received triggers recognized gain.
• Recognized gain is the lesser of boot received or realized gain.
• Boot given does not trigger recognized gain for the giver.

Memory trick: Boot is the 'B' for 'Brought' cash that's taxable.

When boot (e.g., cash) is given in a like-kind exchange, it increases the basis of the new property received. The basis of the new property is generally the adjusted basis of the property given up, plus any boot given, plus any gain recognized, minus any boot received.

• Boot given increases the basis of the property received.
• Boot given does not trigger recognized gain for the giver.
• The basis is adjusted to account for deferred gain or loss.
• Formula: Basis of old property + Boot given + Gain recognized - Boot received.

Memory trick: Basis is the 'B'alance of 'B'efore and 'B'oot.

Contributions to an HSA are tax-deductible (above-the-line), grow tax-free, and qualified distributions are tax-free. Eligibility requires participation in a high-deductible health plan (HDHP).

• Deductible contribution limits vary by year and coverage type (self-only vs. family).
• Individuals age 55 and older can make an additional 'catch-up' contribution.
• Employer contributions count towards the annual limit.
• Must be covered by an HDHP and not enrolled in Medicare.

Memory trick: HSA deduction: HDHP, age 55+ catch-up, employer contribution counts, above the line it floats.

A partner's basis in their partnership interest includes their distributive share of partnership liabilities. Nonrecourse debt is generally allocated among partners in proportion to their share of partnership profits.

• Nonrecourse debt increases partner's basis.
• Allocated based on profit-sharing ratios.
• Recourse debt is allocated based on economic risk of loss.

Memory trick: Recourse Risk, Nonrecourse Profits: The Partner Debt Mix!

A C corporation's charitable contribution deduction is limited to 10% of its taxable income. Taxable income for this purpose is calculated before the charitable contribution deduction itself, the dividends received deduction, the capital loss carryback, and any net operating loss (NOL) carryback, but *after* any NOL carryforward.

• Limit is 10% of adjusted taxable income.
• NOL carryforward reduces income before limit calculation.
• NOL carryback does not reduce income for limit calculation.
• DRD and capital loss carryback also don't reduce income for limit.

Memory trick: Charitable C-Corp: 10% of (Income - NOL CF)!

Individuals not covered by an employer-sponsored retirement plan can generally deduct the full amount of their traditional IRA contributions, up to annual limits, regardless of AGI.

• Annual contribution limit applies ($6,500 for 2023, $7,000 for 2024).
• Catch-up contributions ($1,000) are allowed for those age 50 and over.
• Deduction is 'above-the-line' (reduces AGI).

Memory trick: IRA rules: Covered or Not? Age matters for extra slot.

Annual limits apply to Health Savings Account (HSA) contributions, with additional 'catch-up' contributions allowed for individuals age 55 and over.

• Must be covered by a High-Deductible Health Plan (HDHP).
• Individual limit ($3,850 for 2023).
• Family limit ($7,750 for 2023).
• Catch-up contribution: $1,000 for those age 55+.

Memory trick: HSA: HDHP is key, age 55+ gets you more money.

Allows taxpayers to deduct the full cost of certain qualifying depreciable property in the year it is placed in service, instead of depreciating it over several years. Subject to a maximum dollar limit and a taxable income limitation.

• Applies to tangible personal property used in a trade or business.
• Subject to a maximum dollar limit (e.g., $1,160,000 for 2023).
• Phased out dollar-for-dollar for purchases exceeding a threshold (e.g., $2,890,000 for 2023).
• Cannot create or increase a taxable loss from a trade or business.

Memory trick: 179 is 'ONE' big 'D'eduction, but has 'L'imits.

A tax provision that recaptures gain on the sale of depreciable personal property (and certain real property) as ordinary income to the extent of depreciation deductions taken.

• Applies to personal property and certain real property (e.g., qualified improvement property).
• Recaptures gain as ordinary income up to the lesser of the gain realized or total depreciation taken.
• Any remaining gain after recapture may be Section 1231 gain.
• Prevents taxpayers from converting ordinary deductions (depreciation) into capital gains.

Memory trick: 1245 is for 'P'ersonal property 'P'rofit 'P'urged.

Taxpayers can deduct the amount of interest paid during the year on a qualified student loan, up to a maximum of $2,500. This is an above-the-line deduction.

• Maximum deduction is $2,500 per year.
• Deduction is phased out based on Modified AGI.
• Loan must be for qualified education expenses.
• Taxpayer cannot be claimed as a dependent on someone else's return.

