CPA TCP Cheat Sheet: Tax Compliance and Planning Cheat Sheet

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

Scope and study context

Item	Reference
Official vendor/provider	AICPA
Official exam title	U.S. CPA TCP - Tax Compliance and Planning
Official exam code	CPA TCP
Page purpose	Independent Cheat Sheet for candidates reviewing tax compliance and planning concepts for the real exam

Use the tax year, facts, forms, and dollar limits supplied in the question. Many tax amounts are indexed or law-dependent, so the exam often tests the rule, ordering, classification, or planning consequence more than memorization of a threshold.

Core Federal Tax Computation

[ \text{Gross Income}

• \text{Exclusions}
• \text{Adjustments for AGI} = \text{AGI} ]

[ \text{AGI}

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

[ \text{Regular Tax}

• \text{Additional Taxes}
• \text{AMT, if applicable}

• \text{Credits}
• \text{Payments and Withholding} = \text{Tax Due or Refund} ]

High-Yield Tax Classification Questions

Individual Tax Compliance Reference

Income Inclusion and Exclusion

Notes and examples

Adjustments, Itemized Deductions, and Credits

Category	Examples	Exam decision point
Adjustments for AGI	Traditional IRA deduction, HSA deduction, self-employed health insurance, half of self-employment tax, student loan interest if allowed	Above-the-line deductions reduce AGI and can affect other limits
Itemized deductions	Medical, certain taxes, interest, charitable contributions, casualty losses when allowed	Compare with standard deduction; apply floors/ceilings when provided
Credits	Child-related, education, foreign tax, retirement savings, energy, general business credits	Credits reduce tax; refundable credits can exceed tax liability
Nonrefundable credit	Limited to tax liability	Cannot create refund except to extent allowed
Refundable credit	Can create refund	Watch wording: “refundable,” “partially refundable,” or “nonrefundable”

Filing Status Decision Table

Status	Use when	Common trap
Single	Unmarried and no qualifying status	Missing head-of-household eligibility
Married filing jointly	Married taxpayers file one return	Joint and several liability; relief may be tested conceptually
Married filing separately	Married taxpayers file separate returns	Often loses credits/deductions; community property issues may appear
Head of household	Unmarried or considered unmarried, qualifying person, household cost support	Qualifying relative versus qualifying child rules
Qualifying surviving spouse	Spouse died in prior period and taxpayer maintains home for dependent child, if requirements met	Confusing year of death joint return with later qualifying surviving spouse status

Individual Income Items

Item	Typical Treatment	Common Exam Trap
Wages and salaries	Gross income	Do not confuse gross wages with taxable wages after pretax benefits
Interest income	Generally taxable unless excluded	Municipal bond interest may be federally tax-exempt but can affect other calculations
Dividends	Ordinary or qualified	Qualified dividends receive preferential rates only if requirements are met
Capital gains	Short-term or long-term	Holding period drives rate treatment
Alimony	Depends on governing agreement date and current law	Do not apply old rules blindly
Scholarships	May be excluded if used for qualified tuition and required fees	Room, board, and services often change treatment
Fringe benefits	Taxable unless specifically excluded	“Employer paid” does not automatically mean tax-free
Life insurance proceeds	Often excluded when paid by reason of death	Interest component is taxable
Debt cancellation	Generally income unless exception applies	Insolvency, bankruptcy, qualified residence, or purchase price adjustment rules may matter
Social Security benefits	Potentially partially taxable	Other income can trigger taxation
State tax refund	Taxable only if prior tax benefit was received	Link to prior-year itemized deduction benefit

Above-the-Line vs Itemized vs Credit

Category	Why It Matters	Examples to Review
Above-the-line deductions	Reduce AGI and may affect phaseouts	Retirement contributions, self-employed deductions, HSA, educator, student loan interest
Itemized deductions	Compared against standard deduction	Taxes, interest, charitable contributions, medical, casualty where allowed
Credits	Reduce tax, not income	Child-related, education, foreign tax, energy, retirement savings
Refundable credits	Can produce refund beyond tax liability	Know which credits are refundable under current law
Nonrefundable credits	Limited to tax liability	Ordering can matter when multiple credits apply

Individual Deduction Traps

Area	High-Yield Rule	Mistake to Avoid
Medical expenses	Deductible only above an AGI threshold	Deducting the full amount paid
Taxes	State/local/property taxes may be limited	Ignoring current-year cap rules
Mortgage interest	Depends on acquisition debt and limitations	Treating all personal interest as deductible
Investment interest	Limited to net investment income	Deducting against wages or business income
Charitable contributions	Subject to substantiation and percentage limits	Ignoring property type and holding period
Casualty losses	Often limited and restricted	Forgetting special disaster-related requirements if applicable
Miscellaneous expenses	Many personal expenses are nondeductible	Assuming business-like personal costs qualify

Filing Status and Dependents

Know the logic, not just labels.

