2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES REGULATION Cover Design by David Riedy Cover image: © turtleteeth/iStockphoto Copyright © 2014 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permission Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com ISBN: 978-1-118-81698-1 (paperback); 978-1-118-85424-2 (ebk); 978-1-118-87215-4 (ebk) Printed in the United States of America 10 CONTENTS Preface About the Author About the Contributors Module 23: Module 24: Module 25: Module 26: Module 27: Module 28: Module 29: Module 30: Module 31: Module 32: Module 33: Module 34: Module 35: Professional and Legal Responsibilities Federal Securities Acts Business Structure Contracts Sales Commercial Paper Secured Transactions Bankruptcy Debtor-Creditor Relationships Agency Regulation of Business Employment, Environment, and Antitrust Property Individual Taxation vii ix ix 16 27 51 65 79 92 100 113 117 121 144 153 v Module 36: Module 37: Module 38: Module 39: Transactions in Property Partnership Taxation Corporate Taxation Other Taxation Topics Index 207 214 223 252 275 Contents vi PREFACE This publication is a comprehensive, yet simplified study program It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately This tool allows you to take control of the CPA exam This simplified and focused approach to studying for the CPA exam can be used: • • • As a handy and convenient reference manual To solve exam questions To reinforce material being studied Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format Due to the wide variety of information covered on the exam, a number of techniques are included: • • • Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists Formulas and equations that simplify complex calculations required on the exam Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements vii • • • Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks Proven techniques to help you become a smarter, sharper, and more accurate test taker This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting; Auditing, Business Law, and Federal Income Tax classes; or Economics and Finance classes Good luck on the exam, Ray Whittington, PhD, CPA Preface viii Taxable Estate (continued) Reduce by • • • • Charitable bequests Marital deduction Casualty losses Expenses and liabilities Charitable bequests—Unlimited deduction for amounts left to charitable organizations Marital deduction—Unlimited amount subject to same rules as gifts Focus on Other Taxation Topics—Module 39 264 Taxable Estate (continued) Expenses and Liabilities—Deductions for • • • • • Liabilities incurred prior to death Funeral costs Administrative fees Medical expenses State death taxes Administrative fees may be deducted as either a liability on the estate tax return, or an expense deduction on the estate’s income tax return Medical expenses incurred during decedent’s lifetime may be deducted as claims against the estate, or as a medical deduction on the decedent’s income tax return if paid within one year of death State death taxes are now only a deduction (no longer qualify as a credit) