Tax Compliance & Planning (TCP) Cheat Sheet

Basic Strategies & Income Types

Tax Strategies & Exclusions

• Defer Taxable Income: Postpone recognition to a later tax year (leverages the time value of money).
• Accelerate Tax Deductions: Take deductions currently to immediately reduce liability.
• Foreign Earned Income: Taxpayers employed outside the U.S. may exclude a portion of their foreign-earned compensation from gross income if they meet the bona fide residence or physical presence tests.

Income Categories

Comprehensive Individual Loss Limitations

Losses from flow-through entities are applied sequentially against these four limitations. The Tax Basis and At-Risk limitations are applied at the entity level, while the Passive Activity and Excess Business Loss limitations are applied at the individual taxpayer level.

Mom and Pop Exception

• Taxpayers can deduct up to $25,000 of rental real estate loss if the owner actively participates and owns at least 10%.
• The $25,000 allowance starts phasing out when the taxpayer's MAGI exceeds $100,000 and is fully eliminated when MAGI exceeds $150,000.

Equity Compensation Awards

Includes Statutory (ISOs, ESPPs) and Nonstatutory Stock Options.

Statutory Stock Options (Not taxed as ordinary compensation)

Nonstatutory Stock Options

Taxed as ordinary compensation income to the employee. The timing of taxation depends on whether the option's value is readily determinable.

Alternative Minimum Tax (AMT)

A separate tax system ensuring high-income individuals pay a baseline minimum tax. It adds back certain preferences and adjusts regular taxable income.

Gift Taxation & Unified Transfer Tax

The federal gift tax is paid by the donor. It operates under a unified transfer tax system covering both lifetime gifts and estate transfers.

Exclusions & Thresholds (2026)

Unlimited Exclusions (No Gift Tax Triggered)

• Payments made directly to an educational institution for tuition (not room and board).
• Payments made directly to a medical provider for healthcare.
• Transfers to a spouse (marital deduction).
• Transfers to qualified charities.

Basis of Gifted Property (The Dual-Basis Rule)

Normally, the recipient takes the donor's carryover basis. However, to prevent taxpayers from transferring tax losses to family members, the dual-basis rule kicks in if the property has lost value before it was gifted.

Imputed Interest on Below-Market Loans

If you loan money to a family member at little or no interest, the IRS pretends you charged the market rate. The "foregone interest" is treated as a taxable gift given to the borrower, and taxable interest income received by the lender.

Personal Financial Planning: Retirement & Education

Retirement Plans & Insurance Mitigation

Education Funding

• 529 Plans: Qualified tuition programs. Earnings grow tax-free if used for qualified education expenses.
• Coverdell Accounts: Up to $2,000/year, tax-free if used for K-12 or college qualified expenses.
• Grants & Scholarships: Tax-free if used strictly for tuition, fees, and books (not room and board) by a degree-seeking student.
• Student Loans: Above-the-line deduction for up to $2,500 of interest paid, subject to MAGI phase-outs.

Estate Considerations (Beneficiaries)

Beneficiary designations on retirement accounts and life insurance policies supersede instructions in a will. Inherited assets receive a "stepped-up" basis to FMV at the date of death.

Other Individual Tax Topics

Kiddie Tax

Prevents parents from shifting investment income to children. A dependent child's standard deduction is limited to the greater of:

Net unearned income in excess of $2,700 is taxed at the parent's marginal rate.

Healthcare Savings Accounts

Estimated Tax Payments & Safe Harbors

Taxpayers must make quarterly prepayments if they expect to owe $1,000 or more. Safe harbor requires the lesser of:

• 90% of the Current Year (CY) tax liability.
• 100% of the Prior Year (PY) tax liability (or 110% if PY AGI was > $150,000).

Charitable Contributions & AGI Limits

AGI Limits for Contributions (Public Charities)

• 60% AGI Limit: Cash gifts made directly to qualified public charities (now permanent).
• 50% AGI Limit: Standard non-cash property and ordinary income property.
• 30% AGI Limit: Long-term capital gain property (stocks, real estate) valued at fair market value.
• 5-Year Carryover: Contributions exceeding these AGI ceilings can be carried forward for up to 5 years.