Status / Concept	Review Point
Single	Default if no other status applies
Married filing jointly	Joint liability and combined income; often favorable but not always
Married filing separately	Can limit deductions/credits; may be useful for liability or repayment concerns
Head of household	Requires unmarried or considered unmarried status plus qualifying person and home support rules
Qualifying child	Relationship, age, residency, support, joint return tests
Qualifying relative	Not necessarily a relative in every case; income and support tests matter
Dependency planning	Can affect filing status, credits, education benefits, and healthcare-related items

Self-Employment and Small Business Items

Topic	Exam-Relevant Rule
Schedule C income	Report business income and ordinary/necessary business expenses
Self-employment tax	Applies to net self-employment earnings; separate from income tax
Home office	Requires qualifying business use; direct vs indirect expenses
Vehicle expenses	Actual expense vs standard mileage method; substantiation matters
Meals	Usually limited; entertainment often nondeductible unless exception applies
Startup costs	May be partially deducted and amortized under current rules
Business bad debts	Ordinary if bona fide business debt becomes worthless
Hobby loss rules	Profit motive matters; expenses may be limited or nondeductible
QBI deduction	Review qualified business income, SSTB limits, W-2 wage limits, UBIA, taxable income thresholds

Business Income, Self-Employment, and Loss Limits

Schedule C and Business Income

Notes and examples

Loss Limitation Ordering

Apply limitations in order. The order is frequently tested.

Step	Limitation	Key question
1	Basis limitation	Does the taxpayer have sufficient tax basis?
2	At-risk limitation	Is the taxpayer economically at risk for the loss?
3	Passive activity limitation	Is the activity passive to the taxpayer?
4	Excess business loss limitation, if applicable	Do aggregate business losses exceed the allowed amount?
5	NOL rules	Is any remaining loss carried as a net operating loss?

Passive Activity Rules

Activity type	Default treatment	Exception or planning point
Trade or business with material participation	Nonpassive	Material participation is fact-based
Limited partnership interest	Generally passive	Exception if taxpayer meets applicable participation tests
Rental real estate	Generally passive regardless of participation	Real estate professional and active participation rules may change treatment
Portfolio income	Not passive	Interest/dividends do not absorb passive losses
Disposition of entire passive activity	Suspended passive losses generally freed	Must dispose of entire interest in taxable transaction to unrelated party

Loss Limitation Order

For pass-through and individual business losses, apply limitations in the correct sequence.

1. Tax basis limitation — Does the taxpayer have enough basis?
2. At-risk limitation — Is the taxpayer economically at risk?
3. Passive activity limitation — Is the loss passive, and is there passive income?
4. Business loss limitation — Does a current-year excess business loss rule apply?
5. NOL rules — If allowed loss exceeds income, determine carryforward treatment.

Common Loss Traps

Trap	Correct Thinking
Deducting a K-1 loss automatically	Owner-level limits may disallow it
Treating debt basis the same for S corps and partnerships	Partnership liabilities often increase outside basis; S corp debt basis is narrower
Ignoring passive status	Basis does not make a passive loss deductible
Confusing capital losses with ordinary losses	Capital loss limitations may apply
Forgetting suspended losses	Track carryforwards and release events

Basis and Property Transaction Formulas

General Basis Rules

Notes and examples

Gain and Loss Computation

[ \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 Excluded Amount} ]