Memory trick: Student Loan Interest: $2,500 is the cap, AGI phase-out, above the line, no dependency trap.

A partner's deductible share of partnership losses is limited to their adjusted basis in the partnership interest. Basis includes their share of partnership liabilities.

• Basis includes both recourse and nonrecourse liabilities (with specific rules for each)
• Losses disallowed by basis limitation are carried forward indefinitely
• Other limitations (at-risk, passive activity) apply after basis limitation

Memory trick: Losses flow through, but basis is king; then at-risk, then passive, the whole thing.

A depreciation convention under MACRS that applies if more than 40% of the total depreciable basis of all personal property placed in service during the tax year is placed in service during the last three months of the tax year.

• Overrides the half-year convention.
• Applies to all personal property placed in service during that tax year.
• Depreciation is calculated as if property was placed in service at the midpoint of the quarter.
• Designed to prevent taxpayers from accelerating depreciation by purchasing assets late in the year.

Memory trick: Mid-Quarter is for 'Q'uarter-end 'Q'uantity.

An activity is not subject to Unrelated Business Income Tax (UBIT) if it is substantially related to the exercise or performance of the organization's exempt purpose. This means the activity contributes importantly to the accomplishment of that purpose.

• Substantially related activities are exempt from UBIT.
• Contribution must be important to the exempt purpose.
• Profit motive alone does not determine relatedness.
• Sales of products derived from exempt activities can be related.

Memory trick: UBIT: Related Mission, No Tax Collision!

Rules that, if met, allow taxpayers to avoid underpayment penalties for estimated taxes. Generally, taxpayers must pay at least 90% of the current year's tax liability or 100% (or 110%) of the prior year's tax liability.

• Safe Harbor 1: Pay 90% of current year's tax.
• Safe Harbor 2: Pay 100% of prior year's tax (if prior AGI <= $150,000).
• Safe Harbor 3: Pay 110% of prior year's tax (if prior AGI > $150,000).
• Payments are typically made in four equal installments.

Memory trick: Estimate your tax, pay 90% current or 100/110% prior, or the IRS will roar!

The Section 179 expense deduction for a tax year cannot exceed the taxpayer's aggregate amount of taxable income derived from the active conduct of any trade or business during that tax year.

• Limits the deduction to business income.
• Any disallowed amount can be carried forward indefinitely.
• Applies after the investment spending phase-out.

Memory trick: 179: 'Spend, Phase, Income, Carry.'

Nonresidential real property generally uses a 39-year recovery period and the mid-month convention under MACRS.

• Land is never depreciable.
• 39-year recovery period.
• Mid-month convention applies regardless of when placed in service during the month.

Memory trick: Real Estate: 'Land's Not, 39-Year, Mid-Month Plot.'

Allows taxpayers to exclude a certain amount of gain from the sale of a principal residence if they meet ownership and use tests. Up to $250,000 for single filers and $500,000 for married filing jointly.

• Must own and use as principal residence for at least 2 of the 5 years preceding the sale.
• Can be used once every 2 years.
• Exclusion is up to $250,000 (single) or $500,000 (MFJ).
• Gain exceeding the exclusion is taxable, usually as capital gain.

Memory trick: 121 means 'HOME' free of some tax.

A tax credit for qualified education expenses paid for an eligible student for the first four years of higher education. It is worth up to $2,500 per eligible student, 40% of which is refundable.

• Credit is 100% of first $2,000 and 25% of next $2,000 of expenses.
• Phase-out for MFJ: $160,000 - $180,000 AGI.
• Phase-out for single/HoH: $80,000 - $90,000 AGI.
• Student must be pursuing a degree and enrolled at least half-time.

Memory trick: American Opportunity Credit: First four years, half-time student, AGI phase-out, $2500 max.

When an S corporation has both AAA and Accumulated E&P, distributions follow a specific ordering: first from AAA (tax-free to basis), then from AE&P (taxable dividend), then return of capital (tax-free to basis), then capital gain.

• AAA distributions are tax-free up to basis.
• AE&P distributions are taxable as dividends.
• Basis is reduced by tax-free distributions.

Memory trick: AAA, E&P, Basis Back: The S Corp Cash Flow Track!

Taxpayers can deduct qualified unreimbursed medical expenses that exceed 7.5% of their Adjusted Gross Income (AGI) as an itemized deduction.

• Threshold is 7.5% of AGI.
• Includes payments for diagnosis, cure, mitigation, treatment, or prevention of disease.
• Also includes prescription drugs, insulin, and certain long-term care services.

Memory trick: Medical expenses are deductible after you 'Heal' past the AGI threshold.

Cash rebates received from a manufacturer or seller for the purchase of property are generally treated as a reduction in the cost basis of the property, not as taxable income.

• Reduces the cost basis of the purchased asset.
• Does not increase gross income.
• Different from rebates received from a third party (e.g., credit card rewards, which may be taxable).

Memory trick: Rebates are like a 'Price Cut' to your asset's basis.

The AMT is a parallel tax system designed to ensure that certain taxpayers, particularly those with high incomes, pay a minimum amount of tax by disallowing or limiting many deductions and credits allowed under the regular tax system.

• Applies if AMT liability is greater than regular tax liability.
• Calculated on Alternative Minimum Taxable Income (AMTI).
• Often impacts taxpayers with significant state and local tax deductions or incentive stock option exercises.

Memory trick: AMT is the 'Fairness Check' for high-income earners.

Contributions to a Traditional IRA may be tax-deductible, reducing taxable income in the year of contribution, subject to income limitations and participation in employer-sponsored retirement plans.

• Maximum contribution limit changes annually ($6,500 for 2023, $7,000 for 2024).
• Catch-up contributions allowed for those age 50 or older ($1,000 for 2023/2024).
• Deduction may be limited if covered by a workplace retirement plan and AGI exceeds certain thresholds.

Memory trick: IRA deductions depend on your 'Age, Income, and Access' to other plans.

C corporations can only deduct capital losses to the extent of capital gains. Net capital losses cannot be deducted against ordinary income.

• No deduction against ordinary income for net capital losses.
• Capital losses are carried back 3 years and forward 5 years.
• Applies strictly to C corporations.

Memory trick: Corporate Capital Losses: Only Gains Can Catch Them!

A C corporation distributing appreciated property in a nonliquidating distribution recognizes gain as if it had sold the property at its fair market value. It does not recognize loss if the property has depreciated.

• Corporation recognizes gain on appreciated property.
• Gain = FMV - Adjusted Basis.
• Losses are generally not recognized on depreciated property distributions.

Memory trick: Corporate Property: Gain for Appreciated, Loss Ignored!

For an S corporation without Accumulated Earnings and Profits (AE&P), distributions are first tax-free to the extent of the Accumulated Adjustments Account (AAA), then tax-free to the extent of the shareholder's stock basis, and finally treated as capital gain.

• First from AAA (tax-free, reduces basis).
• Then return of capital (tax-free, reduces remaining basis).
• Any excess is capital gain.

Memory trick: AAA First, Basis Next, Gain Last for S Corp Cash!

C corporations can deduct charitable contributions up to 10% of their taxable income, calculated before certain deductions.

• Limit is 10% of taxable income
• Taxable income is calculated before the charitable contribution deduction itself
• Excess contributions can be carried forward for 5 years

Memory trick: Charity's cap: Ten percent, no more, for corporate giving's core.

AGI is an intermediate calculation in federal income tax, representing gross income minus specific 'above-the-line' deductions. It's a critical figure influencing eligibility for many tax benefits and limitations.

• Calculated before standard or itemized deductions.
• Often used to determine eligibility for credits, deductions, and phase-outs.
• Includes deductions like IRA contributions, student loan interest, HSA contributions, and educator expenses.

Memory trick: AGI is your 'Gross Income' adjusted for 'Above-the-Line' deductions.

Gain on the disposition of Section 1245 property (depreciable personal property and certain real property) is treated as ordinary income to the extent of depreciation taken. Any remaining gain is Section 1231 gain.

• Primarily applies to personal property.
• Converts gain equal to accumulated depreciation into ordinary income.
• Prevents converting ordinary deductions (depreciation) into capital gains.
• Holding period for Section 1231 consideration is more than one year.

Memory trick: Character is 'C'ritical for tax 'C'ode.

For self-employed individuals, gross income generally refers to the total revenue or receipts generated from their business activities before deducting any business expenses.

• Gross income is the starting point for income tax calculations.
• Business expenses are deducted from gross income on Schedule C to arrive at net profit.
• Net profit from self-employment is then included in the calculation of Adjusted Gross Income (AGI).
• The definition of gross income is broad, encompassing all income from whatever source derived unless specifically excluded.

Memory trick: Gross Income: All In, Before Out; Net Income: After the Cut.

Gains from the sale of personal-use property (e.g., personal residence, car) are taxable as capital gains, but losses are generally not deductible.

• Gains are taxable (capital).
• Losses are not deductible.
• Property must be held for personal use, not for business or investment.