Non-Itemizer Above-the-Line Deduction

• $1,000 Cap: Maximum cash deduction allowed for Single filers.
• $2,000 Cap: Maximum cash deduction allowed for Married Filing Jointly.

Valuation of Noncash Property

Risk Management & Investment Analysis

Risk Mitigation Strategies

Types of Risk

• Nonsystematic (Diversifiable): Unique to a certain firm/industry; can be mitigated by diversifying investments.
• Systematic (Market): Affects the entire market (e.g., inflation, interest rates); cannot be diversified away, but can be hedged via derivatives.

Investment Formulas

The One Big Beautiful Bill Act (OBBBA)

Key Individual Provisions (2026+)

Key Business Provisions (2026+)

• Bonus Depreciation: Permanently restored to 100% for qualifying property.
• Research & Experimentation (R&E): Immediate expensing for domestic R&E costs.
• Executive Compensation: The $1M limit on deductible compensation is expanded to all members of a covered corporation's controlled group.

C Corporation Formation

Section 351 Tax-Free Formation

No gain or loss is recognized upon formation if the contributing shareholders own at least 80% of the corporation immediately after the transfer. However, gain is recognized if "boot" (cash) is received, or if liabilities assumed by the corp exceed the shareholder's basis.

Shareholder's Basis in Stock Received:

Corporate Distributions & Liquidation

Nonliquidating Corporate Distributions

Distributions follow a strict order of taxation based on Earnings and Profits (E&P):

Property Distributions: If a C Corp distributes appreciated property, it recognizes a gain as if the property was sold at FMV. It cannot recognize a loss on depreciated property.

Corporate Liquidation

Double taxation applies on liquidation:

• Corporation: Recognizes gain/loss as if assets were sold at FMV.
• Shareholder: Recognizes capital gain/loss = FMV of assets received minus their basis in the stock. The new basis of the assets received is their FMV.

Corporate Losses & Utilization

Section 382 Limitation (Change in Ownership)

If there is an ownership change of more than 50% by 5% shareholders over a 3-year testing period, the ability to use existing NOL carryforwards is severely limited annually.

International Corporate Tax Concepts

Focuses on general concepts of income sourcing and structure, rather than specific foreign treaties.

Sourcing of Income

Foreign Branch vs. Foreign Subsidiary

• Foreign Branch: An unincorporated extension of the domestic corporation. Income is taxed immediately in the U.S. as earned, and the entity claims a Foreign Tax Credit (FTC) for host country taxes.
• Foreign Subsidiary: A separate legal entity incorporated abroad. Income is generally deferred from U.S. taxation until repatriated, unless caught by anti-deferral rules (like Subpart F).

Permanent Establishment (PE)

A fixed place of business (e.g., office, factory) in a foreign country through which business is carried on. Creating a PE generally subjects the entity to corporate income tax in that foreign jurisdiction.

Controlled Foreign Corporation (CFC)

A foreign corporation where > 50% of voting power or value is owned by U.S. shareholders (who each own 10%+). Subject to Subpart F rules, which force U.S. shareholders to currently recognize certain passive or highly mobile foreign income, even if not distributed as a dividend.

Consolidated Tax Returns

An affiliated group can elect to file a single, consolidated federal income tax return. Once elected, this filing status is generally binding for all future years.

The 80% Affiliated Group Test

To qualify, a parent corporation must directly own ≥80% of the voting power AND ≥80% of the total value of the stock of at least one includible subsidiary.

• Losses of one subsidiary can offset the profits of another.
• Brother-sister corporations (two separate corporations owned by the same individual shareholder) do not qualify as an affiliated group.