Property Transaction Matrix

Transaction	Tax result	High-yield trap
Sale of capital asset	Capital gain/loss	Personal-use capital losses are nondeductible
Sale of business equipment	Sec. 1231, with depreciation recapture rules	Sec. 1245/1250 recapture can convert gain to ordinary income
Like-kind exchange	Nonrecognition for qualifying real property held for business/investment	Personal property does not qualify under current federal rules
Involuntary conversion	Gain may be deferred if replacement requirements are met	Loss treatment depends on business/investment versus personal property
Installment sale	Gain recognized as payments received	Dealer sales, inventory, and depreciation recapture may be exceptions
Related-party sale	Special loss/disallowance and holding period rules may apply	Loss may be deferred/disallowed; later gain may be adjusted
Wash sale	Loss disallowed and added to basis of replacement stock/securities	Applies when substantially identical securities acquired within the statutory window
Home sale exclusion	Gain exclusion may apply to principal residence	Ownership/use tests and nonqualified use rules matter

Capital Gain and Loss Netting

Step	Action
1	Separate short-term and long-term gains/losses
2	Net short-term items against short-term items
3	Net long-term items against long-term items
4	Net short-term result against long-term result
5	Apply preferential rates, ordinary loss limits, and carryforward rules as applicable

Common trap: capital losses offset capital gains first. Only a limited net capital loss may offset ordinary income for individuals, with the remainder carried forward.

Basis Rules to Memorize

Transaction	Basis Rule
Purchase	Cost plus capitalized acquisition costs
Gift, FMV greater than donor basis	Carryover basis, adjusted for gift tax where applicable
Gift, FMV less than donor basis	Dual basis rule: gain basis differs from loss basis
Inheritance	Often fair market value at date of death or alternate valuation if elected
Conversion personal to business	Lesser of adjusted basis or FMV for loss/depreciation purposes
Like-kind exchange	Replacement basis generally preserves deferred gain
Nontaxable corporate contribution	Transferred basis, adjusted for gain recognized
Partnership contribution	Carryover basis to partnership; outside basis reflects contributed basis and liabilities

Character of Gains and Losses

Asset / Transaction	Likely Character	Watch For
Inventory	Ordinary	Not capital asset
Accounts receivable of cash-basis taxpayer	Ordinary	No capital gain conversion
Personal-use asset gain	Capital	Loss generally nondeductible
Investment stock	Capital	Short-term vs long-term
Depreciable business equipment	Section 1231 with recapture	Section 1245 ordinary recapture
Business real property	Section 1231 with possible recapture	Section 1250 and unrecaptured gain concepts
Land held for investment	Capital	Dealer property may be ordinary
Land used in trade or business	Section 1231	Holding period matters

Section 1231, 1245, and 1250 Cheat Sheet

Rule	Practical Meaning
Section 1231 net gain	Generally treated favorably as long-term capital gain
Section 1231 net loss	Generally ordinary loss
Section 1231 lookback	Prior nonrecaptured Section 1231 losses can convert current gain to ordinary income
Section 1245 recapture	Depreciation on personal property often recaptured as ordinary income up to gain
Section 1250 recapture	Applies to depreciable real property; special rate concepts may apply
Recapture first	Apply recapture before capital or Section 1231 treatment

Nonrecognition and Deferral Transactions

Transaction	Core Rule	Trap
Like-kind exchange	Defers gain for qualifying real property held for business/investment	Boot can trigger recognized gain
Involuntary conversion	Gain may be deferred if replacement requirements are met	Missing replacement timing or property type
Installment sale	Gain recognized as payments are collected	Depreciation recapture generally recognized upfront
Corporate formation	Section 351 may defer gain if control requirement is met	Services for stock are taxable
Partnership contribution	Section 721 generally defers gain/loss	Liability relief can trigger gain
Gift	Generally no income tax to recipient on receipt	Donee basis is not simply FMV
Inheritance	Estate tax and income tax rules differ	Income in respect of a decedent may not receive step-up

Depreciation, Amortization, and Cost Recovery

Notes and examples

Repairs vs Capital Improvements

Expenditure	Likely treatment	Exam cue
Routine maintenance	Deductible repair	Keeps property in ordinary efficient operating condition
Betterment	Capitalize	Improves capacity, productivity, quality, or strength
Restoration	Capitalize	Replaces major component or returns property to like-new condition
Adaptation	Capitalize	Adapts property to a new or different use

Entity Taxation Decision Matrix

Partnership Tax Reference

Partnership Basis Formula

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

• \text{Income and Gains}
• \text{Partner Share of Liabilities}

• \text{Distributions}
• \text{Losses and Deductions}
• \text{Liability Decreases} ]

