Multiple-Choice Questions (MCQs)
Standard exam questions with one correct answer.
Getting Started: REG Exam Essentials
Free knowledge base
CPA Exam — REG (Regulation) — key terms, tricks & tips
Everything from the course in one searchable place: 270 entries. Use it to review before a practice test or look up a word you forgot.
270 results
Task-Based Simulations (TBSs)
Questions requiring application of knowledge to realistic scenarios.
Getting Started: REG Exam Essentials
Testlet
A set of questions within the exam.
Getting Started: REG Exam Essentials
Scaled Score
A converted raw score, adjusted for question difficulty.
Getting Started: REG Exam Essentials
Content Areas
Specific topics covered on the exam.
Getting Started: REG Exam Essentials
Adaptive Testing
Difficulty of later testlets adjusts based on performance.
Getting Started: REG Exam Essentials
Federal Taxation of Entities
Covers tax rules for corporations, partnerships, etc.
Getting Started: REG Exam Essentials
REG Exam Structure, Scoring, and Study Strategies
To remember the REG content areas by weight (roughly increasing): E.B.P.I.E. - Ethics, Business Law, Property, Individuals, Entities.
Getting Started: REG Exam Essentials
REG Exam Structure, Scoring, and Study Strategies
For California candidates, remember that while REG focuses on federal tax law, understanding the general principles of business law (e.g., contracts, agency) is fundamental and often aligns with state-specific applications, even if the exam doesn't test CA law specifically. Keywords like 'Uniform Commercial Code' or 'common law' indicate business law topics.
Getting Started: REG Exam Essentials
REG Exam Structure, Scoring, and Study Strategies
Underestimating the importance of TBSs, as they carry 50% of the score.
Getting Started: REG Exam Essentials
REG Exam Structure, Scoring, and Study Strategies
Neglecting weaker content areas, assuming strong areas will compensate entirely.
Getting Started: REG Exam Essentials
REG Exam Structure, Scoring, and Study Strategies
Not practicing time management, leading to unfinished testlets on exam day.
Getting Started: REG Exam Essentials
AICPA
American Institute of Certified Public Accountants; develops and scores the CPA Exam.
Getting Started: REG Exam Essentials
CSO
Content Specification Outline; official blueprint detailing exam topics and expectations.
Getting Started: REG Exam Essentials
Content Area
Major section of the REG exam, each with a percentage weight.
Getting Started: REG Exam Essentials
Task Statement
Specific action or skill candidates must demonstrate for a topic.
Getting Started: REG Exam Essentials
Weighting
Percentage indicating a content area's approximate representation on the exam.
Getting Started: REG Exam Essentials
REG Section
The Regulation section of the CPA Exam, covering tax and business law.
Getting Started: REG Exam Essentials
Navigating the AICPA Content Specification Outlines (CSOs)
CSO: 'C'an 'S'tudy 'O'utline – it outlines what you can study!
Getting Started: REG Exam Essentials
Navigating the AICPA Content Specification Outlines (CSOs)
The REG CSO explicitly lists 'Federal Taxation of Individuals' (Area II) and 'Federal Taxation of Entities' (Area III) as significant portions of the exam. Memorize the approximate percentage weightings for each major content area to guide your study time allocation.
Getting Started: REG Exam Essentials
Navigating the AICPA Content Specification Outlines (CSOs)
Ignoring CSOs and studying topics randomly without understanding their importance or weighting.
Getting Started: REG Exam Essentials
Navigating the AICPA Content Specification Outlines (CSOs)
Not using the task statements to self-assess knowledge gaps; just reading instead of actively practicing the skills.
Getting Started: REG Exam Essentials
Navigating the AICPA Content Specification Outlines (CSOs)
Failing to review CSOs periodically to ensure study remains aligned with exam objectives.
Getting Started: REG Exam Essentials
Integrity
Being honest and straightforward in all professional relationships.
Ethics, Responsibilities, and Tax Procedures
Objectivity
Impartiality and freedom from conflicts of interest.
Ethics, Responsibilities, and Tax Procedures
Independence
Freedom from relationships that impair objectivity (for attest services).
Ethics, Responsibilities, and Tax Procedures
Due Care
Exercising reasonable care and diligence in professional services.
Ethics, Responsibilities, and Tax Procedures
Competence
Possessing the necessary knowledge and skill for professional services.
Ethics, Responsibilities, and Tax Procedures
Confidentiality
Protecting client information from unauthorized disclosure.
Ethics, Responsibilities, and Tax Procedures
Conflict of Interest
Situation where personal interests could bias professional judgment.
Ethics, Responsibilities, and Tax Procedures
Ethical Conduct & Professional Responsibilities
I C O D C: **I**ntegrity, **C**onfidentiality, **O**bjectivity, **D**ue Care, **C**ompetence – the core ethical duties!
Ethics, Responsibilities, and Tax Procedures
Ethical Conduct & Professional Responsibilities
The AICPA Code of Professional Conduct is the primary ethical framework tested. Pay close attention to the General Principles and Rules of Conduct, especially those related to independence, integrity, and objectivity. Keywords like 'attest services' often trigger independence rules.
