CPA Exam — REG (Regulation) flashcards

Distributions from an S corporation with accumulated earnings and profits (AE&P) are sourced in a specific order: AAA, then AE&P, then return of capital (shareholder basis), then capital gain.

• AAA distributions are tax-free.
• AE&P distributions are taxable dividends.
• Return of capital reduces shareholder basis.
• Capital gain applies after basis is exhausted.

Memory trick: AAA first, then AE&P, then your basis, then capital gain, that's the S Corp distribution chain.

Partnerships can deduct up to $5,000 of organizational costs and $5,000 of start-up costs immediately, with the remaining amounts amortized over 180 months.

• Immediate deduction of $5,000 for each category.
• Immediate deduction phases out dollar-for-dollar for costs over $50,000 per category.
• Remaining costs are amortized over 180 months (15 years) beginning with the month the business starts.

Memory trick: Start Small, Stretch Long.

UBTI arises from a trade or business regularly carried on by a tax-exempt organization that is not substantially related to the organization's exempt purpose.

• Must be a 'trade or business'.
• Must be 'regularly carried on'.
• Must NOT be 'substantially related' to the exempt purpose.
• Use of funds for exempt purpose does not make an unrelated activity exempt.

Memory trick: Trade Regularly Not Related.

Partnership nonrecourse debt is allocated among partners based on their share of partnership profits, after considering minimum gain and Section 704(c) minimum gain.

• Allocated based on profit-sharing ratios.
• Minimum gain allocations take precedence.
• Section 704(c) minimum gain allocations also take precedence.
• Increases a partner's basis in their partnership interest.

Memory trick: Recourse to Responsibility, Nonrecourse to Profit.

Nonrecourse liabilities are generally allocated among partners in proportion to their share of partnership profits.

• Increases a partner's basis.
• Allocated based on profit-sharing ratios.
• No partner bears economic risk of loss for nonrecourse debt.

Memory trick: Nonrecourse debt, profit shares are the key, no one truly 'owns' it, you see.

Permanently restricted net assets result from donor stipulations that the assets (e.g., endowment principal) be held in perpetuity, with only the income or specified portion of the income available for use.

• Donor-imposed restriction.
• Principal must be maintained indefinitely.
• Typically involves endowments.
• Income generated may be temporarily or without donor restrictions.

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

A C corporation recognizes gain (but not loss) on the distribution of appreciated property to its shareholders in a nonliquidating distribution.

• Gain recognized equals FMV minus adjusted basis.
• Losses are generally not recognized.
• Applies to nonliquidating distributions.

Memory trick: Gain on corporate property, but losses are ignored, a common tax story.

The determination of whether the half-year or mid-quarter convention applies for MACRS personal property is based on the aggregate depreciable basis of all personal property placed in service during the tax year.

• If >40% of basis is placed in service in Q4, mid-quarter applies to ALL personal property.
• Otherwise, half-year convention applies to ALL personal property.
• Real property always uses the mid-month convention.

Memory trick: Don't rush to Half-Year; check Q4's weight, dear!

The amount on which depreciation can be claimed for real estate, typically the cost of the building plus allocable acquisition costs, excluding the value of the land.

• Land is never depreciable.
• Acquisition costs (legal fees, commissions) are added to the basis.
• Basis is allocated between land and building.

Memory trick: Building's Base: Cost - Land + Extra.

C corporations can carry back net capital losses three years and carry forward five years to offset capital gains in those years.

• Losses are carried back to the earliest year first.
• The carryback amount cannot exceed the capital gain of the carryback year.
• Carrybacks and carryforwards retain their character as short-term or long-term.

Memory trick: Three Back, Five Forward, First Gain Gets Funds.

In a like-kind exchange, if a taxpayer receives 'boot' (non-like-kind property, typically cash), gain is recognized to the lesser of the realized gain or the fair market value of the boot received.

• Like-kind exchanges generally defer gain/loss.
• Boot received triggers gain recognition.
• Recognized gain is limited to the amount of boot received.

Memory trick: Boot's the limit for your recognized gain.

If a single depreciable personal property asset is placed in service in the last quarter of the tax year, the mid-quarter convention automatically applies, as 100% of the property's basis was placed in service in Q4.

• Triggered if >40% of total personal property basis is in service in Q4.
• If only one asset, and it's in Q4, mid-quarter applies.
• Depreciation calculated from the mid-point of the quarter.

Memory trick: Q4's 40% rule: If it's all in the last, mid-quarter's fast!

S corporation distributions with accumulated earnings and profits (AE&P) follow a specific order: first from Accumulated Adjustments Account (AAA), then from AE&P, then return of capital, and finally capital gain.

• AAA distributions are tax-free to the extent of basis.
• AE&P distributions are taxable dividends.
• Return of capital reduces stock basis.
• Distributions exceeding basis after all other categories are capital gains.

Memory trick: AAA Always Answers, AE&P Adds Earnings, Basis Becomes Balance, Gain Goes Last.

Gain from the sale or exchange of a capital asset held for one year or less. Short-term capital gains are taxed at ordinary income tax rates.

• Holding period is one year or less.
• Taxed at ordinary income rates.
• Applies to capital assets (e.g., stocks, bonds, investment property).

Memory trick: One year or less, short-term stress; over one year, long-term cheer!

Unrelated Business Income Tax (UBIT) applies to income from a trade or business regularly carried on by a tax-exempt organization that is not substantially related to its exempt purpose.

• An activity is 'substantially related' if it contributes importantly to the accomplishment of the organization's exempt purpose.
• The sale of items that enhance the organization's educational or religious mission is generally related.
• Souvenir sales may be unrelated unless they have a direct educational or promotional link to the exempt purpose.

Memory trick: Unrelated Business Isn't Tax-Exempt.

A partner's deductible share of partnership losses is limited to their adjusted basis in their partnership interest at the end of the partnership year.

• Basis includes capital contributions and share of partnership debt.
• Losses exceeding basis are suspended and carried forward indefinitely.
• Suspended losses can be deducted in future years if basis increases.

Memory trick: Basis Blocks Big Bad Losses.

A single taxpayer can exclude up to $250,000 of gain from the sale of a primary residence if they owned and used the home as their main home for at least two out of the five years preceding the sale.

• Maximum exclusion: $250,000 for single, $500,000 for married filing jointly.
• Must meet ownership and use tests (2 out of 5 years).
• Can only be used once every two years.

Memory trick: Two-five rule, then exclude your cool. Single gets $250k, married gets more play.

The original cost of land, increased by capitalized acquisition costs and capital improvements, and decreased by any casualty losses or other reductions. Property taxes are typically expensed, not added to basis.

• Original cost includes purchase price and acquisition costs (legal, survey, etc.).
• Capital improvements (e.g., special assessments for public improvements) increase basis.
• Property taxes and interest are generally expensed, not capitalized to land basis.

Memory trick: Basis starts, then adds up, and subtracts down.

For gifted property, the basis for determining gain is the donor's adjusted basis, but the basis for determining loss is the property's FMV at the time of the gift. If the selling price is between these two amounts, no gain or loss is recognized.

• Gain basis = Donor's adjusted basis.
• Loss basis = FMV at gift date.
• If sale price is between gain and loss basis, no gain/loss recognized.

Memory trick: Gifted Basis, Two Faces: Gain's High, Loss's Low, Middle is Zero Show.

A principal is generally not liable for the torts (negligent acts) of an independent contractor or their employees, as the principal does not control the methods of the contractor's work.

• Principal controls only the result, not the means of performance.
• Exceptions exist for inherently dangerous activities, non-delegable duties, or principal's own negligence.
• Distinct from employer-employee relationships where respondeat superior applies.

Memory trick: Independent Contractor? Hands-off means no blame, unless you hired a flame.

The initial administrative step for appealing an IRC Sec. 6694 preparer penalty is typically to submit a written protest to the IRS service center, which can lead to a conference with the IRS Office of Appeals.

• IRC Sec. 6694 penalties relate to preparer conduct (e.g., unreasonable positions).
• Administrative appeals precede judicial appeals (e.g., Tax Court).
• A written protest is a common initial step for formal administrative appeals.
• Thresholds exist for formal protest vs. informal request for conference.

Memory trick: First, Protest and then you may progress!

Authority that a third party reasonably believes an agent has based on the principal's words or conduct, even if the agent does not have actual (express or implied) authority.

• Created by the principal's actions, not the agent's.
• Third party must reasonably believe the agent has authority.
• Principal is bound by contracts made under apparent authority.

Memory trick: What you SHOW is what you OWE, even if you didn't KNOW.

SSTS No. 1 requires a CPA to have a good faith belief that a tax return position has at least a 'realistic possibility of being sustained on its merits' to recommend it or prepare a return including it. If not, the CPA should advise against it.

• Minimum standard is 'realistic possibility' (1-in-3 chance).
• If standard not met, CPA should not prepare return with that position.
• Disclosure does not cure a lack of realistic possibility.
• Applies to all tax return positions, not just tax shelters.