Partnership Rules

Notes and examples

Inside vs Outside Basis

Basis type	Meaning	Why it matters
Inside basis	Partnership’s basis in its assets	Depreciation, gain/loss on asset sale
Outside basis	Partner’s basis in partnership interest	Loss deductibility, distribution taxation, sale gain/loss
Book capital	Economic capital account	Allocations and substantial economic effect
Tax capital	Tax-basis capital	Compliance reporting and basis analysis

S Corporation Tax Reference

S Corporation Eligibility and Operation

Notes and examples

S Corporation Basis Formula

[ \text{Stock Basis} = \text{Initial Basis}

• \text{Income}
• \text{Capital Contributions}

• \text{Distributions}
• \text{Nondeductible Expenses}
• \text{Losses and Deductions} ]

Debt basis is separate. A shareholder generally gets debt basis only for direct loans from the shareholder to the S corporation, not merely for corporate debt guaranteed by the shareholder.

S Corporation Distribution Ordering

Situation	Tax result
No accumulated E&P from C corporation years	Distributions generally tax-free to extent of stock basis; excess is gain
Accumulated E&P exists	Ordering rules can create dividend treatment after AAA rules
Distribution exceeds stock basis	Capital gain if stock is capital asset
Loss allocation	Cannot reduce basis below zero; suspended losses carry forward

S Corporation Core Rules

Topic	Review Point
Pass-through taxation	Income, deductions, credits, and separately stated items flow to shareholders
Eligibility	Review shareholder, stock class, domestic entity, and election requirements
Basis	Stock basis and direct shareholder debt basis limit losses
Separately stated items	Items affecting shareholders differently must be separately reported
Distributions	Usually tax-free to extent of basis if no C corporation E&P complications
Reasonable compensation	Shareholder-employees must receive reasonable wages for services
Built-in gains	Former C corporations may have special tax exposure
Fringe benefits	Shareholder-employee ownership level can affect tax treatment

S Corporation Basis Ordering

Typical shareholder stock basis logic:

1. Start with beginning stock basis.
2. Increase for capital contributions and income items.
3. Decrease for distributions.
4. Decrease for nondeductible expenses.
5. Decrease for deductible losses and deductions.

Debt basis is generally available only for direct loans from the shareholder to the S corporation, not merely guarantees.

S Corporation Distribution Traps

Situation	Correct Approach
No accumulated C corp E&P	Distribution usually reduces basis first; excess is gain
C corp E&P exists	Ordering rules can create dividend treatment
Distribution exceeds basis	Excess generally capital gain
Loss exceeds stock basis	Check direct debt basis, then suspend
Shareholder guarantee only	Usually not debt basis unless payment is made

C Corporation Tax Reference

C Corporation Tax Computation

Notes and examples

Corporate Formation: Sec. 351

Requirement	Reference
Transfer	Property transferred to corporation
Control	Transferors control corporation immediately after exchange under the statutory control test
Consideration	Stock received; boot may trigger gain
Services	Services are not property for Sec. 351 control/value purposes
Liabilities	Assumed liabilities usually do not trigger gain unless exceptions apply

Corporate Distributions

Distribution	Corporation result	Shareholder result
Cash dividend	No deduction	Dividend to extent of E&P
Appreciated property	Corporation generally recognizes gain as if sold	Shareholder receives dividend to extent of E&P; FMV basis
Loss property	Corporation generally does not recognize loss on nonliquidating distribution	Shareholder basis usually FMV
Distribution exceeding E&P	N/A	Return of capital to extent of basis, then gain
Liquidating distribution	Corporation may recognize gain/loss; shareholder treats as exchange	Shareholder recognizes gain/loss versus stock basis

Book-Tax Differences

Difference	Temporary or permanent?	Example
Depreciation method differences	Temporary	Tax MACRS vs book straight-line
Bad debt method differences	Temporary	Allowance for book vs specific charge-off for tax
Tax-exempt interest	Permanent	Municipal bond interest
Nondeductible fines/penalties	Permanent	Certain government penalties
Meals limitation	Permanent or partially permanent	Book expense exceeds tax deduction
Life insurance proceeds	Permanent	Excluded proceeds with nondeductible premiums in some cases

