CPA Exam · Cheat Sheet
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| Situation | Rule/Answer | ||
|---|---|---|---|
| Debt forgiveness | Ordinary income EXCEPT: bankruptcy, insolvency (up to insolvency amount), qualified principal residence debt, ag debt, PSLF | ||
| ISO exercise | No ordinary income at grant/exercise; spread = AMT preference; holding periods (2yr grant, 1yr exercise) = LTCG; violation = ordinary income on spread | ||
| NQSO exercise | Ordinary income = FMV − strike price at exercise; basis in stock = FMV | ||
| Annuity taxation | Exclusion ratio = Investment / Expected return; taxable portion = Payment × (1 − ratio) | ||
| Home office loss | Limited to gross income from business (cannot create loss); simplified: $5/sqft up to 300 sqft ($1,500 max) | ||
| Hobby loss | Activity cannot deduct losses if not for profit; 3-of-5 years profitable = presumption of profit motive | ||
| Business meals | 50% deductible; must be ordinary/necessary, directly related, not lavish | ||
| Entertainment | Generally NON-deductible post-TCJA | ||
| Account | Contribution Limit | Catch-Up (50+) | RMD Age |
| 401(k)/403(b)/457 | $23,500 | +$7,500 | 73 |
| SIMPLE IRA | $16,500 | +$3,500 | 73 |
| Traditional/Roth IRA | $7,000 | +$1,000 | 73* |
| Roth | Traditional | ||
| Tax treatment of contribution | After-tax | Pre-tax (if deductible) | |
| Growth/Withdrawals | Tax-free | Taxable | |
| Preferred scenario | Higher rates in retirement | Lower rates in retirement | |
| Income limits | $150K (S) / $236K (MFJ) phase-out | None | |
| Backdoor strategy | Non-deductible trad → Roth conversion (watch pro-rata rule on existing trad IRAs) | ||
| Strategy | Key Feature | Benefit | |
| CRT | Transfer assets → income stream → charity remainder | Deduction for PV of remainder; income-shifted | |
| QCD | IRA direct to charity (age 70½+) | Excluded from income; counts toward RMD; up to $105K/year | |
| DAF | Lump contribution → recommend grants over time | Immediate deduction; timing flexibility | |
| Stepped-up basis | Inherited property = FMV at death as basis | Avoids capital gain on appreciation during lifetime | |
| IRD | Income earned pre-death (e.g., trad IRA, deferred comp) | NO stepped-up basis; taxable when received; §691 deduction available | |
| Distribution Type | Tax Treatment | ||
| From E&P | Dividend (ordinary income) | ||
| Excess over E&P (up to basis) | Return of capital (non-taxable; reduces basis) | ||
| Excess over basis | Capital gain | ||
| Advantage | S Corp | Partnership | |
| SE tax avoidance | Distributions avoid SE tax (if reasonable salary paid) | General partner share = SE income | |
| Allocation flexibility | Pro-rata only | Special allocations (with substantial economic effect) | |
| Basis treatment of liabilities | Limited; basis doesn't increase | Basis increases for entity liabilities |
Substantial economic effect test (§704(b)): Capital accounts maintained, distributions per balance, deficit restoration/QIO.
§704(c) — Contributed property: Pre-contribution built-in gain/loss allocated to contributor upon sale. Three methods: traditional, traditional with curative, remedial.
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Affiliate eligibility: Common parent owns ≥ 80% voting AND 80% value of all group members.
Deferred intercompany transactions: Gains/losses deferred until sale to third party, member leaves, or separate returns filed.
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FTC limitation: `` (Foreign Source Taxable Income
Aligned to the AICPA CPA Exam Blueprints.
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