Memory trick: No solid ground? Then don't write it down!

Under Circular 230, a tax practitioner must assert any recognized privilege, such as attorney-client privilege, on behalf of their client when faced with a demand for privileged information by the IRS.

• Practitioner's duty to protect client's privileged information.
• Applies to recognized privileges (e.g., attorney-client, tax practitioner-client).
• Assertion means refusing to produce documents/information based on privilege.
• Practitioner should not unilaterally waive privilege.

Memory trick: Privilege is sacred, assert it with might!

Gain on the sale of a Section 197 intangible asset (like a patent) is generally treated as ordinary income to the extent of prior amortization, and any excess gain is also ordinary income.

• Section 197 intangibles are amortized over 15 years.
• Gain on disposition is ordinary income to the extent of prior amortization.
• Any gain exceeding amortization is also ordinary income, not Section 1231 gain.

Memory trick: Intangible Amortization, All Ordinary Temptation

Under Circular 230, a tax practitioner must make reasonable inquiries when client-provided information appears implausible or questionable, even if not intentionally misleading.

• Applies to all information provided by clients.
• Requires reasonable inquiries, not blind acceptance.
• Does not automatically require third-party verification or refusal.
• Aims to ensure accuracy and completeness of tax returns.

Memory trick: Questionable data? Dig for the truth!

When a taxpayer pays cash (boot) in a like-kind exchange, gain or loss is generally not recognized, but the basis of the new asset is increased by the boot paid.

• No gain recognized if boot is paid, only if received.
• Basis of new property increases by boot paid.
• Realized gain or loss is deferred until the new property is sold.

Memory trick: Boot Received, Gain Seen; Boot Paid, Gain Laid (aside)

A shipping term where the seller's responsibility ends and the buyer's responsibility begins when the goods are delivered to the carrier at the shipping point. Risk of loss transfers to the buyer at this point.

• Seller pays to get goods to carrier.
• Buyer pays freight from shipping point to destination.
• Risk of loss transfers to buyer at shipping point.

Memory trick: F.O.B. Shipping Point? Once it's on the truck, it's YOUR bad luck!

Temporarily restricted net assets are those whose use by a not-for-profit organization is limited by donor-imposed stipulations that either expire with the passage of time or can be satisfied by the actions of the organization (e.g., spending for a specific purpose).

• Donor-imposed restrictions.
• Restrictions expire by time or purpose fulfillment.
• Funds become unrestricted when restrictions are met.
• Reported separately from unrestricted and permanently restricted net assets.

Memory trick: Unrestricted is 'Free', Temporary has 'Time', Permanent is 'Forever' for the NFP.

An 'unrelated trade or business' is any trade or business regularly carried on by an exempt organization that is not substantially related to the performance by the organization of its exempt functions. Income from such activities may be subject to UBIT.

• Must be a 'trade or business'.
• Must be 'regularly carried on'.
• Must 'not be substantially related' to exempt purpose.
• Certain exceptions apply (e.g., convenience, volunteer work, passive income).

Memory trick: If it's a 'Business' that's 'Regular' and 'Not related', then it's UBIT 'Taxable'.

A C corporation recognizes gain (but not loss) on the distribution of appreciated property to its shareholders as if the corporation sold the property at its fair market value (FMV) at the time of distribution. The gain is FMV minus the adjusted basis.

• Gain recognized = FMV - Adjusted Basis.
• Losses are generally not recognized on distributions to shareholders.
• Applies to nonliquidating distributions.
• Increases the corporation's E&P.

Memory trick: When a Corp 'gifts' appreciated assets, it 'sells' them first.

An activity conducted by a tax-exempt organization is 'substantially related' if it contributes importantly to the accomplishment of the organization's exempt purpose. Income from such activities is generally not subject to Unrelated Business Income Tax (UBIT).

• Activity must contribute importantly to exempt purpose.
• Size and extent of the activity are considered.
• Not subject to UBIT if substantially related.

Memory trick: Remember, if the business 'helps' the mission, no UBIT 'hell' for the organization.

Net assets with donor restrictions are classified as 'temporarily restricted' when the donor imposes restrictions that expire with the passage of time or when a specified purpose has been fulfilled.

• Restrictions can be for specific programs, time periods, or capital projects.
• When the restriction is met, the net assets are reclassified as 'without donor restrictions'.
• This classification is based on FASB ASC 958.

Memory trick: NFP Assets: Free, For Now, Forever.