Ethics, Responsibilities, and Tax Procedures
Ethical Conduct & Professional Responsibilities
Confusing the level of independence required for tax services versus attest services.
Ethics, Responsibilities, and Tax Procedures
Ethical Conduct & Professional Responsibilities
Failing to recognize and disclose potential conflicts of interest.
Ethics, Responsibilities, and Tax Procedures
Ethical Conduct & Professional Responsibilities
Not staying current with tax law changes, leading to a lack of competence.
Ethics, Responsibilities, and Tax Procedures
Circular 230
Regulations governing practice before the IRS by tax professionals.
Ethics, Responsibilities, and Tax Procedures
Due Diligence
Reasonable effort to ascertain correctness of information.
Ethics, Responsibilities, and Tax Procedures
Understatement of Liability
Taxpayer's actual tax is greater than reported tax.
Ethics, Responsibilities, and Tax Procedures
Aiding and Abetting
Assisting in the preparation of a document known to understate tax.
Ethics, Responsibilities, and Tax Procedures
Willful Conduct
Intentional disregard of rules or regulations.
Ethics, Responsibilities, and Tax Procedures
Reckless Conduct
Gross indifference to rules or regulations.
Ethics, Responsibilities, and Tax Procedures
Disbarment
Revocation of privilege to practice before the IRS.
Ethics, Responsibilities, and Tax Procedures
Censure
Public reprimand for professional misconduct.
Ethics, Responsibilities, and Tax Procedures
Circular 230 and Tax Preparer Penalties
To remember the key preparer penalties, think 'A.U.D.I.T.': Aiding & Abetting, Understatement, Due diligence failure, Information return failure, Timeliness/signature issues.
Ethics, Responsibilities, and Tax Procedures
Circular 230 and Tax Preparer Penalties
On the CPA Exam, remember that the 'more likely than not' standard (greater than 50% chance) is generally required for tax shelters and listed transactions to avoid penalties, while a 'reasonable basis' (at least 20%) is the minimum for non-shelter positions to avoid certain preparer penalties if disclosed.
Ethics, Responsibilities, and Tax Procedures
Circular 230 and Tax Preparer Penalties
Assuming Circular 230 only applies to CPAs; it applies to all practitioners before the IRS.
Ethics, Responsibilities, and Tax Procedures
Circular 230 and Tax Preparer Penalties
Confusing the 'reasonable basis' standard with the 'substantial authority' or 'more likely than not' standards for penalty avoidance.
Ethics, Responsibilities, and Tax Procedures
Circular 230 and Tax Preparer Penalties
Believing that client-provided information can be used without question, even if it seems suspicious.
Ethics, Responsibilities, and Tax Procedures
Correspondence Audit
IRS audit conducted by mail.
Ethics, Responsibilities, and Tax Procedures
Notice of Deficiency
90-day letter allowing taxpayer to petition Tax Court.
Ethics, Responsibilities, and Tax Procedures
IRS Office of Appeals
Independent administrative body for tax dispute resolution.
Ethics, Responsibilities, and Tax Procedures
U.S. Tax Court
Court where taxpayers can litigate without paying tax first.
Ethics, Responsibilities, and Tax Procedures
Notice of Federal Tax Lien
Public notice of government's claim against property.
Ethics, Responsibilities, and Tax Procedures
Notice of Levy
IRS action to seize property or wages.
Ethics, Responsibilities, and Tax Procedures
Offer in Compromise (OIC)
Agreement to resolve tax liability for a lower amount.
Ethics, Responsibilities, and Tax Procedures
Collection Due Process (CDP)
Hearing to challenge IRS collection actions.
Ethics, Responsibilities, and Tax Procedures
Federal Tax Procedures: Audits, Appeals, Collections
For the three main courts: 'T-D-C' - Tax Court (no pay), District Court (pay first), Claims Court (pay first).
Ethics, Responsibilities, and Tax Procedures
Federal Tax Procedures: Audits, Appeals, Collections
The CPA Exam often tests the specific deadlines for responding to IRS notices, such as the 30-day letter (to appeal to IRS Appeals) and the 90-day letter (to petition Tax Court). Memorize these timeframes.
Ethics, Responsibilities, and Tax Procedures
Federal Tax Procedures: Audits, Appeals, Collections
Ignoring IRS notices or deadlines, which can lead to default judgments or escalated collection actions.
Ethics, Responsibilities, and Tax Procedures
Federal Tax Procedures: Audits, Appeals, Collections
Failing to adequately document deductions or income, making it difficult to defend during an audit.
Ethics, Responsibilities, and Tax Procedures
Federal Tax Procedures: Audits, Appeals, Collections
Not understanding the difference between the various courts and when each is appropriate for a client's case.
Ethics, Responsibilities, and Tax Procedures
Taxpayer Bill of Rights
Fundamental rights taxpayers have when dealing with the IRS.
Ethics, Responsibilities, and Tax Procedures
Unreasonable Position
Tax position lacking realistic possibility of being sustained on merits.
