CPA REG Cheat Sheet: Taxation and Regulation Cheat Sheet

Last revised: September 28, 2026

Cheat sheet: REG tax and law reference for AICPA CPA REG candidates: entity taxation, property, ethics, business law, formulas, and exam traps.

Use the tables for a quick pre-exam check. Expand a topic’s notes for explanations, examples, and additional distinctions.

Scope and study context

REG questions often turn on four issues:

Who is the taxpayer? Individual, C corporation, S corporation, partnership, estate/trust, fiduciary, preparer, debtor, agent.
What is being measured? Gross income, deduction, credit, basis, realized gain, recognized gain, taxable income, tax liability, liability exposure.
What is the timing rule? Cash/accrual, constructive receipt, all-events test, installment sale, carryforward/carryback, tax year.
What exception limits the general rule? Related-party rule, passive activity rule, at-risk rule, nonrecognition provision, preparer penalty defense, statute of limitations, UCC exception.

Dollar thresholds, phaseouts, indexed amounts, and exam-year tax tables can change. Know the structure and apply the amounts provided in current CPA REG study materials and exam exhibits.

Recommended Practice Sequence

Start with topic drills
- Individual tax: income/deductions/credits.
- Property: basis and recognized gain/loss.
- Entities: C corp, S corp, partnership basis/distributions.
- Procedure/ethics.
- Business law.
Review detailed explanations
- For every miss, write the tested rule in one sentence.
- Identify whether the miss was a rule gap, ordering error, calculation error, or reading error.
Build mixed sets
- Mix tax and business law so you practice switching frameworks.
- Time yourself after accuracy improves.
Use mock exams for endurance
- Do not use mock exams only to get a score.
- Mine them for repeated weak areas.
Return to targeted topic drills
- If basis, distributions, or procedure questions keep repeating as misses, isolate them until the pattern is fixed.

Error Log Template

Missed question topic	Error type	Correct rule	What to do next
Partnership distribution	Ordering error	Cash reduces basis; cash over basis creates gain	Drill 10 partnership basis questions
C corp property distribution	Rule gap	Corp can recognize gain on appreciated property distribution	Review E&P/distribution table
Statute of frauds	Classification error	Determine UCC goods vs common law first	Drill contracts questions
Tax preparer penalty	Ethics judgment	Client info can be relied on only if reasonable	Drill professional responsibility questions

REG Triage Workflow

    flowchart TD
	    A[Read fact pattern] --> B{Tax or law?}
	    B -->|Tax| C[Identify taxpayer and entity]
	    C --> D[Classify item: income, deduction, credit, basis, gain/loss]
	    D --> E[Apply timing, character, and limitation rules]
	    E --> F[Compute or select treatment]
	    B -->|Law/ethics| G[Identify relationship or duty]
	    G --> H[Apply elements, authority, priority, or penalty rule]
	    H --> I[Choose best legal consequence]

Core Tax Formulas

Individual Tax Structure

[ \text{Gross Income}

\text{Adjustments} = \text{Adjusted Gross Income} ]

[ \text{Adjusted Gross Income}

\text{Greater of Standard Deduction or Itemized Deductions}
\text{Qualified Business Income Deduction, if applicable} = \text{Taxable Income} ]

[ \text{Tax on Taxable Income}

\text{Other Taxes}

\text{Credits}
\text{Prepayments} = \text{Tax Due or Refund} ]

Property Transaction Structure

[ \text{Amount Realized} = \text{Cash Received}

\text{FMV of Property Received}
\text{Debt Relief}

\text{Selling Expenses} ]

[ \text{Realized Gain or Loss} = \text{Amount Realized}

\text{Adjusted Basis} ]

[ \text{Recognized Gain or Loss} = \text{Realized Gain or Loss}

\text{Deferred or Disallowed Amount} ]

Basis Structure

[ \text{Adjusted Basis} = \text{Original Basis}

\text{Capital Additions}

\text{Cost Recovery}
\text{Returns of Capital} ]

Partnership Outside Basis

[ \text{Outside Basis} = \text{Contributions}

\text{Income Items}
\text{Share of Liabilities}

\text{Distributions}
\text{Loss and Deduction Items}
\text{Liability Reductions} ]

S Corporation Stock Basis

[ \text{Stock Basis} = \text{Capital Contributions}

\text{Income Items}

\text{Distributions}
\text{Losses and Deductions} ]

Debt basis in an S corporation is separate from stock basis and generally requires a direct loan from shareholder to corporation.

Notes and examples

Core Tax Formula Framework

Do not jump straight to the answer choice. Classify the item first.

[ \text{Taxable income} = \text{Gross income}

\text{Exclusions}
\text{Adjustments}
\max(\text{Standard deduction}, \text{Itemized deductions})
\text{Other allowable deductions} ]

Then:

[ \text{Tax due or refund} = \text{Tax on taxable income}

\text{Credits}
\text{Payments and withholding} ]

Fast Classification Rules

If the fact pattern asks…	First question to ask
“Is it taxable?”	Is it income under broad gross income rules, and is there a specific exclusion?
“Is it deductible?”	Is it personal, business, investment, capital, or specifically disallowed?
“What is the basis?”	How was the property acquired: purchase, gift, inheritance, exchange, contribution, distribution?
“Is gain recognized?”	Is there a nonrecognition rule, deferral rule, or partial recognition rule?
“Can the loss be used?”	Is it allowed, capital, passive, at-risk limited, basis limited, or personal and nondeductible?
“Who pays tax?”	Individual, C corporation, pass-through owner, estate/trust, donor, or recipient?

High-Yield Tax Decision Table

Question type	First decision	Then test	Common trap
Is it taxable income?	Is there accession to wealth?	Exclusion, deferral, return of capital, loan, gift, inheritance	Treating all cash receipts as income
Is it deductible?	Trade/business, production of income, personal, capital, or itemized?	Ordinary, necessary, reasonable, substantiated, not capitalized	Deducting capital expenditures immediately
Is loss deductible?	Individual, corporation, partner, shareholder?	Basis, at-risk, passive, capital loss, related party	Forgetting basis comes before at-risk and passive limits
What is basis?	Purchase, gift, inheritance, contribution, exchange, conversion?	Carryover, substituted, FMV, stepped basis, boot	Using FMV for every transfer
What is character?	Capital, ordinary, Section 1231, inventory, receivable, depreciation recapture?	Holding period and asset class	Assuming all business asset gains are capital
Which entity rule?	C corp, S corp, partnership, sole proprietor?	Taxpayer level and pass-through treatment	Applying corporate distribution rules to partnerships
Is gain recognized?	Sale/exchange or nonrecognition transaction?	Boot, debt relief, related party, replacement property	Confusing realized with recognized gain
Is preparer liable?	Position strength and disclosure?	Negligence, understatement, willful/reckless conduct	Ignoring disclosure and reasonable cause defenses

Individual Taxation

Gross Income: Include vs. Exclude

Item	Usual treatment	REG focus
Wages, salaries, tips	Included	Constructive receipt, fringe benefit exceptions
Business income	Included, reported net of business deductions	Schedule C vs. entity pass-through
Interest	Included unless specifically excluded	Municipal bond interest often excluded federally
Dividends	Included	Ordinary vs. qualified treatment
Alimony	Depends on governing divorce instrument rules	Apply exam facts; do not assume current treatment without context
Child support	Excluded	Never deductible by payer
Gifts and inheritances	Excluded from recipient income	Income generated after receipt is taxable
Life insurance proceeds by reason of death	Generally excluded	Interest component is taxable
Scholarships	Excludable if used for qualified tuition/required fees by degree candidate	Room, board, and services component may be taxable
Employer-provided benefits	Depends on specific exclusion	Group-term life, health coverage, meals/lodging, dependent care rules
Unemployment compensation	Generally included	Watch for state/federal distinction in facts
Social Security benefits	May be partially taxable	Depends on provisional income
Discharge of indebtedness	Generally included	Insolvency, bankruptcy, qualified exclusions
Damages	Physical injury often excluded; punitive damages taxable	Emotional distress and lost wages are common traps
Return of capital	Not income until basis recovered	Reduces basis first

Notes and examples

Adjustments, Itemized Deductions, Credits

Category	Examples	Exam handling
Adjustments to income	Certain retirement contributions, student loan interest, self-employed health insurance, HSA, educator expenses, deductible self-employment tax portion	Reduce AGI; available whether or not taxpayer itemizes
Itemized deductions	Medical, taxes, interest, charitable contributions, casualty losses where allowed	Compare total itemized deductions to standard deduction
Personal expenses	Food, commuting, clothing, personal interest	Generally nondeductible unless statutory exception
Credits	Child/dependent, education, foreign tax, retirement savings, energy where applicable	Credits reduce tax; deductions reduce taxable income
Refundable credits	Can create refund beyond tax liability	Distinguish from nonrefundable credits
Nonrefundable credits	Limited to tax liability	Order of credits can matter in detailed computations

Individual Limitation Order

Step	Limitation	Why it matters
1	Basis	Cannot deduct more than tax basis in activity/investment
2	At-risk	Limits loss to amount economically at risk
3	Passive activity	Passive losses generally offset passive income, not active wages
4	Capital loss	Individuals have limited net capital loss deduction against ordinary income
5	Excess business loss or other current-year rules	Apply if relevant under exam-year law

Filing and Dependency Traps

Topic	Rule pattern	Trap
Filing status	Determined by marital/family status on relevant date, with special rules	Choosing head of household without qualifying person
Qualifying child	Relationship, age, residency, support, joint return tests	Support test is not the same as gross income test
Qualifying relative	Not qualifying child, relationship/household, gross income, support	Cousins usually need household test
Dependent benefits	Dependency can affect credits, filing status, and standard deduction	One person cannot generally be claimed by multiple taxpayers
Kiddie tax	Unearned income of certain children taxed under special rules	Confusing earned wages with unearned investment income

Filing Status and Dependents

Topic	High-yield rule	Trap
Married filing jointly	Generally joint income, deductions, credits, and joint liability	One spouse’s tax issue can affect both unless relief applies
Married filing separately	Separate reporting; often reduced credit/deduction benefits	Not automatically better just because spouses have separate income
Head of household	Unmarried or considered unmarried, qualifying person, household maintenance	A dependent is not always a qualifying person for this status
Qualifying surviving spouse	Transitional favorable status after spouse’s death if requirements met	Not the same as head of household
Qualifying child	Relationship, age, residency, support, joint return tests	The test is generally whether the child provided over half of own support
Qualifying relative	Not a qualifying child, relationship/household, gross income test, support test	The taxpayer generally must provide over half of support

Gross Income: Include Unless Excluded

Usually included	Often excluded or partially excluded
Wages, bonuses, commissions	Gifts and inheritances received, though later income from the property is taxable
Business and self-employment income	Life insurance proceeds paid by reason of death, excluding interest
Interest, dividends, rents, royalties	Municipal bond interest for federal income tax purposes
Prizes, awards, gambling winnings	Qualified scholarships used for qualifying education costs
Unemployment compensation	Certain employer-provided health and fringe benefits
Taxable state/local refunds if prior tax benefit	Workers’ compensation and certain physical injury damages
Cancellation of debt income unless exception applies	Return of capital up to basis

Adjustments, Deductions, and Credits

Category	Examples	Exam focus
Adjustments to income	Certain retirement contributions, HSA deductions, student loan interest, self-employed health insurance, one-half self-employment tax	These reduce AGI
Itemized deductions	Medical expenses above the applicable floor, state/local taxes subject to limits, mortgage interest, charitable contributions, casualty losses when allowed	Compare total itemized deductions with standard deduction
Credits	Child/dependent-related credits, education credits, foreign tax credit, earned income credit where applicable	Credits reduce tax; deductions reduce income
Refundable credits	Can produce refund beyond tax liability	Do not treat all credits as refundable
Nonrefundable credits	Limited to tax liability	Excess may be lost or carried only if a rule allows

Individual Tax Traps

AGI vs taxable income: AGI comes before standard/itemized deductions.
Exclusion vs deduction: An exclusion never enters gross income; a deduction reduces income after inclusion.
Refundable vs nonrefundable credit: A nonrefundable credit cannot reduce regular tax below zero unless specific rules permit.
Alimony: Treatment depends on the governing divorce or separation instrument and current-law rules.
State tax refunds: Taxable only to the extent the taxpayer received a prior federal tax benefit.
Capital losses: Individual capital losses offset capital gains, then a limited amount of ordinary income, with excess carried forward.
Personal losses: Generally nondeductible unless a specific rule allows the deduction.

