Taxation & Regulation (REG) Cheat Sheet

Individual Income Tax Formula

Filing Requirements & Status

Who Must File & When

• General Rule: A return is required if gross income meets or exceeds the standard deduction (including age/blindness additions).
• Self-Employed: A return is required if net earnings from self-employment are $400 or more.
• Deadline: April 15th.
• Extensions: A 6-month extension to file (not to pay) is available via Form 4868.

Filing Status Rules

Qualifying Dependents (Child vs. Relative)

Gross Income: Concepts & Accounting

• Realization: The economic event that triggers income (e.g., a sale).
• Recognition: Recording the income on the tax return.

Accounting Method

• Cash Method: Recognition occurs when revenue is actually or constructively received.
• Accrual Method: Recognition occurs when revenue is earned.

Gross Income: Taxable Items

Gross Income: Investment & Other Income

Interest Income

Dividend Distribution "Waterfall"

The tax treatment of a corporate distribution flows through three sequential buckets:

Qualified dividends meeting specific source and holding period requirements are taxed at lower long-term capital gains rates.

Annuities

Payments are split between a non-taxable return of capital and taxable ordinary income via the exclusion ratio:

If the annuitant outlives their life expectancy, all additional payments are fully taxable as ordinary income.

Social Security Income

Taxability depends on the taxpayer's Provisional Income.

Net Investment Income Tax (NIIT)

A 3.8% tax applies to the lesser of net investment income or the excess of modified AGI over a threshold ($250,000 for MFJ, $200,000 for Single/HoH).

Gross Income: Nontaxable & Partially Taxable Items

Schedule C Details & SE Tax

Business Interest Expense Limitation

For businesses with average gross receipts over $30 million, the business interest expense deduction is limited to the sum of:

• Business interest income
• 30% of the adjusted taxable income
• Floor plan financing interest

Common Nondeductible Sch. C Expenses

• Salaries paid to the sole proprietor (these are considered a draw/withdrawal)
• Federal income tax
• Bad debt expense for a cash-basis taxpayer
• Personal portion of auto, travel, and meal expenses
• Charitable contributions (these are an itemized deduction on Schedule A)

Self-Employment Tax Calculation

Nontaxable Fringe Benefits

Rental & Hobby Income/Loss

Rental Income (Schedule E)

Hobby Losses

If an activity is not engaged in for profit, expenses are not deductible. Income is still included in gross income. The IRS uses a nine-factor test to determine if an activity is a business (for profit) or a hobby:

1. Carrying on the activity in a businesslike manner.
2. The expertise of the taxpayer or their advisors.
3. The time and effort expended by the taxpayer.
4. Expectation that assets used in the activity may appreciate in value.
5. The success of the taxpayer in carrying on other similar or dissimilar activities.
6. The activity's history of income or losses.
7. The amount of occasional profits, if any.
8. The financial status of the taxpayer.
9. Elements of personal pleasure or recreation.

Taxation of Retirement Plan Distributions

The taxability of IRA distributions depends on the type of IRA and whether contributions were deductible.

Distributions before age 59½ generally incur a 10% penalty, but exceptions exist for death, disability, medical expenses, first-time home purchase (up to $10k), education, and birth/adoption ($5k).

Tax Treatment of Divorce-Related Payments

Adjustments for AGI ("Above the Line")

Itemized Deductions (Schedule A)

Standard & Additional Deductions

Taxpayers can take the greater of their standard deduction or itemized deductions.

Additional Standard Deduction & Senior Relief

An additional deduction is available for taxpayers who are age 65 or older and/or blind.

• Unmarried: $2,050 for each condition (age or blindness).
• Married: $1,650 for each condition, per taxpayer.

OBBBA Senior Deduction (2026)

• Benefit: Taxpayers age 65 and older can take an additional $6,000 deduction per qualifying individual (up to a $12,000 deduction if both spouses are 65+).
• Income Limit (Single): Available to single filers earning $75,000 or less.
• Income Limit (MFJ): Available to couples filing jointly earning $150,000 or less.