Ethics, Responsibilities, and Tax Procedures
Preparer Penalty
Fines imposed on tax preparers for non-compliance.
Ethics, Responsibilities, and Tax Procedures
Taxpayer and Preparer Rights and Responsibilities
For preparer penalties: 'U-R-W-R': Unreasonable is Realistic, Willful is Reckless. (Unreasonable position: no realistic possibility. Willful/Reckless: higher penalty).
Ethics, Responsibilities, and Tax Procedures
Taxpayer and Preparer Rights and Responsibilities
The CPA exam frequently tests the specific dollar amounts for preparer penalties related to understatements and other failures. Memorize the 'greater of' rules for unreasonable positions and willful/reckless conduct.
Ethics, Responsibilities, and Tax Procedures
Taxpayer and Preparer Rights and Responsibilities
Assuming client-provided information is always accurate without verification.
Ethics, Responsibilities, and Tax Procedures
Taxpayer and Preparer Rights and Responsibilities
Not advising clients about potential penalties for aggressive tax positions.
Ethics, Responsibilities, and Tax Procedures
Taxpayer and Preparer Rights and Responsibilities
Failing to understand the difference in penalty amounts for various preparer misconducts.
Ethics, Responsibilities, and Tax Procedures
Agency Relationship
One party acts for another, subject to control.
Foundations of Business Law
Fiduciary Duty
Agent's obligation to act in principal's best interest.
Foundations of Business Law
Actual Authority
Authority explicitly or implicitly granted by principal.
Foundations of Business Law
Apparent Authority
Third party's reasonable belief agent has authority.
Foundations of Business Law
Contract
Legally enforceable agreement between two or more parties.
Foundations of Business Law
Consideration
Bargained-for exchange of something of legal value.
Foundations of Business Law
Statute of Frauds
Requires certain contracts to be in writing to be enforceable.
Foundations of Business Law
Legal Capacity
Competence of parties to enter into a contract.
Foundations of Business Law
Agency Relationships and Contracts Fundamentals
For a valid contract, remember 'OACCL': Offer, Acceptance, Consideration, Capacity, Legality. If any letter is missing, the contract might be whack-y!
Foundations of Business Law
Agency Relationships and Contracts Fundamentals
The CPA Exam frequently tests the distinction between actual and apparent authority. Remember that apparent authority protects third parties who reasonably rely on the principal's manifestations, even if the agent acts without actual authority. Also, know the specific types of contracts that fall under the Statute of Frauds.
Foundations of Business Law
Agency Relationships and Contracts Fundamentals
Confusing actual authority (given by principal to agent) with apparent authority (created by principal's actions towards a third party).
Foundations of Business Law
Agency Relationships and Contracts Fundamentals
Forgetting that consideration must be a 'bargained-for exchange' and not merely a gift or past performance.
Foundations of Business Law
Agency Relationships and Contracts Fundamentals
Assuming all contracts must be in writing; only specific types fall under the Statute of Frauds.
Foundations of Business Law
Debtor
Party who owes a debt to another.
Foundations of Business Law
Creditor
Party to whom a debt is owed.
Foundations of Business Law
Secured Transaction
Debt backed by specific collateral property.
Foundations of Business Law
Collateral
Property subject to a security interest.
Foundations of Business Law
Security Interest
Creditor's legal right in debtor's collateral.
Foundations of Business Law
Attachment
Security interest becomes enforceable against the debtor.
Foundations of Business Law
Perfection
Establishes creditor's rights against third parties.
Foundations of Business Law
Financing Statement (UCC-1)
Public notice filed to perfect a security interest.
Foundations of Business Law
Debtor-Creditor Relationships & Secured Transactions
To remember the requirements for Attachment: 'VDR' - Value given, Debtor has Rights, and a (written) security agreement is Required.
Foundations of Business Law
Debtor-Creditor Relationships & Secured Transactions
The CPA Exam will test your understanding of UCC Article 9 rules for attachment and perfection. Pay close attention to the requirements for each step and the methods of perfection, as these are frequently examined.
Foundations of Business Law
Debtor-Creditor Relationships & Secured Transactions
Confusing attachment (enforceable against debtor) with perfection (enforceable against third parties).
Foundations of Business Law
Debtor-Creditor Relationships & Secured Transactions
Forgetting that a security agreement usually needs to be in writing and signed by the debtor.
Foundations of Business Law
Debtor-Creditor Relationships & Secured Transactions
Not knowing the different methods of perfection based on collateral type.
Foundations of Business Law
Securities Act of 1933
Regulates initial public offerings and sales of securities.
Foundations of Business Law
Securities Exchange Act of 1934
Regulates secondary trading, establishes SEC, ongoing reporting.
Foundations of Business Law
Registration Statement
Document filed with SEC for public offerings, disclosing company info.
Foundations of Business Law
Prospectus
Part of registration statement, provided to potential investors.
Foundations of Business Law
Insider Trading
Trading securities using non-public, material information.
Foundations of Business Law
Sherman Act
Prohibits anti-competitive agreements and monopolization.