Property Transactions and Basis

Basis by Acquisition Type

Acquisition	Starting basis	Holding period	High-yield point
Purchase	Cost plus capitalized acquisition costs	Starts after acquisition	Debt-financed purchase still includes full cost basis
Gift, gain property	Donor adjusted basis, adjusted for gift tax rules if applicable	Usually carryover	Donee may inherit donor holding period
Gift, loss property	Dual basis rules may apply	Depends on sale outcome	No gain/no loss zone can occur
Inheritance	Generally FMV or estate valuation basis	Usually long-term	Do not use decedent’s adjusted basis unless exception applies
Taxable exchange	FMV of property received	New holding period	Recognized gain/loss usually resets basis
Like-kind exchange	Carryover/substituted basis adjusted for boot	Tacked for like-kind property	Current like-kind treatment is generally real property focused
Corporate contribution	Shareholder basis in stock generally equals basis of property transferred adjusted for boot/gain	Holding period may tack	Control requirement and boot matter
Partnership contribution	Partner outside basis generally equals contributed property basis plus liabilities assumed/shared	Holding period may tack	Liability relief can trigger gain

Notes and examples

Capital vs. Ordinary vs. Section 1231

Asset or item	Character tendency	Trap
Personal-use capital asset	Capital gain taxable; personal loss nondeductible	Loss on sale of personal car/residence usually nondeductible
Investment stock	Capital	Holding period controls short-term vs. long-term
Inventory	Ordinary	Not a capital asset
Accounts receivable of cash-basis taxpayer	Ordinary	Collection right has no basis unless previously included
Depreciable business property	Section 1231 with possible recapture	Recapture can convert gain to ordinary income
Real property used in trade/business	Section 1231 with possible unrecaptured/recapture rules	Netting rules matter
Related-party sale loss	Disallowed or deferred depending on rule	Related buyer may later use disallowed loss only in limited way

Nonrecognition and Deferral

Transaction	General result	Key condition
Like-kind exchange	Gain deferred except boot; loss generally not recognized	Qualifying property and exchange requirements
Involuntary conversion	Gain may be deferred if replacement property acquired timely	Reinvestment and replacement similarity rules
Installment sale	Gain recognized as payments are collected	Gross profit percentage; interest may be separately taxable
Corporate formation	No gain/loss if statutory control and property transfer requirements met	Services are not property for this purpose
Partnership contribution	Generally no gain/loss on contribution	Liability relief can create deemed distribution/gain
Wash sale	Loss disallowed and added to replacement basis	Repurchase window and substantially identical securities

Installment Sale Computation

Component	Formula in words
Gross profit	Selling price minus adjusted basis and selling expenses
Contract price	Selling price minus qualifying debt assumed by buyer, with adjustments
Gross profit percentage	Gross profit divided by contract price
Recognized gain per payment	Cash principal collected times gross profit percentage
Interest	Separately stated or imputed; ordinary income

Universal Gain/Loss Framework

\[ \text{Realized gain or loss} = \text{Amount realized} - \text{Adjusted basis} \]\[ \text{Recognized gain or loss} = \text{Realized gain or loss allowed under the applicable tax rule} \]

Term	Meaning
Amount realized	Cash received + FMV of property received + liabilities relieved - selling expenses
Adjusted basis	Original basis + capital improvements - depreciation/amortization/depletion - returns of capital
Realized gain/loss	Economic gain or loss from the transaction
Recognized gain/loss	Taxable or deductible portion
Deferred gain/loss	Realized but not currently recognized due to a deferral rule

Basis by Acquisition Method

Acquisition	General basis rule	Common trap
Purchase	Cost, including capitalized acquisition costs	Repairs are usually expensed; improvements are capitalized
Gift	Carryover basis for gain; special dual-basis rule may apply for loss when FMV is lower than donor basis	Recipient does not use FMV automatically
Inheritance	Generally fair market value at valuation date, subject to special rules	Income in respect of a decedent may not receive a step-up
Conversion from personal to business use	Lower of adjusted basis or FMV at conversion for loss/depreciation purposes	Built-in personal loss is not converted into deductible business loss
Taxable exchange	FMV of property received	Do not use carryover basis unless a nonrecognition rule applies
Nontaxable exchange	Substitute or carryover basis, adjusted for boot and recognized gain	Basis preserves deferred gain

Character of Gain or Loss

Property type	Usual character	Exam focus
Personal-use asset	Capital gain; personal loss nondeductible	Sale of personal residence has special exclusion rules
Investment asset	Capital	Holding period matters
Inventory	Ordinary	Never capital asset to dealer
Depreciable business property	Section 1231/recapture framework	Depreciation can convert gain to ordinary income
Accounts receivable of cash-basis taxpayer	Ordinary	Basis often zero
Partnership/S corp interest	Generally capital, with ordinary treatment for certain “hot” items	Look for unrealized receivables or inventory

Special Property Rules

Rule	Core idea	Candidate mistake
Wash sale	Loss on stock/securities disallowed if substantially identical stock/securities are acquired within the wash-sale window; disallowed loss is added to basis	Applying wash-sale rules to gains
Related-party loss	Losses on certain related-party sales are disallowed	Assuming related-party gain is also disallowed
Like-kind exchange	Deferral generally for qualifying real property held for business/investment; gain recognized to extent of boot, loss not recognized	Treating personal property or personal-use real estate as qualifying
Involuntary conversion	Gain may be deferred if replacement property is acquired under the applicable rules	Forgetting basis is reduced by deferred gain
Installment sale	Gross profit percentage determines gain recognized as payments are collected	Depreciation recapture is generally recognized up front
Depreciation recapture	Prior depreciation can cause ordinary income treatment on disposition	Treating all Section 1231 gain as capital gain
Capital loss limits	Capital losses follow special offset and carryover rules	Deducting capital losses like ordinary business expenses

Business Entities

Entity Selection Matrix

Feature	C corporation	S corporation	Partnership	Sole proprietorship
Tax level	Entity pays tax; shareholders taxed on dividends	Generally pass-through	Pass-through	Owner reports directly
Owners	Shareholders	Eligible shareholders only	Partners or members	One owner
Basis importance	Stock basis affects gain/loss on sale and distributions	Stock and debt basis limit losses	Outside basis and liabilities central	Asset basis and business deductions
Distributions	Dividend to extent of E&P; return of capital after basis	Tax-free to extent of basis, with ordering rules	Generally tax-free to extent of basis, liability effects matter	Not a separate tax event
Losses	Stay at corporation	Pass through subject to basis/at-risk/passive	Pass through subject to basis/at-risk/passive	Directly subject to owner limits
Self-employment	Wages/dividends distinction	Shareholder wages vs. distributions	General partners often subject on active income	Net earnings subject where applicable
REG trap	Double taxation and E&P	Eligibility, basis, reasonable compensation	Liability allocations and guaranteed payments	Commingling personal/business expenses