C Corporation Compliance Concepts

Topic	Review Rule
Taxable income	Starts from book income but requires tax adjustments
Double taxation	Corporation taxed on income; shareholders taxed on dividends
Dividends received deduction	Available to qualifying corporate shareholders, subject to limitations
Charitable contributions	Deductible subject to taxable income percentage limitations and carryover rules
Capital losses	Deductible only against capital gains, with carry rules
NOLs	Follow current carryforward and limitation rules
Organizational costs	May be partially deducted and amortized under current rules
Estimated taxes	Corporations may need periodic payments
Accumulated earnings / personal holding company concerns	Review purpose and penalty concepts if tested

Corporate Formation and Section 351

Section 351 generally allows nonrecognition when property is transferred to a corporation solely in exchange for stock and the transferors control the corporation immediately after the exchange.

High-yield points:

• Property counts; services do not.
• Stock received for services is taxable compensation.
• Boot received can trigger gain.
• Liabilities assumed are usually not boot, but liabilities exceeding basis can trigger gain.
• Corporation generally takes carryover basis increased by gain recognized.
• Shareholder basis generally reflects transferred basis, gain recognized, boot received, and liabilities assumed.

Corporate Distributions

Distribution Type	Shareholder Treatment	Corporate Treatment
Cash dividend from E&P	Dividend income	No corporate deduction
Property dividend	Dividend to extent of E&P and FMV rules	Corporation recognizes gain on appreciated property
Return of capital	Reduces shareholder stock basis	Applies after dividend portion
Excess over basis	Capital gain	No deduction
Stock dividend	Often nontaxable unless exceptions apply	Review election and disproportionate rules
Liquidating distribution	Shareholder recognizes gain/loss vs stock basis	Corporation generally recognizes gain/loss on distributed property

Earnings and Profits

E&P is not the same as retained earnings or taxable income. For TCP review, know that E&P helps determine whether a corporate distribution is:

1. Dividend income,
2. Return of capital, or
3. Capital gain.

Common trap: A corporation may have accounting retained earnings but different tax E&P.

Permanent vs Temporary Differences

Difference Type	Meaning	Examples
Permanent	Affects book income but never taxable income, or vice versa	Tax-exempt interest, nondeductible penalties, certain meals disallowance
Temporary	Timing difference that reverses later	Depreciation, bad debt method differences, prepaid income, accrued expenses
Favorable	Reduces taxable income relative to book	Accelerated tax depreciation
Unfavorable	Increases taxable income relative to book	Nondeductible expenses

Common trap: A permanent difference does not create a deferred tax asset or liability in financial accounting, while a temporary difference may.

Qualified Business Income Deduction

Common trap: QBI is not the same as net business cash flow. Separately stated investment items, reasonable S corporation compensation, and partnership guaranteed payments require special treatment.

Retirement, Investment, and Personal Financial Planning

Notes and examples

After-Tax Yield

\[ \text{Tax-Equivalent Yield} = \frac{\text{Tax-Exempt Yield}}{1 - \text{Marginal Tax Rate}} \]

Use this when comparing municipal bonds with taxable bonds for a taxpayer in a given marginal tax bracket.

Gift, Estate, and Trust Concepts

Notes and examples

Gift and Estate Tax Review

Topic	Core Rule
Gift tax	Generally imposed on donor, not donee
Annual exclusion	Review current-year amount and present interest requirement
Lifetime exemption	Unified estate and gift system; confirm current amount
Gift basis	Usually carryover basis, with dual basis rule for loss property
Gift holding period	May tack if carryover basis applies
Estate tax	Based on taxable estate after deductions and credits
Inherited basis	Often stepped to FMV, subject to exceptions
IRD	Income in respect of a decedent does not receive normal basis step-up treatment

Trust Taxation

Topic	Review Point
Simple trust	Generally required to distribute accounting income; limited charitable/discretionary features
Complex trust	May accumulate income or make discretionary distributions
DNI	Limits trust distribution deduction and beneficiary taxable income
Character flow-through	Income character can pass to beneficiaries
Fiduciary accounting income	Not the same as taxable income
Grantor trust	Grantor may be treated as owner for income tax purposes

Tax Compliance Process Reference

Common Federal Return and Entity Forms

Notes and examples

Filing and Payment Planning

Area	Reference
Extensions	Usually extend time to file, not time to pay
Estimated taxes	Required when withholding/payments are insufficient
Safe harbors	Often based on current-year tax or prior-year tax; use exam-provided percentages if calculation is needed
Penalties	Commonly involve late filing, late payment, underpayment, negligence, or substantial understatement
Interest	Generally accrues on underpayments
Amended returns	Used to correct previously filed returns
Statute of limitations	Varies based on filing, omission, fraud, or nonfiling facts

Common trap: an extension does not prevent interest or penalties on unpaid tax.