Casualty Loss Calculation

Remember, personal casualty losses are deductible only if they occur in a federally declared disaster area. The calculation is as follows:

1. Determine Loss Amount: Take the lesser of the property's lost cost (adjusted basis) or its decreased FMV.
2. Subtract Insurance: Reduce the loss amount by any insurance reimbursement you receive.
3. Apply $100 Floor: Subtract $100 from the loss for each separate casualty event.
4. Apply 10% AGI Floor: Subtract 10% of your Adjusted Gross Income (AGI) from the remaining loss.

QBI Deduction (Section 199A)

A deduction of up to 20% of Qualified Business Income from flow-through entities.

• QTB: Qualified Trade or Business (Standard businesses).
• SSTB: Specified Service Trade or Business (Health, law, accounting, consulting, athletics, financial services).

Deductibility Thresholds

Tax Credits

Credits reduce tax liability dollar-for-dollar. Refundable credits can result in a refund if they exceed the tax owed; nonrefundable credits can only reduce liability to zero.

Kiddie Tax

The net unearned income of a dependent child is taxed at the parents' marginal rate.

2026 Thresholds:

Estimated Taxes & Underpayment Penalty

Taxpayers must make estimated tax payments if they expect to owe at least $1,000 in tax and their withholding is insufficient.

Avoiding the Penalty

To avoid a penalty, withholding and timely estimated payments must equal or exceed the lesser of:

• 90% of the current year's tax liability, OR
• 100% of the prior year's tax liability (110% if prior year AGI > $150,000).

Trump Accounts (IRC § 530A)

Property Basis & Acquisition

Basis of Gifted Property

The general rule is that the donee's basis is the same as the donor's basis (NBV). However, an exception applies if the FMV at the date of the gift is lower than the donor's basis.

Holding Period & Depreciation Basis

• Holding Period: If the donor's basis is used, the holding period tacks. If the FMV is used, the holding period starts at the date of the gift.
• Depreciation Basis: The basis for depreciation is the lesser of the donor's adjusted basis or the FMV at the date of the gift.

Business Property Deductions & Amortization

Depreciation (MACRS)

Personal Property

Convention: Uses Half-Year convention by default. The Mid-Quarter convention is required if more than 40% of personal property is placed in service during the 4th quarter.

Real Property (Straight-Line)

Convention: Always uses the Mid-Month convention. Land is never depreciated.

Advanced Depreciation Rules

Additional Section 179 Rules

• Cannot be acquired from a related party.
• Land and improvements to land do not qualify.
• Not available for investment, rental, or most real property (qualified interior non-residential improvements are an exception).

Depreciation in Year of Disposal

Capital Gains & Losses

Special Rates & Cases

• Unrecaptured Section 1250 Gain: Taxed at a maximum rate of 25% (applies to previously taken straight-line depreciation on real property).
• Collectibles: Taxed at a maximum rate of 28%.
• Worthless Stock: Treated as a capital loss as if sold on the last day of the tax year it becomes worthless.

Nondeductible Losses

• Wash Sales: A loss is disallowed if an identical security is repurchased within 30 days before or after the sale. The disallowed loss is added to the basis of the new stock.
• Related Party Transactions: Losses between related parties (e.g., siblings, >50% owned entities) are disallowed.

C-Corporation: Filing & Estimated Taxes

Filing Requirements

C-Corps must file Form 1120 by the 15th day of the 4th month after their year-end. A 6-month extension is available.

Estimated Taxes

Corporations must pay estimated taxes in four quarterly installments.

• Small Corps (<$1M TI): Required to pay the lesser of 100% of the current year's tax or 100% of the prior year's tax.
• Large Corps (>$1M TI): Must pay 100% of the current year's tax.

Corporate Accounting & Key Concepts

Accrual vs. Cash Method

The accrual method is required for:

• Accounting for inventory (purchases and sales).
• Tax shelters.
• C-Corporations and partnerships with C-Corp partners with average annual gross receipts exceeding $30 million for the prior 3-year period.

Bonus Accruals (for Accrual-Basis Taxpayers)

Bonuses are deductible in the tax year they are accrued if they are paid out within 2.5 months of the taxpayer's year-end.

Bad Debts

• Accrual Basis: Deductible only in the year the specific debt is written off (direct write-off method). The allowance method is not permitted for tax.
• Cash Basis: Not deductible, as the income was never recognized.

C-Corporation: Book-to-Tax Reconciliation (Schedule M-1)

Reconciles book income (GAAP) with taxable income. Start with Net Income per books and adjust for differences.