Consolidated Taxable Income Computation

Instead of a single calculation, consolidated income is determined through a 5-step adjustment process:

State & Local Taxation (SALT) for Corporations

Nexus & Jurisdiction

Nexus: The minimum degree of connection between a business and a state that subjects the business to the state's tax jurisdiction. Can be physical (property, employees) or economic (exceeding state-defined sales thresholds).

Allocation vs. Apportionment

Standard Apportionment Formula

Historically equally weighted, but many states now heavily or solely weight the Sales Factor.

Partnership Formation

Contribution of Property

Generally tax-free for both the partner and the partnership. Pre-contribution built-in gains/losses on property are allocated to the contributing partner upon a subsequent sale by the partnership.

• Contribution of Services: A partner must recognize ordinary income equal to the FMV of the partnership interest received in exchange for services.
• Property with Excess Liability: A partner recognizes a taxable capital gain if they contribute property subject to a liability, and the portion of the liability assumed by the other partners exceeds the contributing partner's basis.

Partnership Basis & Elections

Basis Terminology

Adjustments to Outside Basis

Section 754 Election & Sec. 743(b) Adjustment

When a partnership interest is sold, the new partner's outside basis (purchase price) often differs from their share of the partnership's inside basis. A Section 754 election allows a Section 743(b) adjustment to equalize them.

This adjustment applies ONLY to the purchasing partner, altering their future depreciation and gain/loss recognition to reflect the FMV they paid.

Partnership Distributions & Liquidation

Nonliquidating Distributions

Generally nontaxable. Distributions reduce the partner's outside basis (cash first, then property). A gain is only recognized if cash distributed exceeds the partner's entire outside basis. Losses are never recognized.

Liquidating Distributions

Generally nontaxable. The partner's remaining outside basis (after cash) is fully allocated to the property received to zero out the partner's interest. A loss is recognized only if the distribution consists solely of cash, unrealized receivables, and inventory, and their inside basis is less than the partner's outside basis.

Basis Allocation in Liquidation (Property)

Special rules apply when the partner's outside basis does not equal the partnership's inside basis for the distributed assets:

S Corp Operations & Distributions

Separately Stated Items

Items not aggregated at the corporate level, passed through separately on Schedule K-1:

• Rental Real Estate: Income/loss is passive.
• Portfolio Income: Interest, dividends, and royalties.
• Net Section 1231 Gain/Loss: Evaluated at the shareholder level.
• Charitable Contributions: Subject to individual AGI limits.
• Section 179 Expense: Subject to individual limits.
• Tax-Exempt Interest: Increases stock basis (OAA) but is not taxable.

Accumulated Adjustments Account (AAA)

Tracks undistributed tax-paid earnings. Distributions from AAA are tax-free. AAA can go negative from losses, but a distribution cannot drop AAA below zero.

Distribution Order (with C Corp E&P)

If the S Corp has accumulated E&P from prior C Corp years, follow this waterfall:

AAA Bypass Election

An S Corp can elect to distribute C Corp AEP before AAA. This tax planning "bypass election" is utilized to strip out C Corp E&P to avoid the passive investment income tax or the termination of S status.

S Corp Built-In Gains (BIG) Tax

Designed to prevent C Corporations from electing S Corp status merely to distribute appreciated assets without corporate-level double taxation.

When Does It Apply?

• A C Corporation elects S Corporation status, AND
• The FMV of corporate assets exceeds their adjusted basis on the election date (Net Unrealized Built-In Gain).

Tax Calculation

If an asset with built-in gain is sold within 5 years of the S election, the S Corp pays an entity-level tax:

Where the Base is the lesser of:

• The Recognized Built-In Gain
• The Current Year Taxable Income

The tax paid by the entity reduces the amount of gain passed through to the shareholders on their K-1s.

Character of Assets

Capital Assets

Assets held for investment or personal use (e.g., stocks, bonds, personal car, home).

Noncapital (Ordinary) Assets

• Inventory
• Accounts Receivable
• Depreciable property and real estate used in a trade or business held for one year or less.

Section 1231 Assets

Depreciable personal property and real estate used in a trade or business held for more than one year.