Tax Planning Decision Tables

Timing Income and Deductions

Notes and examples

Entity Choice Planning

Goal	Entity often considered	Tax tradeoff
Simplicity	Sole proprietorship or single-member LLC	Self-employment tax; no separate tax entity
Flexible allocations	Partnership/LLC taxed as partnership	Complex basis and liability rules
Payroll tax planning	S corporation	Reasonable compensation required
Retain earnings for growth	C corporation	Potential double taxation on dividends/sale
Attract broad investors	C corporation	More flexible ownership than S corporation
Loss pass-through	Partnership or S corporation	Basis, at-risk, and passive limitations still apply

Compensation vs Distribution

Entity	Payment type	Tax treatment focus
Partnership	Guaranteed payment	Ordinary income to partner; not dependent on profits
Partnership	Distributive share	Character flows through; may affect self-employment tax
S corporation	Wages to shareholder-employee	Deductible by corporation; payroll tax applies
S corporation	Distribution	Generally not wages, but limited by basis and AAA/E&P rules
C corporation	Salary/bonus	Deductible if reasonable
C corporation	Dividend	Not deductible; taxed to shareholder

Charitable Giving Planning

Donation	Tax result focus	Trap
Cash	Deduction subject to AGI percentage limits	Substantiation required
Long-term appreciated public stock	Potential FMV deduction and no capital gain recognition	Deduction limits and qualified organization rules
Short-term appreciated property	Deduction often limited to basis	Character affects deduction amount
Ordinary income property	Deduction often reduced by ordinary income that would be recognized	Inventory rules may apply
Services	No deduction for value of time	Out-of-pocket unreimbursed expenses may qualify

Entity Choice and Planning

TCP planning questions often ask which entity structure best fits a taxpayer’s goals.

Entity	Advantages	Disadvantages / Watch Points
Sole proprietorship	Simple, direct losses, no entity return separate from owner schedule	Self-employment tax, liability exposure, limited continuity
Partnership / LLC taxed as partnership	Flexible allocations, single level of tax, liability planning	Complex basis, self-employment, special allocations
S corporation	Pass-through, possible payroll/self-employment planning, corporate form	Eligibility limits, reasonable compensation, basis restrictions
C corporation	Lower entity-level planning potential, retained earnings, fringe benefits	Double taxation, dividend treatment, accumulated earnings issues
Trust	Estate and distribution planning	DNI, fiduciary accounting, compressed tax rate concerns
Disregarded entity	Simplicity for tax reporting	Still legal and payroll considerations

Planning Decision Rules

Goal	Possible Planning Lever
Reduce current taxable income	Accelerate deductions, defer income, retirement contributions, depreciation options
Improve cash flow	Defer gain, use installment sale, manage estimated taxes
Use losses	Ensure basis, at-risk amount, and passive income availability
Avoid double taxation	Consider pass-through entity or compensation/dividend mix
Transfer wealth	Gifts, trusts, family entities, valuation and basis planning
Convert character	Prefer long-term capital gain or Section 1231 gain where legitimate
Manage owner compensation	Balance wages, distributions, retirement plan, payroll taxes
Exit business	Stock sale vs asset sale, installment sale, liquidation, redemption planning

Common TCP Exam Traps

Fast Review Checklist

Before answering a CPA TCP tax scenario, identify:

1. Taxpayer type: individual, C corporation, S corporation, partnership, estate, trust, or exempt organization.
2. Tax year and any exam-provided limits.
3. Accounting method: cash, accrual, or special method.
4. Character: ordinary, capital, Sec. 1231, passive, portfolio, tax-exempt, or personal.
5. Timing: included/deducted now, deferred, excluded, capitalized, or amortized.
6. Basis: initial basis, adjustments, liabilities, distributions, depreciation, and suspended losses.
7. Loss limits: basis, at-risk, passive, excess business loss, NOL.
8. Entity-level versus owner-level consequences.
9. Compliance item: form, schedule, filing/payment, extension, disclosure, or penalty.
10. Planning result: tax saved, tax deferred, rate arbitrage, cash flow, or risk created.

