CPA TCP Quick Review: Tax Compliance and Planning

AICPA CPA TCP Quick Review

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:

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

Individual Tax Compliance Review

Individual Income Items

Above-the-Line vs Itemized vs Credit

Individual Deduction Traps

Filing Status and Dependents

Know the logic, not just labels.

Self-Employment and Small Business Items

Property Transactions and Basis

Basis Rules to Memorize

Character of Gains and Losses

Section 1231, 1245, and 1250 Quick Review

Nonrecognition and Deferral Transactions

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

C Corporation Taxation

C Corporation Compliance Concepts

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

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.

S Corporation Taxation

S Corporation Core Rules

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

Partnership and LLC Taxation

Partnership Core Rules

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

Partnership vs S Corporation Basis Trap

Entity Choice and Planning

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

Planning Decision Rules

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

Compensation Planning

Estate, Gift, and Trust Basics

Gift and Estate Tax Review

Trust Taxation

Tax Compliance, Procedure, and Ethics

Compliance Concepts

Professional Responsibility

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

AMT and Other Individual Planning Topics

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

Book-Tax Differences

Permanent vs Temporary Differences

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

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

Separately Stated Pass-Through Items

Basis Increase / Decrease Summary

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.

How to Use Practice Questions After This Review

After reading this Quick Review, move into active practice:

1. Start with topic drills on basis, pass-through losses, property transactions, and entity distributions.
2. Use original practice questions to test whether you can identify the taxpayer, character, basis, and limitation order quickly.
3. Review detailed explanations, especially for questions you answered correctly by guessing.
4. Build an error log organized by rule type: basis, character, timing, limitation, entity, or planning.
5. Finish with mixed mock exams so you practice switching between individual, entity, property, and planning issues under time pressure.

A practical next step is to work a focused CPA TCP question bank set on pass-through basis and loss limitations, then review each explanation until you can state the rule and the trap in your own words.