Notes and examples

C Corporations

Topic	Rule pattern	Exam trap
Corporate taxable income	Gross income less business deductions, special corporate deductions	Charitable contribution and dividends-received deduction limitations
Formation	Nonrecognition possible for property transferors in control	Services for stock produce taxable compensation
Capital gains/losses	Corporate capital losses generally limited to capital gains	No individual-style ordinary offset
Net operating loss	Corporate NOL rules differ from individual rules	Apply exam-year carry rules
Dividends paid	Not deductible by corporation	Dividends are paid from after-tax earnings
Distributions	Dividend to extent of current/accumulated E&P, then return of capital, then gain	E&P is not the same as taxable income or retained earnings
Stock redemption	Dividend or sale/exchange treatment	Family attribution may prevent sale treatment
Liquidation	Corporation recognizes gain/loss on distributed property; shareholder recognizes gain/loss on stock	Both corporate and shareholder tax consequences may occur
Accumulated earnings/personal holding company	Penalty-tax concepts for retained/passive income abuses	Look for purpose and ownership/income composition facts

Earnings and Profits

Adjustment type	Effect on E&P
Tax-exempt income	Increases E&P
Federal income tax paid	Decreases E&P
Nondeductible expenses	Decrease E&P
Dividends received deduction	Add back for E&P
Depreciation differences	Adjust taxable income to E&P method
Installment method differences	E&P may differ from taxable income timing

S Corporations

Topic	Rule pattern	Exam trap
Eligibility	Domestic corporation, eligible shareholders, one class of stock, shareholder limits	Debt differences generally do not create second class of stock if rights are not equity-like
Election	Requires timely valid election and shareholder consent	Late/invalid election changes entity treatment
Income allocation	Pro rata by shares and days	Special allocations are partnership concept, not S corp concept
Loss limitation	Stock basis first, then debt basis; then at-risk/passive	Bank loan guarantee alone usually does not create debt basis
Distributions	Generally tax-free to extent of stock basis; ordering depends on E&P/AAA	AAA does not equal basis
Built-in gains tax	Can apply after C-to-S conversion	Look for appreciated assets at conversion
Reasonable compensation	Shareholder-employees need wages for services	Avoid treating all corporate cash as distributions

Partnerships

Topic	Rule pattern	Exam trap
Formation	Generally nonrecognition on contribution	Services for partnership interest can be taxable
Outside basis	Partner’s tax basis in partnership interest	Includes share of liabilities
Inside basis	Partnership’s basis in assets	Different from outside basis
Capital account	Economic book measure	Not the same as tax basis
Guaranteed payment	Deductible or capitalized by partnership; ordinary income to partner	Paid without regard to partnership income
Distributions	Generally tax-free to extent of outside basis	Cash over basis triggers gain
Loss allocation	Basis, at-risk, passive limits	Allocated loss does not guarantee deductibility
Liabilities	Increase in partner share increases basis; decrease treated as distribution	Liability shifts can trigger gain
Special allocations	Must have substantial economic effect	Cannot simply allocate tax benefits arbitrarily
Partnership termination/change	Contributions, distributions, sales, admissions, retirements	Track basis before and after each event

Entity Distribution Comparison

Event	C corporation	S corporation	Partnership
Cash distribution	Dividend to extent of E&P, then basis recovery, then gain	Usually basis recovery subject to ordering; gain if exceeds basis	Basis recovery; gain if cash exceeds outside basis
Appreciated property distribution	Corporation recognizes gain; shareholder dividend/basis/gain rules	S corp recognizes gain; shareholder basis/distribution rules	Partnership generally does not recognize gain, with exceptions
Loss property distribution	Corporation generally cannot recognize loss on nonliquidating distribution	S corp generally cannot recognize loss on distribution	Partnership generally no entity-level loss, exceptions for liquidating distributions
Liquidation	Corporate and shareholder-level consequences	Pass-through plus shareholder stock consequences	Partner recovers basis through distributed assets/cash

Estates, Trusts, and Gifts

Topic	Key rule	Trap
Gift tax	Donor is generally responsible for gift tax filing/payment	Recipient usually does not include gift value in income
Gift basis	Carryover or dual basis depending on gain/loss property	Selling gifted loss property below FMV at gift can create dual-basis issue
Annual exclusion/lifetime exemption	Apply current exam-year amounts if tested	Do not use stale dollar limits
Estate tax	Tax on transfer of decedent’s estate	Income tax and estate tax are separate systems
Inherited basis	Generally FMV-based basis	Holding period usually long-term
Trust taxation	Simple/complex trust rules and DNI allocate taxation between trust and beneficiaries	Distributions can carry taxable income to beneficiaries
DNI	Limits income taxed to beneficiaries and deduction to trust	Accounting income is not always taxable income
Fiduciary duty	Trustee/executor must act for beneficiaries/estate	Conflicts of interest and self-dealing are tested

Notes and examples

Estates, Gifts, and Trust Basics

Topic	Quick rule	Trap
Gift received	Generally excluded from recipient’s gross income	Income generated after the gift is taxable to recipient
Gift basis	Often carryover basis, with special loss basis rule if FMV is lower	Recipient does not receive automatic stepped-up basis
Gift tax	Generally imposed on donor, not donee	Do not treat every gift as taxable income to recipient
Inherited property	Generally basis is FMV at valuation date, subject to exceptions	Income in respect of a decedent has special treatment
Trust/estate income	Tax may be paid by trust/estate or beneficiary depending on distributions and DNI concepts	Distribution deduction is not unlimited

Tax Accounting, Timing, and Deductions

Cash vs. Accrual

Issue	Cash method	Accrual method
Income recognition	When actually or constructively received	When earned under all-events test and amount determinable
Deduction recognition	When paid	When liability fixed, amount determinable, and economic performance occurs
Prepaid income	Often recognized when received unless exception	May have limited deferral under specific rules
Prepaid expense	May require capitalization	Matching/economic performance rules can defer deduction
Bad debts	Generally no deduction unless income previously included or loan basis exists	Deduction possible when debt becomes worthless

Notes and examples

Business Deduction Classification

Expense	Deduct, capitalize, or disallow?	Exam cue
Ordinary repairs	Deduct	Maintains property in ordinary condition
Improvements/betterments	Capitalize	Extends life, increases value, adapts use
Start-up costs	Capitalize with possible election/amortization	Before active business begins
Organizational costs	Capitalize with possible election/amortization	Entity formation costs
Inventory costs	Capitalize into inventory/COGS	Product costs, resale goods
Meals/entertainment	Limited or disallowed depending on category	Entertainment often treated more harshly than business meals
Fines/penalties	Generally nondeductible	Paid to government for violation
Political contributions/lobbying	Generally nondeductible or limited	Public policy disallowance
Charitable contributions	Deductible subject to entity and percentage limits	Individual vs. corporate rules differ
Interest	Business, investment, personal, qualified residence, passive	Personal interest usually nondeductible

Ethics, Professional Responsibilities, and Federal Tax Procedures

Practitioner Duties and Penalties

Topic	Practical rule	REG trap
Return position	Must meet applicable authority/disclosure standards	Client pressure does not justify unsupported position
Due diligence	Make reasonable inquiries when information appears incorrect, incomplete, or inconsistent	Preparer may generally rely on client information unless suspicious
Confidentiality	Do not disclose client information without authority or legal requirement	Tax practice rules and professional standards overlap
Conflict of interest	Disclose and obtain consent where allowed; withdraw if unmanageable	Representation of adverse parties can impair objectivity
Competence	Accept work only with required knowledge/skill or ability to obtain it	Tax research and consultation can support competence
Preparer signature/PTIN	Paid preparer obligations apply	Ghost preparation is a penalty risk
Frivolous position	Penalties possible	“Tax protester” arguments are not reasonable authority
Willful/reckless conduct	Higher penalty exposure	Intent matters for sanction severity
Client error discovered	Advise client of error and consequences	Preparer generally cannot force amended return but must consider future association

Notes and examples

Authority Hierarchy for Tax Research

Authority	Strength
Internal Revenue Code	Primary statutory authority
Treasury regulations	Strong administrative authority; final regs generally strongest
Revenue rulings/procedures	IRS published guidance; useful but below Code/regs
Court cases	Weight depends on court and jurisdiction
IRS notices/announcements	Administrative guidance; context-specific
Private letter rulings	Binding only for requesting taxpayer; may indicate IRS reasoning
Tax treatises/articles	Secondary authority, not substantial authority by themselves
Client or preparer opinion	Not authority unless supported by primary sources

Federal Tax Procedure

Topic	Rule pattern	Trap
Filing date	Timely filing affects limitations, penalties, elections	Extension to file is not extension to pay
Amended return	Used to correct previously filed return	Watch statute and refund claim timing
Assessment statute	IRS generally has limited time after filing; longer/no limit for major omissions, fraud, or no return	Early-filed returns may be treated as filed on due date
Refund claim	Must be timely under applicable lookback rules	Payment date matters
Audit selection	Correspondence, office, field	Do not infer wrongdoing from audit selection
Appeals	Administrative dispute resolution before litigation	Settlement authority and hazards of litigation
Tax Court	Prepayment generally not required after notice of deficiency	Must petition timely
District Court/Court of Federal Claims	Pay first, then sue for refund	Full-payment rule may matter
Tax liens	Government claim against taxpayer property	Lien vs. levy distinction
Tax levy	Seizure/collection action	More immediate than lien
Innocent spouse	Relief from joint liability in qualifying cases	Joint return creates joint and several liability unless relief applies
Offers/installment agreements	Collection alternatives	Do not erase liability unless accepted under rules

Tax Authority Hierarchy

Authority	Weight in exam reasoning
Internal Revenue Code	Primary statutory authority
Treasury regulations	Strong authority; final and temporary regulations generally carry significant weight
Revenue rulings and revenue procedures	IRS administrative guidance; useful but below statute/regulations
Court decisions	Weight depends on court level and jurisdiction
Private letter rulings	Generally apply only to requesting taxpayer; useful for reasoning but not precedent
IRS publications/instructions	Helpful guidance but not primary authority

Statutes of Limitation and Refund Claims

Issue	General rule to remember
IRS assessment	Generally limited after a return is filed, subject to longer periods for substantial omissions and no limit for fraud/no return
Substantial omission	Longer assessment period can apply
Fraudulent return or no return	No normal limitation period
Refund claim	Generally tied to the later of a period from filing or from payment
Amended return	Does not automatically reset every limitation period

Audit and Collection Concepts

Concept	What to know
Correspondence audit	Narrow, document-driven audit by mail
Office/field audit	Broader factual development
Notice of deficiency	Key notice that allows petitioning Tax Court without first paying the deficiency
Refund suit	Generally requires payment first, then claim for refund, then suit if unresolved
Lien	Legal claim against taxpayer property
Levy	Actual seizure/collection action
Installment agreement	Payment over time
Offer in compromise	Settlement for less than full amount if requirements are met
Penalties	Accuracy-related, failure to file, failure to pay, fraud, preparer penalties, information-reporting penalties

Practitioner Standards

Area	Practical rule
Due diligence	Make reasonable inquiries when information appears incomplete, inconsistent, or incorrect
Client-provided information	May generally rely on client information in good faith, but not blindly
Tax return positions	Must have appropriate support and must not be frivolous
Error discovery	Advise client promptly of error and potential consequences; practitioner usually cannot correct without client permission
Confidentiality	Do not disclose or use tax return information without consent unless an exception applies
Conflicts of interest	Identify, disclose, and obtain appropriate consent when representation is permitted
Contingent fees	Restricted in many tax return preparation contexts; know when they are prohibited or permitted
Written advice	Avoid unreasonable assumptions, reliance on incorrect facts, or advice designed to evade penalties
Preparer penalties	Can apply for unreasonable positions, willful/reckless conduct, or lack of due diligence

Ethics Traps

A CPA is not required to audit every client-provided tax number, but must question red flags.
“The client insisted” is not a defense to an unsupported position.
A return position can be nonfrivolous yet still fail a higher disclosure or penalty-avoidance standard.
Confidentiality duties apply even when disclosure would make the CPA’s work easier.
If a client refuses to correct a material error, consider withdrawal and professional obligations.

Business Law

Contracts

Topic	Elements or rule	Trap
Contract formation	Offer, acceptance, consideration, capacity, legality	Advertisement usually invitation, not offer, unless specific and definite
Common law vs. UCC	Common law for services/real estate; UCC Article 2 for goods	Mixed contracts use predominant purpose test
Consideration	Bargained-for legal detriment	Past consideration generally not valid new consideration
Capacity	Minors and incompetent persons may avoid contracts	Necessaries may create liability
Statute of frauds	Certain contracts require writing/signed evidence	Performance can sometimes remove barrier
Parol evidence	Prior/contemporaneous terms cannot contradict final integrated writing	Can explain ambiguity or prove fraud/condition
Conditions	Event that triggers or discharges duty	Condition precedent vs. subsequent
Breach	Material breach can excuse other party	Minor breach generally allows damages, not avoidance
Remedies	Expectation damages, specific performance, restitution, reliance	Specific performance common for unique goods/real estate, not ordinary services
Third-party beneficiaries	Intended beneficiary may enforce	Incidental beneficiary cannot

Notes and examples

UCC Sales of Goods

Topic	UCC rule pattern	Trap
Merchant	Higher standards for merchants	Not every seller is a merchant
Firm offer	Merchant signed writing can be irrevocable without consideration for stated period	Common law option requires consideration
Battle of forms	Additional terms may enter merchant contracts unless objection/material alteration	Mirror image rule is common law, not UCC default
Perfect tender	Buyer may reject nonconforming goods, subject to cure and contract terms	Installment contracts use substantial impairment standard
Risk of loss	Depends on shipping terms, carrier, merchant status, breach	Title and risk of loss are not always same
Warranties	Express, implied merchantability, implied fitness	Disclaimers must satisfy UCC requirements
Buyer remedies	Cover, damages, specific performance for unique goods	Must act commercially reasonably
Seller remedies	Withhold delivery, resell, recover damages, reclaim in limited cases	Insolvent buyer facts matter

Agency

Topic	Rule pattern	Trap
Actual authority	Express or implied authority from principal to agent	Agent’s reasonable belief matters
Apparent authority	Principal’s manifestations to third party create reasonable belief	Agent alone cannot create apparent authority
Ratification	Principal later accepts unauthorized act with knowledge	Must ratify entire transaction
Agent liability	Depends on disclosure of principal	Undisclosed or partially disclosed principal can leave agent liable
Fiduciary duties	Loyalty, care, obedience, accounting	Secret profits and self-dealing are common tested facts
Principal liability for torts	Respondeat superior for employee within scope	Independent contractor usually no vicarious liability, with exceptions

Business Organizations and Liability

Entity	Owner liability	Tax tendency	Control/formation cue
Sole proprietorship	Unlimited personal liability	Direct owner taxation	No separate legal entity formalities
General partnership	General partners jointly/severally liable under applicable rules	Pass-through	Can form by conduct, no filing necessarily required
Limited partnership	General partner liable; limited partners limited if requirements met	Pass-through	Requires filing; at least one general partner
LLP	Partners have liability shield for many partnership obligations	Pass-through	Professional/service firm context
LLC	Members generally limited liability	Flexible tax classification	Operating agreement and state filing
Corporation	Shareholders generally limited liability	C or S tax treatment	Articles, bylaws, directors, officers
Piercing veil	Owners can become liable if entity abused	Not tax classification issue	Undercapitalization, commingling, fraud, lack of separateness

Secured Transactions

Step	Meaning	Exam cue
Attachment	Security interest becomes enforceable against debtor	Value, debtor rights in collateral, authenticated security agreement or possession/control
Perfection	Protects secured party against third parties	Filing, possession, control, automatic perfection for some PMSI consumer goods
Priority	Determines who wins among creditors	Perfected beats unperfected; first to file/perfect; PMSI superpriority if rules met
Default	Creditor may repossess or dispose of collateral	Must avoid breach of peace and act commercially reasonably
Proceeds	Security interest may continue in proceeds	Traceability and continuation rules matter

Debtor-Creditor and Bankruptcy

Topic	Rule pattern	Trap
Suretyship	Surety promises to pay debt of another	Statute of frauds often applies
Guaranty	Secondary liability depending on terms	Conditional vs. unconditional language
Priority	Secured creditors generally before unsecured	Perfected status matters
Fraudulent transfer	Transfer made to hinder creditors or for less than reasonably equivalent value under insolvency facts	Look for insider and timing clues
Bankruptcy chapters	Liquidation vs. reorganization vs. individual repayment plan	Match debtor type and objective
Automatic stay	Stops most collection actions upon filing	Exceptions exist
Estate property	Broadly includes debtor legal/equitable interests	Exemptions remove some property from creditor reach
Discharge	Eliminates personal liability for dischargeable debts	Some taxes, fraud debts, domestic support, student loans may be nondischargeable
Preference	Certain prepetition payments to creditors can be avoided	Insider period and ordinary-course defense facts matter
Secured creditor in bankruptcy	Claim may be secured to collateral value	Undersecured creditor can have secured and unsecured portions

Contracts: Common Law vs UCC

Issue	Common law	UCC sale of goods
Subject	Services, real estate, employment, non-goods	Goods
Acceptance	Mirror image rule more important	More flexible acceptance rules
Contract modification	Usually needs consideration	Good-faith modification may not need new consideration
Performance	Substantial performance often relevant	Perfect tender rule, subject to cure and exceptions
Warranties	Can arise, but UCC warranty rules are central for goods	Express, implied merchantability, implied fitness

Contract Formation and Defenses

Topic	Rule
Offer	Must show intent, definite terms, and communication
Acceptance	Must match required method or be reasonable if not specified
Consideration	Bargained-for legal detriment or benefit
Capacity	Minors and impaired parties may have avoidance rights
Legality	Illegal agreements generally unenforceable
Statute of frauds	Certain contracts must be in writing, including land, suretyship, contracts not performable within one year, and goods above UCC threshold
Parol evidence	Prior/contemporaneous outside evidence generally cannot contradict final integrated writing
Assignment	Transfer of rights; generally allowed unless materially changes obligor’s duty or prohibited
Delegation	Transfer of duties; not allowed for special personal performance or where prohibited
Remedies	Damages aim to protect expectation, reliance, restitution, or specific performance where appropriate

Agency

Concept	Quick rule	Trap
Actual authority	Principal expressly or impliedly grants authority	Implied authority can arise from role or circumstances
Apparent authority	Third party reasonably believes agent has authority due to principal’s manifestations	Agent alone cannot create apparent authority
Ratification	Principal later accepts unauthorized act with knowledge	Ratification is all-or-nothing for the transaction
Agent duties	Loyalty, care, obedience, accounting, notification	Secret profits breach duty of loyalty
Principal liability	Principal may be bound by authorized acts	Undisclosed principal rules can affect liability
Employee torts	Employer may be liable for acts within scope of employment	Independent contractor distinction matters

Secured Transactions

Step	Requirement	Exam focus
Attachment	Value given, debtor has rights in collateral, authenticated security agreement or possession/control	Attachment makes security interest enforceable against debtor
Perfection	Filing, possession, control, or automatic perfection depending on collateral	Perfection protects against third parties
Priority	Secured parties rank under priority rules	First to file or perfect often wins, subject to exceptions
PMSI	Purchase-money security interest can receive special priority	Timing and collateral type matter
Buyer in ordinary course	Can take free of certain security interests created by seller	Applies only under specific buyer/seller circumstances