AICPA CPA TCP Cheat Sheet

This independent quick review is for candidates preparing for the AICPA U.S. CPA TCP - Tax Compliance and Planning exam, official exam code CPA TCP. Use it as a final review before working topic drills, mock exams, and original practice questions with detailed explanations.

Important: Tax rules, thresholds, phaseouts, and exam blueprints can change. Use this page for high-yield concepts and decision rules, then confirm current-year amounts and testing scope in your primary study materials.

The TCP Mindset: Compliance Plus Planning

CPA TCP questions often test more than “what is taxable?” They usually require you to:

1. Identify the taxpayer: individual, C corporation, S corporation, partnership, estate, trust, or exempt entity.
2. Classify the item: income, deduction, credit, basis adjustment, distribution, or separately stated item.
3. Determine timing: current year, deferred, capitalized, amortized, or excluded.
4. Apply limitations in the correct order.
5. Consider planning impact: tax rate, character, cash flow, basis, risk, and future-year consequences.

High-Yield Question Prompts

Universal Tax Framework

Use this sequence when a problem feels complex:

1. Who is taxed? Entity, owner, beneficiary, donor, donee, decedent, or estate.
2. What is the transaction? Sale, exchange, contribution, distribution, compensation, gift, inheritance, loan, lease, or service.
3. What is the character? Ordinary, capital, Section 1231, tax-exempt, portfolio, passive, self-employment, or separately stated.
4. What is the basis impact? Basis determines gain, loss, depreciation, distribution taxability, and future deductions.
5. What limitations apply? Basis, at-risk, passive, capital loss, charitable, interest, QBI, AMT, credit limitations.
6. What planning answer is best? Lower rate, deferral, conversion of character, entity selection, or risk control.

Key formulas:

\[ \text{Realized gain or loss} = \text{Amount realized} - \text{Adjusted basis} \]\[ \text{Amount realized} = \text{Cash received} + \text{FMV of property received} + \text{Debt relief} - \text{Selling costs} \]\[ \text{Adjusted basis} = \text{Original basis} + \text{Capital additions} - \text{Depreciation, amortization, depletion, or returns of capital} \]

Partnership and LLC Taxation

Partnership Core Rules

Notes and examples

Partnership Basis

Outside basis generally increases for:

• Contributions of cash or property,
• Share of partnership income,
• Tax-exempt income,
• Increases in share of partnership liabilities.

Outside basis generally decreases for:

• Distributions,
• Share of losses and deductions,
• Nondeductible expenses,
• Decreases in share of partnership liabilities.

A decrease in partnership liabilities is treated like a cash distribution. If deemed cash distributed exceeds outside basis, gain may result.

Partnership Distributions

Distribution Type	General Treatment
Nonliquidating cash distribution	Tax-free until cash exceeds outside basis
Property distribution	Generally nonrecognition; partner takes basis limited by outside basis
Cash exceeding basis	Gain recognized
Liquidating cash distribution	Gain if cash exceeds basis; loss possible in limited cases
Marketable securities	May be treated similarly to cash in certain cases
Hot assets	Ordinary income potential under unrealized receivables and inventory rules

Partnership vs S Corporation Basis Trap

Issue	Partnership	S Corporation
Entity debt	Partner share of debt usually increases basis	Corporate debt usually does not increase shareholder stock basis
Direct owner loan	Creates basis impact	Can create shareholder debt basis
Guarantees	May affect liability allocation depending on risk	Usually not basis until payment
Loss flowthrough	Basis, at-risk, passive limits apply	Stock/debt basis, at-risk, passive limits apply

Tax Credits and Planning

Credits are high value because they reduce tax liability directly.

Common trap: Deductions reduce taxable income; credits reduce tax. A smaller credit may be worth more than a larger deduction depending on marginal rate.