Net 1231 Treatment: Net gains are treated as long-term capital gains, while net losses are treated as ordinary losses. A 5-year look-back rule applies: if there is a net Section 1231 gain, it is treated as ordinary income to the extent of any unrecaptured Section 1231 losses from the previous five years.

Depreciation Recapture

When Section 1231 assets are sold at a gain, the gain must be "recaptured" as ordinary income up to the amount of accumulated depreciation.

Cost Recovery & Depreciation

Taxpayers must recover the cost of business or income-producing property through MACRS.

MACRS Conventions

Accelerated Expensing (OBBBA Updated)

• 100% Bonus Depreciation: The OBBBA permanently restored bonus depreciation to 100%. Qualifying property (generally MACRS property with a recovery period of 20 years or less) can be fully expensed in the year it is placed in service.
• Section 179: Allows an immediate deduction of tangible personal property up to a specified limit, but it cannot create or increase a net loss.

Property Gains & Deferrals

Like-Kind Exchange (Sec. 1031)

Applies to real property used in business or held for investment. No loss is ever recognized on the like-kind exchange itself.

Boot includes cash received and net liability relief.

Involuntary Conversion

Gain is deferred if insurance proceeds are reinvested in similar property within 2 years (3 years for condemned business property). Recognized gain is limited to unreinvested proceeds.

Specific Asset Dispositions

Section 1244 Small Business Stock

Allows original individual owners to deduct a loss on the sale or worthlessness of qualifying small business stock as an ordinary loss rather than a capital loss. The maximum ordinary loss deduction is $50,000 ($100,000 for MFJ) per year. Any loss in excess of this limit is treated as a standard capital loss.

Installment Sales

Revenue is recognized proportionately as cash payments are received. The recognized gain for the year is calculated using the gross profit percentage:

Recapture Rule: Depreciation recapture (Sec. 1245/1250) must be recognized fully as ordinary income in the year of sale, regardless of the cash received. Only the remaining Sec. 1231 gain is deferred under the installment method.

Related Party Transactions

Includes family (siblings, spouses, ancestors, lineal descendants), >50% owned entities, and controlled groups.

Disallowed Losses

Losses on sales between related parties are permanently disallowed for the seller. However, the buyer can use the disallowed loss to offset a gain on a future sale to an unrelated party.

Subsequent Sale to Unrelated Party

When the buyer eventually sells the property to an unrelated party, the recognized gain or loss depends on the new sales price relative to the original relative's cost basis:

Constructive Ownership Rules

1. Stock owned by a corp/partnership/trust is treated as owned proportionately by its shareholders/partners/beneficiaries.
2. An individual is considered to own the stock of their family members.

Trusts & Estates: Income Taxation

Estates and trusts are separate income-tax-paying entities. Income is taxed at either the entity level (if retained) or the beneficiary level (if distributed), but not both.

Trust Classifications

Distributable Net Income (DNI)

DNI establishes the maximum amount of income taxed to beneficiaries and deducted by the trust. It also determines the character of the income (e.g., tax-exempt).

Income Distribution Deduction

The trust or estate deducts the lesser of:

1. The actual amount distributed to beneficiaries, OR
2. The DNI, less any tax-exempt interest included in DNI.

Tax-Exempt Organizations

Obtaining & Maintaining Status (501c3)

Organizations operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes. To maintain status:

• No part of net earnings may benefit private interests/shareholders.
• Substantial part of activities cannot be attempting to influence legislation (lobbying limits).
• May not directly or indirectly participate or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office.

Unrelated Business Income (UBI)

Income from a trade or business that is regularly carried on and not substantially related to the organization's tax-exempt purpose. Subject to Unrelated Business Income Tax (UBIT) at corporate rates.

• Exclusions from UBI (Not Taxed): Dividends, interest, royalties, rents from real property, gains from property sales, income from research, bingo games, work done for member convenience, trade shows, and sale of merchandise received as gifts/thrift shop items.