Bankruptcy

Topic	High-yield rule
Automatic stay	Stops most collection actions once bankruptcy petition is filed
Bankruptcy estate	Includes debtor’s property interests, subject to exclusions/exemptions
Secured creditors	Have collateral rights; may receive adequate protection
Priority unsecured claims	Paid before general unsecured claims
General unsecured creditors	Often receive limited distribution
Discharge	Releases debtor from many debts, but not all
Preference	Certain pre-bankruptcy transfers to creditors can be avoided if statutory elements are met
Fraudulent transfer	Transfers made to hinder creditors or for inadequate value may be avoided
Chapter 7	Liquidation
Chapter 11	Reorganization, often business-focused
Chapter 13	Individual repayment plan

Negotiable Instruments and Commercial Paper

Topic	Rule
Negotiability	Writing, signed, unconditional promise/order, fixed amount of money, payable to order/bearer, payable on demand or definite time, no improper extra undertakings
Holder	Possesses instrument with proper rights
Holder in due course	Takes for value, in good faith, without notice of problems
HDC protection	Takes free of many personal defenses
Real defenses	Still valid against holder in due course, such as forgery, fraud in the execution, material alteration, infancy where applicable, illegality, duress, incapacity, bankruptcy discharge
Transfer warranties	Can create liability even without indorsement liability
Indorser liability	Secondary liability if proper presentment, dishonor, and notice occur

Common REG Traps

Trap	Correct approach
Equating book income with taxable income	Reconcile permanent and temporary differences
Using taxable income as E&P	Adjust taxable income for E&P-specific items
Treating all pass-through distributions the same	Partnership, S corp, and trust distribution rules differ
Forgetting liabilities in partnership basis	Liability shares can increase or decrease outside basis
Deducting losses before checking basis	Apply basis first, then at-risk, then passive limits
Treating a gift as taxable income to recipient	Gift value generally excluded; basis rules are separate
Recognizing all realized gain	Check nonrecognition, boot, and disallowance rules
Treating personal losses as deductible	Personal-use loss generally nondeductible
Assuming UCC applies to services	UCC Article 2 covers goods
Letting an agent create apparent authority alone	Apparent authority comes from principal’s manifestation
Treating extension to file as extension to pay	Payment deadline rules differ
Relying on private letter ruling as precedent for all taxpayers	PLR generally binds only requesting taxpayer

Practice Debrief Checklist

After each CPA REG practice set, tag missed questions by failure type:

Taxpayer/entity missed: Individual vs. C corp vs. S corp vs. partnership.
Formula missed: Basis, amount realized, AGI, taxable income, E&P, DNI, installment sale.
Character missed: Ordinary, capital, Section 1231, recapture, passive, portfolio.
Timing missed: Cash/accrual, constructive receipt, economic performance, installment, carryover.
Limitation missed: Basis, at-risk, passive, capital loss, related party, phaseout.
Law element missed: Offer/acceptance, agency authority, attachment/perfection, bankruptcy stay/discharge.
Ethics/procedure missed: Authority level, preparer duty, statute timing, court forum.

Final Review Priorities

Memorize the framework formulas: AGI, taxable income, amount realized, recognized gain, adjusted basis, partnership outside basis, S corp basis.
Drill entity distributions and loss limitations until you can identify basis effects without hesitation.
Practice property character and nonrecognition questions; many wrong answers confuse realized and recognized gain.
Review business law elements in compact element lists, especially contracts, agency, secured transactions, and bankruptcy.
For further practice, complete timed mixed REG question sets and write a one-line rule for every missed question before moving on.

Cheat Sheet for CPA REG

This independent quick review is for candidates preparing for the AICPA U.S. CPA REG - Taxation and Regulation exam, code CPA REG. Use it as a fast review before topic drills, mixed question-bank sets, mock exams, and detailed explanations.

The goal is not to replace full study. The goal is to help you recognize the rule being tested, choose the correct order of analysis, avoid common traps, and convert missed practice questions into targeted review.

Current tax-year dollar amounts, phaseouts, thresholds, and effective dates can change. For CPA REG, know the rule structure and confirm any annual amounts against the current exam materials you are using.

High-Yield REG Map

Area	Know cold	Common exam trap
Individual taxation	Gross income, exclusions, adjustments, itemized deductions, credits, filing status, dependents, capital gains/losses	Confusing AGI, taxable income, tax liability, and refund/payment
Property transactions	Basis, amount realized, recognized gain/loss, capital vs ordinary, depreciation recapture, like-kind exchanges, involuntary conversions	Calculating realized gain correctly but recognizing the wrong amount
Entity taxation	C corporations, S corporations, partnerships, LLC tax classification, basis, distributions, separately stated items	Forgetting basis limits and loss limitation ordering
Tax procedure	Authority, audits, statutes of limitation, penalties, refund claims, liens/levies, taxpayer rights	Assuming all IRS correspondence means the same procedural deadline
Ethics and professional responsibilities	Due diligence, preparer standards, client information, confidentiality, conflicts, tax return positions	Treating “client says so” as enough when facts look inconsistent
Business law	Contracts, agency, secured transactions, bankruptcy, commercial paper, debtor-creditor rights	Applying UCC rules to non-goods contracts, or common law rules to goods

Entity Taxation Cheat Sheet

Entity Type Comparison

Entity	Tax treatment	High-yield focus
Sole proprietorship	Not separate from owner for federal income tax	Schedule C income, self-employment tax, business deductions
C corporation	Separate taxable entity	Double taxation, E&P, corporate distributions, formation, liquidation
S corporation	Pass-through entity with eligibility restrictions	Shareholder basis, distributions, separately stated items, loss limits
Partnership	Pass-through entity	Outside basis, inside basis, liabilities, guaranteed payments, distributions
LLC	Tax classification depends on default rules/election	Single-member disregarded entity vs partnership vs corporate election

Notes and examples

C Corporations

Topic	Rule to remember	Trap
Formation	Nonrecognition may apply when property is transferred to corporation by persons in control after exchange	Services are not property for this purpose
Shareholder basis	Generally transferred basis, adjusted for boot/gain	FMV is not always shareholder basis
Corporation basis	Carryover basis, often increased by gain recognized by transferor	Do not automatically use FMV
Liabilities assumed	Can affect gain recognition if liabilities exceed basis or have tax-avoidance purpose	Forgetting liability relief can be boot-like economically
Corporate income tax	Corporation pays tax on taxable income	Dividends are taxed again to shareholders
E&P	Determines dividend treatment of distributions	Taxable income and E&P are not identical
Nonliquidating cash distribution	Dividend to extent of E&P, then return of capital, then capital gain	Dividend treatment does not depend only on current-year profits
Property distribution	Corporation may recognize gain as if property sold; shareholder generally receives dividend amount based on value, subject to liability rules	Corporation generally does not recognize loss on nonliquidating property distribution
Liquidation	Corporation and shareholder both may recognize gain/loss	Liquidation is not treated like an ordinary dividend