Memory trick: Personal Property: 'Gain is Taxed, Loss is Gone.'

For gifted property, the basis for determining gain is the donor's adjusted basis. The basis for determining loss is the lesser of the donor's adjusted basis or the fair market value at the time of the gift. If the selling price is between these two bases, no gain or loss is recognized.

• Gain Basis = Donor's Adjusted Basis.
• Loss Basis = Lesser of Donor's Basis or FMV at Gift.
• Selling price between bases = No recognized gain or loss.

Memory trick: Gifted Basis: 'Gain from Donor, Loss from Lesser, Middle is No Stressor.'

A non-refundable tax credit of up to $2,000 per qualifying child under age 17. Up to $1,600 (for 2023) may be refundable as the Additional Child Tax Credit.

• Qualifying child must be under age 17 at the end of the tax year.
• Subject to a phase-out based on Modified AGI.
• Phase-out for MFJ begins at $400,000 AGI.
• Phase-out for single/HoH begins at $200,000 AGI.

Memory trick: Child Tax Credit: Under 17, $2000 per kid, AGI phase-out, MFJ $400k, Single $200k.

Certain acquired intangible assets, such as patents, copyrights, goodwill, and covenants not to compete, are amortized over a 15-year (180-month) straight-line period, starting in the month of acquisition.

• 15-year (180-month) straight-line amortization period.
• Amortization begins in the month of acquisition.
• Applies to acquired intangibles, not self-created ones.
• Includes goodwill, going concern value, patents, copyrights, trademarks, etc.

Memory trick: 197 is 'I'ntangibles for 'I'nvestment, 15 years.

Contributions made to a Health Savings Account (HSA) by an eligible individual are deductible 'above-the-line' (an adjustment to income), up to annual limits, and funds grow tax-free.

• Must be covered by a High-Deductible Health Plan (HDHP).
• Annual contribution limits apply ($3,850 self-only, $7,750 family in 2023).
• Catch-up contributions ($1,000) allowed for those age 55 or older.

Memory trick: HSA deductions are for 'Healthy Savings' with a high deductible.

Qualified dividends are a type of dividend payment that is taxed at preferential long-term capital gains rates (0%, 15%, or 20%) rather than ordinary income tax rates.

• The tax rate depends on the taxpayer's ordinary income tax bracket.
• For 2023, the 0% rate applies to taxable income up to $44,625 (single), $89,250 (MFJ).
• The 15% rate applies for taxable income above these thresholds up to $492,300 (single), $553,850 (MFJ).
• The 20% rate applies for taxable income exceeding the 15% bracket thresholds.

Memory trick: Qualified Dividends: 0, 15, 20 are the rates, depending on your income's gates.

Depreciable real property consisting of dwelling units where 80% or more of the gross rental income is from dwelling units. It is depreciated using the straight-line method over 27.5 years with the mid-month convention.

• 27.5-year recovery period.
• Straight-line depreciation method.
• Mid-month convention applies.
• Land is not depreciable.

Memory trick: Residential is 'R' for 'Real' and 'R'egular (straight-line).

The amount an asset can be depreciated over its useful life, typically including the purchase price plus all costs incurred to get the asset ready for its intended use.

• Includes acquisition cost, sales tax, shipping, and installation.
• Does not include financing costs or routine maintenance.
• Used to calculate depreciation expense over the asset's life.

Memory trick: Basis is the 'BIG' cost to get it going.

The deduction for state and local taxes (SALT), including income, sales, real estate, and personal property taxes, is capped at $10,000 per household ($5,000 for married filing separately).

• Applies to state and local income, sales, real estate, and personal property taxes.
• Maximum deductible amount is $10,000 ($5,000 for MFS).
• This limit was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017.

Memory trick: The SALT cap is like a 'Tax Hat' on your state and local taxes.

The Child Tax Credit, a non-refundable credit of up to $2,000 per qualifying child, is subject to phase-out for higher-income taxpayers based on their Modified Adjusted Gross Income (MAGI).

• Phase-out threshold for MFJ is $400,000 (2023).
• Phase-out threshold for single/HoH is $200,000 (2023).
• Credit is reduced by $50 for each $1,000 (or fraction thereof) over the threshold.

Memory trick: The higher your AGI, the 'Less Credit' you get for your kids.

Realized gain or loss is the difference between the amount realized from the disposition of property and its adjusted basis.

• Amount Realized = Sales Price - Selling Expenses.
• Adjusted Basis = Original Cost - Accumulated Depreciation.
• Realized Gain = Amount Realized > Adjusted Basis.