Foundations of Business Law
Clayton Act
Addresses specific anti-competitive practices like certain mergers.
Foundations of Business Law
Federal Trade Commission (FTC)
Agency enforcing antitrust laws and consumer protection.
Foundations of Business Law
Government Regulation: Securities and Antitrust
For the Securities Acts, think '33 is new, '34 is old. '33 for New Issues (IPO), '34 for Ongoing Disclosure (10-K, 10-Q) and the SEC.
Foundations of Business Law
Government Regulation: Securities and Antitrust
The CPA exam frequently tests the distinction between the Securities Act of 1933 (new issues, registration) and the Securities Exchange Act of 1934 (secondary market, SEC, periodic reports, anti-fraud Rule 10b-5). Memorize these core differences.
Foundations of Business Law
Government Regulation: Securities and Antitrust
Confusing the Securities Act of 1933 (initial offerings) with the Securities Exchange Act of 1934 (secondary market and ongoing reporting).
Foundations of Business Law
Government Regulation: Securities and Antitrust
Underestimating the severity of penalties for insider trading or antitrust violations, which can include both civil and criminal charges.
Foundations of Business Law
Government Regulation: Securities and Antitrust
Failing to recognize common antitrust violations like price fixing or bid rigging, assuming they only apply to large corporations.
Foundations of Business Law
Uniform Commercial Code (UCC)
Standardized laws governing commercial transactions across states.
Foundations of Business Law
Chapter 7 Bankruptcy
Liquidation process where non-exempt assets are sold to pay creditors.
Foundations of Business Law
Chapter 11 Bankruptcy
Reorganization process, primarily for businesses, to restructure debts.
Foundations of Business Law
Chapter 13 Bankruptcy
Repayment plan for individuals with regular income over 3-5 years.
Foundations of Business Law
Automatic Stay
Injunction that halts most creditor collection actions upon bankruptcy filing.
Foundations of Business Law
Discharge of Debts
Legal release of a debtor from personal liability for certain debts.
Foundations of Business Law
Secured Creditor
Creditor with a lien on specific property, giving higher payment priority.
Foundations of Business Law
Unsecured Creditor
Creditor without collateral; generally lower priority in bankruptcy.
Foundations of Business Law
Uniform Commercial Code (UCC) and Bankruptcy Basics
To remember the main bankruptcy chapters: '7' is for 'Sell' (liquidation), '11' is for 'Reorganize' (think of a business reorganizing its finances), and '13' is for 'Plan' (a repayment plan for individuals).
Foundations of Business Law
Uniform Commercial Code (UCC) and Bankruptcy Basics
For the CPA exam, remember that while the UCC aims for uniformity, states can and do have minor variations. Always assume the general UCC rules apply unless a specific state variation is mentioned in a question. For bankruptcy, focus on the federal Bankruptcy Code, as it supersedes state law.
Foundations of Business Law
Uniform Commercial Code (UCC) and Bankruptcy Basics
Confusing the scope of UCC articles (e.g., applying Article 2 to services instead of goods).
Foundations of Business Law
Uniform Commercial Code (UCC) and Bankruptcy Basics
Assuming all debts are dischargeable in bankruptcy.
Foundations of Business Law
Uniform Commercial Code (UCC) and Bankruptcy Basics
Forgetting that the automatic stay is immediate and legally binding upon filing.
Foundations of Business Law
Initial Basis
Original cost used to determine gain/loss.
Taxation of Property Transactions
Adjusted Basis
Initial basis modified by additions/subtractions.
Taxation of Property Transactions
Cost Recovery
Deducting asset cost over its useful life.
Taxation of Property Transactions
Depreciation
Cost recovery for tangible assets.
Taxation of Property Transactions
Amortization
Cost recovery for intangible assets.
Taxation of Property Transactions
Step-up in Basis
Basis of inherited property to FMV at death.
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
BIG (Basis Is Greater) for Gifted Loss - If FMV at gift is lower than donor's basis, use FMV for loss calculation.
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
The CPA exam frequently tests the basis rules for gifted and inherited property. Pay close attention to the 'dual basis' rule for gifts when FMV is less than the donor's basis, and the 'step-up in basis' for inherited property. These are common traps.
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
Confusing repairs (expensed) with capital improvements (added to basis).
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
Failing to apply the dual basis rule for gifted property when FMV is less than the donor's basis.
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
Incorrectly using the donor's basis for inherited property instead of the FMV at death.
Taxation of Property Transactions
Basis of Assets: Initial, Adjusted, and Cost Recovery
Forgetting to reduce basis by cost recovery deductions taken.
Taxation of Property Transactions
Amount Realized
Cash, FMV of property received, and liabilities assumed by buyer.
Taxation of Property Transactions
Recognized Gain/Loss
The portion of realized gain/loss included in taxable income.
Taxation of Property Transactions
Like-Kind Exchange
Exchange of business/investment real property for similar real property.
Taxation of Property Transactions
Boot
Non-like-kind property received in an exchange (e.g., cash, debt relief).