S Corporations

Topic	Rule to remember	Trap
Eligibility	Domestic corporation with permitted shareholders and one class of stock	Debt can create issues if it functions like a second class of stock
Pass-through	Income, deductions, losses, and credits pass to shareholders	Separately stated items retain character
Basis increases	Contributions and income items	Tax-exempt income can increase basis
Basis decreases	Distributions, nondeductible expenses, losses/deductions	Apply ordering carefully
Loss use	Limited by basis, then at-risk and passive activity rules	A shareholder cannot deduct losses beyond allowable basis
Debt basis	Direct shareholder loans can create basis; corporate third-party debt generally does not	Guarantees alone are not usually enough
Distributions	Generally tax-free to extent of basis unless C corporation E&P complications apply	Negative stock basis is not allowed

Partnerships

Topic	Rule to remember	Trap
Formation	Generally nonrecognition for contribution of property to partnership	Contribution of services can create taxable compensation/income
Outside basis	Partner’s basis in partnership interest	Includes partner’s share of partnership liabilities
Inside basis	Partnership’s basis in its assets	Inside and outside basis can differ
Liabilities	Increases in share of liabilities increase outside basis; decreases are treated like distributions of cash	Liability shifts can trigger gain
Distributive share	Partners taxed on allocated income whether or not cash is distributed	Cash distributions are not the same as taxable income allocations
Guaranteed payments	Usually ordinary income to recipient and deductible by partnership if otherwise allowable	Not dependent on partnership income
Nonliquidating distributions	Generally nonrecognition; cash exceeding outside basis creates gain	Property basis cannot exceed remaining outside basis
Liquidating distributions	Basis is allocated to assets received under ordering rules	Do not create a loss unless specific requirements are met
Sale of partnership interest	Generally capital, but ordinary income for certain hot assets	Unrealized receivables and inventory matter

Loss Limitation Order

A frequent REG mistake is applying passive activity rules before checking basis.

Basis limitation — Does the taxpayer have enough tax basis?
At-risk limitation — Is the taxpayer economically at risk?
Passive activity limitation — Is the activity passive, and is there passive income?
Excess business loss or other applicable limitation — Apply if relevant under current law.

C Corp vs S Corp vs Partnership Decision Table

Question	C corporation	S corporation	Partnership
Is the entity taxed directly?	Yes	Usually no federal income tax at entity level	Usually no federal income tax at entity level
Do owners receive pass-through basis increases?	No for corporate income	Yes	Yes
Do liabilities increase owner basis?	Generally no	Generally no, except direct shareholder loans	Yes, partner’s share of liabilities
Are distributions often taxable?	Dividend to extent of E&P	Often tax-free to basis, subject to E&P rules	Usually tax-free to basis
Can losses pass to owners?	No	Yes, limited	Yes, limited
Are separately stated items important?	Less central to shareholder return	Yes	Yes

REG Calculation Checklist

Before selecting a numeric answer:

Identify taxpayer type — individual, C corp, S corp shareholder, partner, estate/trust.
Classify the item — income, exclusion, deduction, credit, basis adjustment, distribution, gain/loss.
Apply ordering rules — especially for basis, distributions, losses, and capital gains/losses.
Separate book and tax — financial accounting income is not taxable income.
Check character — ordinary, capital, Section 1231, separately stated, passive, portfolio.
Check limitations — basis, at-risk, passive, AGI floors, percentage limits, phaseouts.
Check timing — cash vs accrual, installment method, deferral, carryover.
Avoid negative basis — tax basis generally cannot go below zero.
Use current-year amounts carefully — do not rely on old thresholds.
Answer the question asked — tax liability, taxable income, deduction, basis, recognized gain, or amount realized.

Common Candidate Mistakes

Mistake	Better approach
Memorizing isolated rules without order	Practice multi-step ordering: inclusion, deduction, limitation, character, timing
Treating every distribution as taxable income	First determine entity type, E&P, basis, and distribution ordering
Forgetting separately stated items	Pass-through items retain character for owners
Confusing partner debt basis with S shareholder debt basis	Partnership liabilities affect outside basis; S corp third-party debt generally does not
Recognizing all realized gains	Look for nonrecognition or deferral rules
Deducting personal expenses	Confirm business, investment, or specifically allowed personal deduction
Ignoring preparer ethics	REG often tests judgment, not just tax math
Applying UCC to service contracts	Determine whether goods dominate the transaction
Missing “except,” “least,” or “not”	Re-read the call of the question before calculating
Overusing annual dollar amounts	Learn the structure; verify current thresholds separately

Fast Final Review Tables

Tax Treatment of Common Receipts

Receipt	Likely treatment
Compensation for services	Taxable ordinary income
Gift received	Excluded from income, basis rules apply
Inheritance received	Excluded from income, basis rules apply
Interest on corporate bond	Taxable interest income
Municipal bond interest	Generally excluded federally
Qualified dividend	Taxable, potentially favorable rate
Return of capital	Reduces basis, then gain after basis reaches zero
Loan proceeds	Not income because of repayment obligation
Debt cancellation	Income unless exclusion/exception applies
Security deposit	Depends on facts; advance rent is generally income

Notes and examples

Business Deduction Decision Rules

Expense	Usually deductible?	Watch for
Ordinary and necessary business expense	Yes	Capitalization, substantiation, public policy limits
Capital improvement	No immediate deduction; capitalize	Depreciation or basis recovery
Personal living expense	No	Specific exceptions only
Meals/entertainment	Limited or disallowed depending on type	Documentation and business purpose
Fines/penalties	Often disallowed	Compensatory vs punitive distinction
Bad debt	Depends on business/nonbusiness and worthlessness	Cash-basis receivables often have no basis
Interest	Depends on type and limitations	Personal interest generally disallowed
Charitable contribution	Subject to entity and percentage rules	C corp vs individual rules differ

Entity Distribution Ordering

Entity	Distribution logic
C corporation	Dividend to extent of E&P, then return of capital to basis, then capital gain
S corporation without C corp E&P issue	Generally reduces stock basis; excess is gain
Partnership	Cash reduces outside basis; cash over basis creates gain; property basis rules apply
Liquidating corporation	Shareholder generally recognizes gain/loss comparing amount received with stock basis
Liquidating partnership	Special basis allocation rules; loss only in limited circumstances

Put the review into practice

Finance Prep

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