C-Corporation: Key Deductions & Losses

Dividends Received Deduction (DRD)

Deduction for dividends received from other domestic corporations. The DRD is the lesser of the percentage of dividends received or the percentage of taxable income.

• 0-20% Ownership: 50% DRD
• 20-80% Ownership: 65% DRD
• >80% Ownership (Affiliated): 100% DRD

Charitable Contributions

• Limit: Deduction is limited to 10% of taxable income (before DRD, NOL/Capital Loss carrybacks).
• Timing: Accrued contributions are deductible if paid within 3.5 months of year-end.
• Carryover: 5-year carryforward.

Net Operating Losses (NOLs)

• NOLs before 2018: Carry back 2 years, carry forward 20 years. Offsets 100% of future income.
• NOLs in 2018-2020: Carry back 5 years, carry forward indefinitely. Offsets 100% of future income.
• NOLs after 2020: No carryback, carry forward indefinitely. The NOL deduction is limited to 80% of taxable income.

Capital Losses

• Corporate capital losses can only be used to offset capital gains.
• Carryover rules: They can be carried back 3 years and carried forward 5 years.

Additional Corporate Deductions

Executive Compensation

A publicly held corporation cannot deduct compensation expenses in excess of $1,000,000 paid to its highest-paid employees.

Business Gifts

Deductible up to a maximum of $25 per recipient per year.

Life Insurance Premiums

• Corporation as Beneficiary (Key Person): Premiums are not deductible.
• Employee as Beneficiary (Fringe Benefit): Premiums are deductible as an employee benefit.

Business Casualty Losses

• Partially Destroyed: The loss is the lesser of the change in FMV or the adjusted basis, reduced by any insurance proceeds.
• Fully Destroyed: The loss is the adjusted basis less insurance proceeds.

C-Corporation: Special Taxes & Credits

Accumulated Earnings Tax

• A penalty tax of 20% on undistributed earnings accumulated beyond reasonable business needs.
• C-Corps are entitled to a minimum lifetime credit of $250,000.

Personal Holding Company (PHC) Tax

A penalty tax of 20% on the undistributed income of a PHC. A company is a PHC if it meets both tests:

1. Ownership Test: More than 50% of the stock is owned by 5 or fewer individuals.
2. Income Test: 60% or more of adjusted ordinary gross income consists of passive income (Net rent, Royalties, Interest, Dividends).

Foreign Tax Credit

• Calculated as the lesser of foreign taxes paid or the US tax liability on foreign income.
• Formula: (Worldwide TI * US Rate) * (Foreign TI / Worldwide TI).
• Carryover rules: Carry back 1 year, carry forward 10 years.

S-Corporations

Eligibility Requirements

• Must be a domestic corporation.
• Must have only one class of stock (differences in voting rights, like voting vs. non-voting, do not create a second class).
• Limited to 100 or fewer shareholders (family members count as a single shareholder).
• Eligible shareholders include individuals, estates, and certain trusts.
• Ineligible shareholders: Nonresident aliens, C-Corporations, and Partnerships.

Election Timing

• To be effective for the current year, Form 2553 must be filed by the 15th day of the 3rd month of the tax year (March 15 for a calendar year).
• An election made after this date becomes effective on the first day of the next tax year.

Shareholder Basis & Loss Limitation

• Losses are deductible to the extent of the shareholder's basis.
• Basis calculation: Stock Basis + Debt Basis (direct loans made by the shareholder to the S-Corp).
• Income and losses are allocated to shareholders on a per-share, per-day basis.
• Unlike partnership income, passed-through S-Corp earnings are generally not subject to self-employment taxes.

Fringe Benefits

• Non-Shareholder Employees & ≤ 2% Shareholders: Benefits are deductible by the S-Corp.
• > 2% Shareholders: Benefits are generally not deductible by the S-Corp unless the cost is included in the employee-shareholder's W-2 income.

Separately Stated Items

Items not included in ordinary business income pass through separately to shareholders (e.g., Net rental real estate income/loss, Interest/dividend income, Capital gains/losses, Section 179 deduction, Charitable contributions).

Termination of S-Election

• Voluntary: Shareholders holding more than 50% of the stock consent.
• Involuntary: Fails to meet any qualification requirement.
• Excess Passive Income: More than 25% of gross receipts are from passive income for 3 consecutive years (only applies if the S-Corp has prior C-Corp E&P).