Taxation of Property Transactions
Involuntary Conversion
Property destroyed, stolen, or condemned; gain deferral possible.
Taxation of Property Transactions
Replacement Property
Property acquired to replace involuntarily converted property.
Taxation of Property Transactions
Dispositions of Assets: Sales, Exchanges, Involuntary Conversions
S.E.I. - Sales, Exchanges, Involuntary conversions. Remember these three main types of dispositions!
Taxation of Property Transactions
Dispositions of Assets: Sales, Exchanges, Involuntary Conversions
For California tax purposes, like-kind exchanges generally follow federal rules, but there are nuances. Always confirm if state-specific forms or adjustments are required, especially for multi-state transactions. The CPA exam focuses on federal rules unless otherwise specified.
Taxation of Property Transactions
Dispositions of Assets: Sales, Exchanges, Involuntary Conversions
Confusing realized gain/loss with recognized gain/loss; not all realized gain is recognized immediately.
Taxation of Property Transactions
Dispositions of Assets: Sales, Exchanges, Involuntary Conversions
Applying like-kind exchange rules to personal property (it only applies to real property now).
Taxation of Property Transactions
Dispositions of Assets: Sales, Exchanges, Involuntary Conversions
Forgetting to adjust the basis of the new property after a like-kind exchange or involuntary conversion deferral.
Taxation of Property Transactions
Depletion
Cost recovery for natural resources.
Taxation of Property Transactions
MACRS
Modified Accelerated Cost Recovery System for tangible property.
Taxation of Property Transactions
Section 197 Intangibles
Intangibles amortized over 15 years.
Taxation of Property Transactions
Half-Year Convention
Treats assets as placed in service mid-year.
Taxation of Property Transactions
Cost Depletion
Based on asset's basis and units extracted.
Taxation of Property Transactions
Percentage Depletion
Based on gross income from natural resource.
Taxation of Property Transactions
Depreciation, Amortization, and Depletion Methods
To remember the three types of cost recovery, think 'D-A-D': Depreciation (Tangible), Amortization (Intangible), Depletion (Natural Resources). D-A-D helps recover costs!
Taxation of Property Transactions
Depreciation, Amortization, and Depletion Methods
For the CPA Exam, memorize the MACRS recovery periods for common asset classes (e.g., 5-year for computers, 7-year for office furniture, 27.5-year for residential real property, 39-year for nonresidential real property). Also, recall the 15-year amortization period for Section 197 intangibles.
Taxation of Property Transactions
Depreciation, Amortization, and Depletion Methods
Confusing MACRS recovery periods with the asset's actual economic useful life; tax rules are specific.
Taxation of Property Transactions
Depreciation, Amortization, and Depletion Methods
Applying depreciation rules to intangible assets or vice-versa; each has its own method.
Taxation of Property Transactions
Depreciation, Amortization, and Depletion Methods
Forgetting to apply the correct convention (half-year, mid-quarter, mid-month) for MACRS property, especially in the year of acquisition or disposition.
Taxation of Property Transactions
Section 1245 Property
Depreciable personal property; gain recaptured as ordinary income up to depreciation.
Taxation of Property Transactions
Section 1250 Property
Depreciable real property; specific recapture rules apply.
Taxation of Property Transactions
Depreciation Recapture
Reclassifying gain on asset sale as ordinary income due to prior depreciation deductions.
Taxation of Property Transactions
Additional Depreciation
Excess of accelerated depreciation over straight-line depreciation.
Taxation of Property Transactions
Unrecaptured Section 1250 Gain
Gain on real property attributable to straight-line depreciation, taxed at 25% max.
Taxation of Property Transactions
Related Party Transaction
Sale between closely connected entities/individuals; can trigger ordinary income.
Taxation of Property Transactions
Section 1239
Rule treating gain from sale of depreciable property to related party as ordinary income.
Taxation of Property Transactions
Recapture Provisions and Related Party Transactions
1245 is for 'P-ersonal' property, 1250 is for 'R-eal' property. P comes before R, and 45 comes before 50. Easy to remember which section applies to which type of asset!
Taxation of Property Transactions
Recapture Provisions and Related Party Transactions
The CPA exam frequently tests the distinction between Section 1245 (personal property, full recapture) and Section 1250 (real property, less punitive for non-corps, 20% for corps). Keywords to spot include 'machinery,' 'equipment,' or 'building,' and 'corporate' vs. 'non-corporate taxpayer.'
Taxation of Property Transactions
Recapture Provisions and Related Party Transactions
Confusing Section 1245 and Section 1250 property types.
Taxation of Property Transactions
Recapture Provisions and Related Party Transactions
Forgetting the 20% corporate recapture rule for Section 1250 property.
Taxation of Property Transactions
Recapture Provisions and Related Party Transactions
Failing to identify related party transactions under Section 1239, which converts all gain to ordinary income.
Taxation of Property Transactions
Gross Income
All income from whatever source derived, unless specifically excluded.
Individual Federal Income Taxation
Exclusion
An item of income specifically exempted from taxation by law.