Memory trick: Realized is 'Sale Minus Basis'.

Recourse liabilities are allocated among partners based on who bears the economic risk of loss if the partnership cannot pay the debt. For limited partnerships, this is typically the general partner.

• Allocated based on economic risk of loss
• General partners usually bear economic risk for recourse debt
• Limited partners generally do not share in recourse liabilities unless they guarantee them

Memory trick: Recourse: who's on the hook? Nonrecourse: profit's look.

A partner recognizes gain in a nonliquidating cash distribution only if the cash received exceeds the partner's adjusted basis in their partnership interest. The basis cannot go below zero.

• Gain recognition is limited to cash exceeding basis
• Basis is reduced by the cash distributed, but not below zero
• No loss is recognized in nonliquidating distributions

Memory trick: Cash in hand, if it's more than your share, a gain you'll declare, with basis to spare (zero, that is).

A penalty assessed by the IRS if a taxpayer does not pay enough tax throughout the year, either through withholding or estimated tax payments, by the due dates.

• Generally applies if tax owed (after withholding) is $1,000 or more.
• Can be avoided by meeting specific safe harbor rules (e.g., 90% of current year tax).
• The penalty is calculated on the amount of underpayment for the period it was underpaid.
• Exceptions exist for certain situations, such as casualty, disaster, or disability.

Memory trick: Underpayment penalty? Not if you pay 90% current or 100/110% prior, by the deadline, or you'll feel the fire!

An S corporation recognizes gain on the distribution of appreciated property as if it sold the property for its fair market value.

• Gain recognized equals FMV - Adjusted Basis
• Recognized gain passes through to shareholders
• Losses on distributed property are generally not recognized by the S corp

Memory trick: S-Corp's gift, if it's worth more, a gain is recognized, for sure.

A type of gain on the sale of depreciable real property (Section 1250 property) that is attributable to depreciation taken. It is taxed at a maximum rate of 25% for non-corporate taxpayers.

• Applies to depreciable real property.
• Taxed at a maximum 25% rate for individuals.
• Equals the lesser of total gain or accumulated depreciation.
• Different from Section 1250 ordinary income recapture (which only applies to accelerated depreciation).

Memory trick: 1250 is for 'R'eal property 'R'ate 25%.

Conditional grants to Not-for-Profit (NFP) organizations are recognized as revenue (and classified as With Donor Restrictions) only when the conditions are substantially met or explicitly waived. Restrictions can be temporary (purpose or time) or permanent.

• Conditional grants are not recognized as revenue until conditions are met.
• Purpose restrictions make assets 'With Donor Restrictions'.
• Time restrictions (implied or explicit) also make assets 'With Donor Restrictions'.
• Permanently restricted assets typically involve endowments where principal is maintained indefinitely.

Memory trick: No Strings, Temporary Strings, Forever Strings.

Corporate distributions are taxed as dividends to the extent of current E&P, then accumulated E&P. Amounts exceeding E&P reduce stock basis, then are treated as capital gains.

• Current E&P is exhausted first.
• Accumulated E&P is exhausted second.
• Distributions in excess of total E&P reduce shareholder's stock basis.
• Once basis is zero, further distributions are capital gain.

Memory trick: Current first, Accumulated second, Basis then Capital.

S corporation shareholder stock basis is adjusted yearly for income, gains, losses, deductions, and distributions, generally in a specific order.

• Basis increases for income (taxable and tax-exempt).
• Basis decreases for losses and deductions.
• Basis decreases for distributions.
• Order of adjustments matters: income/gain first, then distributions, then losses/deductions.

Memory trick: Income Up, Losses Down, Distributions Out.

C corporations face double taxation: once at the corporate level on their profits, and again at the shareholder level when those profits are distributed as dividends.

• Corporate profits are taxed first.
• Distributions (dividends) to shareholders are taxed again.
• This is a major disadvantage compared to pass-through entities.

Memory trick: Corporate Profit Pockets Pay Twice.

In a nonliquidating distribution of marketable securities, a partner's basis in the distributed securities is generally their fair market value (FMV), but cannot exceed the partner's adjusted basis in their partnership interest (outside basis) immediately before the distribution, reduced by any cash distributed.

• Generally, partner takes FMV basis in marketable securities.
• Basis is limited by the partner's outside basis.
• Outside basis reduced by any cash distributed first.
• This rule prevents partners from converting what would be cash distributions into property distributions to avoid gain recognition.

Memory trick: Basis from Partnership, but Not More Than My Basis.