Partnerships

Tax Forms

• Form 1065: Informational return filed by the partnership.
• Schedule K: Reports the partnership's total income, deductions, credits, etc.
• Schedule K-1: Provided to each partner, showing their individual share of the items on Schedule K.

Partner Basis & Loss Limitation

• A partner's basis is calculated using their capital account + their share of partnership liabilities.
• Losses are deductible only to the extent of this total tax basis.
• Withdrawals are nontaxable but decrease the partner's basis.

Guaranteed Payments

• Payments made to a partner for services or use of capital, determined without regard to partnership income.
• Partnership Treatment: Deductible as a business expense.
• Partner Treatment: Taxable as ordinary income.

Pass-Through Basis Calculations

Understanding how basis flows is critical for both Partnerships and S-Corporations.

The Impact of Liabilities (Crucial Difference)

Tax-Exempt Organizations

Most common is a Section 501(c)(3) organization, which is generally exempt from federal income tax.

Unrelated Business Income (UBI)

Exempt organizations may be taxed on UBI if the income meets all three of these conditions:

• Derived from a trade or business;
• Regularly carried on; and
• Not substantially related to the organization's tax-exempt purpose.

Public vs. Private

• Public Charities: Receive broad public support (at least 1/3 of total support must be from the public/government). Includes churches, schools, and hospitals.
• Private Foundations: Receive support from a single major source and primarily make grants to other organizations. Subject to stricter rules and excise taxes.

State & Local Taxation (SALT)

Nexus

• Definition: The minimum level of connection a business must have with a state before it is subject to the state's tax jurisdiction (e.g., owning property, resident employees, or significant sales).
• Public Law 86-272 Exception: Protects out-of-state sellers from income tax if their only activity is soliciting orders for tangible personal property.

Apportionment (Business Income)

Business income is apportioned among states where nexus exists, typically using a three-factor formula (though some states heavily weight sales):

Allocation (Non-Business Income)

Non-business income (e.g., dividends, interest) is allocated entirely to a specific state, usually the state of commercial domicile.

Circular 230: Practice Before the IRS

Overview

Circular 230 provides regulations governing practice before the IRS. It covers authority to practice, duties and restrictions, sanctions for violations, and disciplinary proceedings.

Tax Preparer Roles

A tax preparer is anyone who prepares a substantial portion of a tax return for compensation. They must have an IRS Preparer Tax Identification Number (PTIN).

• Signing Tax Preparer: The individual with primary responsibility for the overall accuracy of the return.
• Non-Signing Tax Preparer: An individual who prepares all or a substantial portion of a return but does not have primary responsibility (e.g., assists the signing preparer).

Key Practitioner Duties & Restrictions

• Information to Be Furnished: Must promptly provide records to the IRS, unless believed in good faith to be privileged.
• Knowledge of Client Omission: Must advise the client of noncompliance and potential penalties. Not required to notify the IRS or withdraw.
• Diligence as to Accuracy: Must exercise due diligence in preparing and filing documents.
• Conflicts of Interest: Cannot represent a client if there is a conflict, unless representation is not prohibited by law, the practitioner believes they can competently represent all clients, and all affected clients waive the conflict in writing.
• Fees: Cannot charge an "unconscionable fee." Contingent fees are generally not allowed, with exceptions for IRS examinations, refund claims, and judicial proceedings.
• Return of Client Records: Must return client records upon request, even if a fee dispute exists.
• Practice by Former Government Employees: Restrictions apply. For example, if an employee "personally and substantially participated" in a matter, they can never represent clients on that matter.

Tax Return Position Standards & Penalties

Tax Return Position Standards

Taxpayer Penalties

• Failure-to-File: 5% per month (max 25%). Minimum penalty if >60 days late is lesser of $535 or 100% of tax due.
• Failure-to-Pay: 0.5% per month (max 25%).
• Substantial Understatement / Negligence: 20% of the understatement. An understatement is "substantial" if it exceeds the greater of 10% of the correct tax or $5,000.
• Substantial Valuation Misstatement: 20% penalty if the valuation of property claimed is 150% or more of the correct value (increases to 40% for gross misstatements).
• Fraud: Civil penalty is 75% of the understatement (IRS must prove by "preponderance of evidence"). Criminal penalties include fines up to $100,000 ($500,000 for corps) and imprisonment (government must prove "beyond a reasonable doubt").
• Earned Income Credit Penalty: Taxpayers who negligently claim the EIC may be disallowed from claiming it for two years (ten years in cases of fraud).