Retirement, Compensation, and Employee Benefits

Retirement Planning

Notes and examples

Compensation Planning

Compensation Type	Tax Consideration
Wages	Deductible to business if reasonable; taxable to employee; payroll taxes
Bonus	Timing and constructive receipt issues
Fringe benefits	Excludable only if rule allows
Equity compensation	Timing, valuation, ordinary vs capital character
Independent contractor payments	Reporting, self-employment tax, worker classification
Shareholder distributions	Entity-specific tax treatment
Guaranteed payments	Partnership ordinary income and possible self-employment impact

Tax Compliance, Procedure, and Ethics

Compliance Concepts

Notes and examples

Professional Responsibility

For AICPA CPA TCP review, be prepared to distinguish aggressive planning from unsupportable positions.

Concept	Practical Meaning
Reasonable basis	Position has some support, but may require disclosure
Substantial authority	Stronger support level; may avoid certain penalties
More-likely-than-not	Greater than 50% likelihood standard in some contexts
Due diligence	Preparer must make reasonable inquiries and not ignore red flags
Confidentiality	Taxpayer information must be protected
Conflict of interest	Identify, disclose, and obtain appropriate consent where required
Tax avoidance vs evasion	Legal planning is allowed; fraudulent concealment is not

AMT and Other Individual Planning Topics

Alternative minimum tax and related calculations can appear conceptually even when exact computations are not the focus.

Common CPA TCP Candidate Mistakes

1. Computing recognized gain before realized gain. Always compute realized gain first.
2. Ignoring basis. Basis drives gain, loss, depreciation, and distributions.
3. Applying pass-through losses without owner-level limits.
4. Treating all distributions as dividends. Entity type and E&P/basis matter.
5. Confusing book income with taxable income.
6. Deducting personal expenses as business expenses.
7. Forgetting separately stated items.
8. Missing recapture. Depreciation can convert favorable gain into ordinary income.
9. Using the wrong holding period.
10. Treating a tax credit like a deduction.
11. Assuming a tax extension delays payment.
12. Ignoring constructive receipt or economic benefit.
13. Overlooking related-party rules.
14. Failing to distinguish employee vs independent contractor.
15. Choosing a planning answer that saves tax but creates worse cash flow or compliance risk.

Quick Tables for Final Review

Tax Character Snapshot

Notes and examples

Separately Stated Pass-Through Items

Item	Why Separately Stated
Capital gains and losses	Owner-level netting and rates
Charitable contributions	Owner-level limitations
Section 179 expense	Owner-level limits
Tax-exempt income	Basis and tax reporting
Investment interest expense	Owner-level investment income limit
Foreign taxes	Credit or deduction decision
Credits	Owner-level limitation
Passive income/loss	Owner passive activity grouping
Guaranteed payments	Character and self-employment considerations

Basis Increase / Decrease Summary

Taxpayer Interest	Increases	Decreases
S corporation stock	Contributions, income	Distributions, nondeductible expenses, losses
S corporation debt	Direct shareholder loans and restorations	Losses deducted using debt basis, repayments
Partnership outside basis	Contributions, income, liability increases	Distributions, losses, liability decreases
C corporation stock	Purchase cost, contributions, taxable stock dividends where applicable	Return of capital, certain adjustments
Trust beneficiary interest	Depends on trust terms and distributions	Depends on distributions and taxable income

Last-Minute CPA TCP Review Checklist

Before a mock exam or final topic drill set, make sure you can do the following without notes:

• Calculate realized and recognized gain.
• Determine basis for purchased, gifted, inherited, contributed, and exchanged property.
• Identify ordinary, capital, Section 1231, and recapture character.
• Apply pass-through basis and loss limitations in order.
• Distinguish C corporation, S corporation, and partnership distribution treatment.
• Explain Section 351 corporate formation consequences.
• Explain Section 721 partnership contribution consequences.
• Track S corporation stock and debt basis.
• Track partnership outside basis, including liabilities.
• Recognize separately stated pass-through items.
• Identify major individual exclusions, deductions, and credits.
• Distinguish refundable and nonrefundable credits.
• Apply charitable, interest, passive, capital loss, and business loss limitations conceptually.
• Identify common book-tax differences.
• Choose planning strategies based on marginal tax rate, timing, character, and cash flow.
• Recognize compliance and preparer responsibility issues.

Put the review into practice