Individual Federal Income Taxation
Punitive Damages
Damages awarded to punish wrongdoer; always included in gross income.
Individual Federal Income Taxation
Municipal Bond Interest
Interest from state and local government bonds; generally excluded.
Individual Federal Income Taxation
Qualified Scholarship
Funds for tuition/fees, excluded from income if conditions met.
Individual Federal Income Taxation
Unemployment Compensation
Benefits received for unemployment; fully included in gross income.
Individual Federal Income Taxation
Gross Income Inclusions and Exclusions
Think 'G.I. Joe's EX-WIFE' for Gross Income EXclusions: Gifts, Inheritances, Job-related injury compensation, EX-empt interest (municipal), Welfare, Insurance proceeds (life, by death), Fringe benefits (qualified), Education (qualified scholarships).
Individual Federal Income Taxation
Gross Income Inclusions and Exclusions
The CPA Exam will test your ability to identify specific inclusions and exclusions. Pay close attention to dollar limits (e.g., $50,000 for group term life insurance) and specific conditions (e.g., for qualified scholarships). Keywords like 'punitive damages' or 'municipal bonds' signal specific tax treatments.
Individual Federal Income Taxation
Gross Income Inclusions and Exclusions
Assuming all personal injury settlements are non-taxable; punitive damages are always taxable.
Individual Federal Income Taxation
Gross Income Inclusions and Exclusions
Forgetting that unemployment compensation is fully taxable income.
Individual Federal Income Taxation
Gross Income Inclusions and Exclusions
Not knowing the $50,000 limit for employer-provided group term life insurance exclusion.
Individual Federal Income Taxation
Above-the-Line Deductions
Deductions subtracted from gross income to arrive at AGI.
Individual Federal Income Taxation
Adjusted Gross Income (AGI)
Gross income minus above-the-line deductions; a key tax figure.
Individual Federal Income Taxation
Itemized Deductions
Deductions subtracted from AGI, taken if greater than standard deduction.
Individual Federal Income Taxation
Standard Deduction
A fixed amount taxpayers can subtract from AGI if not itemizing.
Individual Federal Income Taxation
SALT Limit
Maximum $10,000 deduction for state and local taxes.
Individual Federal Income Taxation
Taxable Income
AGI minus standard/itemized deductions; the amount taxed.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
Think 'A' for Above = AGI. These deductions are 'above' the line, reducing AGI first. 'I' for Itemized = If you Itemize, you're 'in' the details, choosing over the standard.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
The CPA exam often tests the $10,000 State and Local Tax (SALT) deduction limit for individuals, a key provision from the TCJA. Remember this limit applies to the sum of state income taxes, local property taxes, and state and local sales taxes.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
Confusing above-the-line with itemized deductions; remember the AGI distinction.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
Forgetting the $10,000 SALT deduction limit when calculating itemized deductions.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
Not comparing total itemized deductions to the standard deduction before making a choice.
Individual Federal Income Taxation
Above-the-Line and Itemized Deductions
Applying pre-TCJA rules for miscellaneous itemized deductions (they are suspended).
Individual Federal Income Taxation
Tax Credit
Direct reduction of tax liability, dollar-for-dollar.
Individual Federal Income Taxation
Refundable Credit
Can reduce tax liability below zero, resulting in a refund.
Individual Federal Income Taxation
Nonrefundable Credit
Can reduce tax to zero, but no excess is refunded.
Individual Federal Income Taxation
Alternative Minimum Tax (AMT)
Parallel tax system ensuring high-income taxpayers pay minimum tax.
Individual Federal Income Taxation
AMT Adjustments
Items added/subtracted from regular taxable income for AMT.
Individual Federal Income Taxation
Tax Preference Items
Certain deductions/exclusions added back to AMTI.
Individual Federal Income Taxation
Tentative Minimum Tax (TMT)
Tax calculated under AMT rules before comparison to regular tax.
Individual Federal Income Taxation
AMT Exemption
Amount reducing AMTI, phases out at higher income levels.
Individual Federal Income Taxation
Tax Credits and Alternative Minimum Tax (AMT)
For AMT, remember 'SALT PIES': State And Local Taxes, Private activity bond Interest, Excess depreciation, Incentive stock options, and Standard deduction (if taken) are common adjustments/preferences.
Individual Federal Income Taxation
Tax Credits and Alternative Minimum Tax (AMT)
The CPA Exam will test your ability to distinguish between refundable and nonrefundable credits and their impact on tax liability. For AMT, focus on identifying common adjustments and preferences, especially state and local taxes and incentive stock options, as these are frequently tested triggers.
Individual Federal Income Taxation
Tax Credits and Alternative Minimum Tax (AMT)
Confusing refundable and nonrefundable credits; remember, only refundable credits can generate a refund.
Individual Federal Income Taxation
Tax Credits and Alternative Minimum Tax (AMT)
Forgetting that state and local taxes are generally disallowed as a deduction for AMT purposes.
Individual Federal Income Taxation
Tax Credits and Alternative Minimum Tax (AMT)
Not considering the AMT implications of Incentive Stock Options (ISOs) in the year of exercise.
Individual Federal Income Taxation
Filing Status
Determines tax rates, standard deduction, and credits.
Individual Federal Income Taxation
Estimated Tax
Payments made throughout the year for income not subject to withholding.
Individual Federal Income Taxation
Underpayment Penalty
Penalty for not paying enough tax throughout the year.
Individual Federal Income Taxation
Extension to File
Grants more time to file a return, but not to pay tax.
Individual Federal Income Taxation
Tax Computations, Payments, and Filing Requirements
For estimated tax payment safe harbors, remember '90-100-110': 90% of current year, 100% of prior year (or 110% for high earners).
Individual Federal Income Taxation
Tax Computations, Payments, and Filing Requirements
The CPA exam frequently tests the '90% of current year's tax or 100% of prior year's tax' rule for estimated tax payments. Pay close attention to the 110% rule for high-income taxpayers (AGI over $150,000 in the prior year).
Individual Federal Income Taxation
Tax Computations, Payments, and Filing Requirements
Confusing an extension to file with an extension to pay; tax is still due by April 15th.
Individual Federal Income Taxation
Tax Computations, Payments, and Filing Requirements
Not making estimated tax payments for self-employment income, leading to penalties.
Individual Federal Income Taxation
Tax Computations, Payments, and Filing Requirements
Incorrectly determining filing status, which can significantly alter tax liability and available credits.
Individual Federal Income Taxation
Section 351
Allows tax-free transfer of property to a controlled corporation.
Federal Taxation of Entities: Part 1
Control
80% ownership of voting stock and 80% of all other stock classes.
Federal Taxation of Entities: Part 1
Dividends Received Deduction (DRD)
Corporate deduction for dividends received from other corporations.
Federal Taxation of Entities: Part 1
Earnings & Profits (E&P)
A measure of a corporation's ability to pay dividends.
Federal Taxation of Entities: Part 1
Double Taxation
Corporate income taxed at both corporate and shareholder levels.
Federal Taxation of Entities: Part 1
Form 1120
The U.S. Corporation Income Tax Return.
Federal Taxation of Entities: Part 1
C Corporations: Formation, Operations, and Distributions
For C Corps, remember 'D.E.A.D.': Double Taxation, E&P matters, Assets get carryover Basis, Deductions are specific.
Federal Taxation of Entities: Part 1
C Corporations: Formation, Operations, and Distributions
On the exam, closely review questions involving corporate distributions. If a distribution exceeds E&P, remember the order: first, taxable dividend (to extent of E&P); second, return of capital (reduces basis); third, capital gain (after basis is zero).
Federal Taxation of Entities: Part 1
C Corporations: Formation, Operations, and Distributions
Confusing C corporation income with shareholder income. They are separate entities.
Federal Taxation of Entities: Part 1
C Corporations: Formation, Operations, and Distributions
Forgetting the Dividends Received Deduction (DRD) when calculating corporate taxable income.
Federal Taxation of Entities: Part 1
C Corporations: Formation, Operations, and Distributions
Incorrectly applying the order of distributions (E&P, return of capital, capital gain) when E&P is insufficient.
Federal Taxation of Entities: Part 1
S Corporation
A corporation with pass-through taxation to shareholders.
Federal Taxation of Entities: Part 1
Pass-Through Entity
Business income/losses are taxed at the owner's level.
Federal Taxation of Entities: Part 1
Form 2553
IRS form used to elect S corporation status.
Federal Taxation of Entities: Part 1
Schedule K-1
Reports a shareholder's share of S corp income/losses.
Federal Taxation of Entities: Part 1
Reasonable Salary
Required compensation for shareholder-employees.
Federal Taxation of Entities: Part 1
One Class of Stock
S corps can only have common stock, no preferred.
Federal Taxation of Entities: Part 1
100 Shareholder Limit
Maximum number of shareholders for an S corp.
Federal Taxation of Entities: Part 1
Ineligible Shareholder
Non-resident aliens, partnerships, C corps cannot own S corp stock.
Federal Taxation of Entities: Part 1
S Corporations: Eligibility, Elections, and Operations
S for 'Small' and 'Simple' shares: S corps are for SMALL businesses with SIMPLE stock (one class) and a limited number of shareholders.
Federal Taxation of Entities: Part 1
S Corporations: Eligibility, Elections, and Operations
For the exam, remember the '15th day of the 3rd month' rule for S corp elections. This is a common cutoff date for many tax elections and is frequently tested.
Federal Taxation of Entities: Part 1
S Corporations: Eligibility, Elections, and Operations
Forgetting to file Form 2553 by the deadline, leading to a delayed or denied S corp election.
Federal Taxation of Entities: Part 1
S Corporations: Eligibility, Elections, and Operations
Admitting an ineligible shareholder (e.g., a non-resident alien) which automatically terminates S corp status.
Federal Taxation of Entities: Part 1
S Corporations: Eligibility, Elections, and Operations
Failing to pay a 'reasonable salary' to a shareholder-employee, which can lead to IRS reclassification of distributions as wages.