Tax Authoritative Hierarchy & Sources

The determination of a tax position's authority is based on a strict hierarchy. If a conflict occurs, the source higher in the hierarchy governs.

1. Internal Revenue Code (IRC): Highest Legislative Authority.
2. Treasury Regulations: Highest Administrative Authority (interprets the IRC).
3. Revenue Rulings & Procedures: IRS application of the law to specific factual situations.
4. Private Letter Rulings (PLR): Binding only for the specific requesting taxpayer.

Unsupported Tax Positions

• Frivolous Position: A position with less than a 20% chance of success; has no basis in law or authority. Patently improper.
• Listed Transaction: A transaction identified by the IRS as a tax avoidance transaction. Strict disclosure is required.

Common Law Duties & Legal Liability

A tax professional can be held civilly liable to clients and, under certain doctrines, to third parties who rely on their work.

Taxpayer Privileges & Workpapers

The tax practitioner-taxpayer privilege protects confidential communications but does not apply to criminal cases or tax shelters. Workpapers are the preparer's property but cannot be shared without client consent, except for a valid court subpoena, a quality/peer review, or in defense of a lawsuit.

Tax Preparer Penalties & Legal Liability

Preparer Conduct Penalties

• Understatement due to Unreasonable Position: Penalty is the greater of $1,000 or 50% of the preparer's fee.
• Willful or Reckless Conduct (Fraud): Penalty is the greater of $5,000 or 75% of the preparer's fee.
• Aiding and Abetting Understatement: Civil penalty of $1,000 for individuals ($10,000 for corporations). IRS has the burden of proof.
• Wrongful Disclosure/Use of Information: $250 penalty for each instance (max $10,000). Exceptions include court orders, quality reviews, and client consent.

Preparer Compliance Penalties

IRS Audits, Appeals, and Courts

Types of Audits

• Correspondence Audit: Conducted via mail (common for simple errors or missing documents).
• Office Audit: Conducted at a local IRS office.
• Field Audit: Conducted at the taxpayer's location/business (most comprehensive).

Selection Methods: Statistical models, random selection, prior year audits, or information return discrepancies (e.g., mismatched 1099s).

Appeals Process

Trial Courts

• U.S. Tax Court: No payment required to petition. No jury trial. Judges are tax experts.
• U.S. District Court: Must pay tax first and sue for a refund. Jury trial is an option. Located in taxpayer's geographic area.
• U.S. Court of Federal Claims: Must pay tax first. No jury trial.

Regulatory Bodies & Legal Concepts

Regulatory Power

• State Boards of Accountancy: Have the sole power to grant, suspend, and revoke a CPA's license. Can impose fines and require CPE.
• AICPA & State Societies: Can sanction members (e.g., suspend membership), but cannot revoke a CPA's license.
• SEC: Can censure, suspend, or revoke the right to practice before the SEC for CPAs.

Burden of Proof

• Civil Cases: "Preponderance of the evidence." Generally on the taxpayer.
• Criminal Cases: "Beyond a reasonable doubt." On the government.

Contract Law: Formation & Sources

Methods of Formation

• Express Contract: Formed by language, oral or written.
• Implied-in-Fact Contract: Formed by conduct.
• Unilateral Contract: One promise given in exchange for performance.
• Bilateral Contract: Two promises; a promise for a promise.

Sources of Contract Law

• Common Law: Governs contracts for services, employment, insurance, and real estate.
• Uniform Commercial Code (UCC): Governs contracts for the sale of goods (moveable tangible property).

Contract Law: Enforceability & Remedies

Elements of an Enforceable Contract

1. Agreement: Offer and Acceptance (Mutual Assent).
2. Consideration: Bargained-for exchange of legal value. (Pre-existing duties do not count).
3. Lack of Defenses: Must be free from fraud, duress, illegality, etc.

Breach & Substitution Doctrines

Remedies for Breach

Contract Law: The Offer & Acceptance

The Offer

Must be a serious offer with definite and certain terms. Advertisements are generally invitations, not offers.

