CPA REG — U.S. - Taxation and Regulation Quick Reference

Last revised: June 25, 2026

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

Exam Identity and Use

This Quick Reference is independent review support for candidates preparing for the AICPA U.S. CPA REG - Taxation and Regulation exam, exam code CPA REG. Use it to compress last-mile review, spot common traps, and organize practice question debriefs.

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.

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.

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

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

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

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

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

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

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

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

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

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

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

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.

Scenario Guide

Ethics and Federal Tax Procedures