Federal Taxation of Entities: Part 1
Partnership Interest
A partner's ownership share in a partnership.
Federal Taxation of Entities: Part 1
Outside Basis
A partner's basis in their partnership interest.
Federal Taxation of Entities: Part 1
Inside Basis
The partnership's basis in its assets.
Federal Taxation of Entities: Part 1
Hot Assets
Unrealized receivables and inventory items.
Federal Taxation of Entities: Part 1
Guaranteed Payments
Payments to partners regardless of partnership income.
Federal Taxation of Entities: Part 1
Substantial Economic Effect
Test for validity of partnership allocation.
Federal Taxation of Entities: Part 1
Partnerships: Formation, Basis, and Operations
Remember 'BIG' for Basis Increase Generals: B (Beginning Basis) + I (Income/Liabilities) - G (Losses/Distributions) = Ending Basis.
Federal Taxation of Entities: Part 1
Partnerships: Formation, Basis, and Operations
The CPA Exam REG section focuses on federal tax law. While California has its own partnership tax rules, the exam primarily tests the Internal Revenue Code (IRC) and related Treasury Regulations. Do not confuse state-specific rules with federal rules for the exam.
Federal Taxation of Entities: Part 1
Partnerships: Formation, Basis, and Operations
Forgetting to adjust basis for changes in partnership liabilities.
Federal Taxation of Entities: Part 1
Partnerships: Formation, Basis, and Operations
Confusing the tax treatment of contributed property versus contributed services.
Federal Taxation of Entities: Part 1
Partnerships: Formation, Basis, and Operations
Incorrectly applying the nonrecognition rule for property contributions when control requirements are not met.
Federal Taxation of Entities: Part 1
Current Distribution
Distribution where partner remains in partnership.
Federal Taxation of Entities: Part 1
Liquidating Distribution
Distribution terminating a partner's interest.
Federal Taxation of Entities: Part 1
Basis Adjustment
Changes to a partner's basis after distributions.
Federal Taxation of Entities: Part 1
Capital Gain/Loss
Gain or loss from sale of capital assets.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
CASH first, then PROPERTY. 'Hot Assets' make things ORDINARY.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
The CPA Exam will test your ability to apply the basis rules for both current and liquidating distributions. Pay close attention to the order of basis reduction (cash first) and the specific conditions for recognizing gain or loss, especially for 'hot assets.' Remember that a loss is only recognized in a liquidating distribution if only cash, unrealized receivables, and inventory are received.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
Confusing the rules for current vs. liquidating distributions, especially regarding gain/loss recognition.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
Incorrectly applying the basis reduction rules, particularly the order of cash vs. property.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
Forgetting to consider 'hot assets' and their potential for ordinary income/loss.
Federal Taxation of Entities: Part 1
Partnership Distributions and Liquidations
Assuming gain or loss is always recognized in a liquidating distribution.
Federal Taxation of Entities: Part 1
Distributable Net Income (DNI)
Limit on income taxable to beneficiaries and deductible by the trust/estate.
Federal Taxation of Entities: Part 1
Simple Trust
Must distribute all income, no corpus, no charity.
Federal Taxation of Entities: Part 1
Complex Trust
Any trust not meeting simple trust requirements.
Federal Taxation of Entities: Part 1
Grantor Trust
Grantor retains control; income taxed to grantor.
Federal Taxation of Entities: Part 1
Form 1041
U.S. Income Tax Return for Estates and Trusts.
Federal Taxation of Entities: Part 1
501(c)(3) Organization
Tax-exempt charitable, educational, or religious entity.
Federal Taxation of Entities: Part 1
Unrelated Business Taxable Income (UBTI)
Income from a tax-exempt organization's unrelated trade or business.
Federal Taxation of Entities: Part 1
Form 990
Annual information return for tax-exempt organizations.
Federal Taxation of Entities: Part 1
Trusts, Estates, and Exempt Organizations
For 'SIMPLE' trusts, remember: S-hould distribute income, I-ncome only, M-andatory distributions, P-rincipal not distributed, L-imited to income, E-xcludes charities.
Federal Taxation of Entities: Part 1
Trusts, Estates, and Exempt Organizations
The CPA Exam often tests the DNI concept extensively. Remember that DNI limits both the distribution deduction for the trust/estate and the amount taxable to beneficiaries. Also, be aware of the 'tier system' for complex trust distributions when DNI is less than total distributions.
Federal Taxation of Entities: Part 1
Trusts, Estates, and Exempt Organizations
Confusing the tax rates for individuals vs. trusts/estates (trusts/estates reach highest rates much faster).
Federal Taxation of Entities: Part 1
Trusts, Estates, and Exempt Organizations
Forgetting that grantor trusts are disregarded for tax purposes and income flows directly to the grantor.
Federal Taxation of Entities: Part 1
Trusts, Estates, and Exempt Organizations
Not understanding that exempt organizations can still have taxable income (UBTI) from unrelated business activities.
Federal Taxation of Entities: Part 1