Termination of Offer:

• Revocation by Offeror: Effective when received by the offeree. An option contract (consideration paid to keep offer open) is irrevocable.
• Rejection by Offeree: A counteroffer is a rejection. Effective when received by the offeror.
• By Operation of Law: Death or incompetency of parties, destruction of subject matter, or illegality.

The Acceptance

• Mailbox Rule: Acceptance is effective when SENT (dispatched), regardless of when it is received.
• Common Law (Mirror Image Rule): Acceptance must exactly mirror the offer's terms.
• UCC (Sale of Goods): Mirror Image Rule does not apply. Minor changes are acceptable.

Contract Law: Defenses

Agency Law

Agent's Power to Bind Principal

Duties of Agent to Principal

Termination of Agency

Actual authority terminates by acts of the parties (quitting, firing) or operation of law (death, bankruptcy). Apparent authority only terminates once notice is given to third parties.

Surety Law

Surety vs. Guarantor

• Surety: Directly liable on the debt. The creditor can proceed directly against the surety upon the debtor's default.
• Guarantor: Liable only if the creditor first tries and fails to collect from the debtor.

Surety's Rights

• Exoneration: Can compel the debtor to pay before the surety has to pay.
• Subrogation: After paying, the surety acquires all the creditor's rights against the debtor.
• Reimbursement: Can recover from the debtor any amount the surety paid.

Surety's Defenses

A surety can use defenses like fraud by the creditor, duress upon the debtor, illegality of the underlying obligation, and discharge of the debtor's obligation. A surety's own incapacity or bankruptcy is also a defense.

Secured Transactions (UCC Article 9)

Governs debtor-creditor relationships where personal property (collateral) is used to secure a debt.

Secured vs. Unsecured Creditor

• Unsecured Creditor: Has no specific claim to the debtor's property. If the debtor defaults, the creditor must sue, obtain a judgment, and execute it.
• Secured Creditor: Has a legal interest (security interest) in specific personal property. Can repossess the collateral upon default without a court judgment (if done without breaching the peace).

Attachment vs. Perfection

Key Bankruptcy Concepts (U.S. Code)

Types of Bankruptcy & Eligibility

• Chapter 7 (Liquidation): Trustee liquidates non-exempt assets to distribute proceeds. Available to individuals, partnerships, and corporations. Excludes: railroads, insurance companies, banks, and small business investment companies.
• Chapter 11 (Reorganization): Debtor continues operating while developing a repayment plan. Excludes: stockbrokers and commodity brokers.
• Chapter 13 (Individual Debt Adjustment): Individual with regular income creates a 3- to 5-year repayment plan.
• Chapter 9: Municipal Debt Adjustment.
• Chapter 12: Family Farmers with Regular Income.

Key Features of Bankruptcy Proceedings

• Automatic Stay: Injunction halting most collection activities against the debtor.
• Section 341 Meeting: A mandatory meeting of creditors held during proceedings.
• Property of the Estate: Includes all assets at filing, plus inheritances, life insurance payouts, or divorce settlements received within 180 days after filing.
• Preferential Payments: Trustee can recover payments made to a creditor within 90 days before filing (or 1 year for an insider) that allowed the creditor to receive more than they would have in bankruptcy.

Priority of Claims in a Chapter 7 Liquidation

Unsecured claims are paid in this order:

1. Domestic support obligations.
2. Administrative expenses of the bankruptcy estate.
3. "Gap" claims incurred in the ordinary course of business in an involuntary case.
4. Wage claims earned within 180 days of filing, up to $15,150 per employee.
5. Employee benefit plan contributions, up to $15,150 per employee (less wage claims paid).
6. Claims of grain farmers and fishermen, up to $7,475 per claimant.
7. Consumer deposits, up to $3,350 per claimant.
8. Certain tax claims.
9. Claims for death/personal injury from intoxicated driving.

Business Entities Summary & Corporate Doctrines

Corporate Doctrines

• Piercing the Corporate Veil: Courts may disregard the corporate structure and hold shareholders personally liable if the entity is used improperly (e.g., commingling personal with corporate funds, inadequate capitalization, fraud).
• Ultra Vires Act: An act by a corporation that is beyond the scope of its powers as defined in its articles of incorporation.

Federal Laws & Regulations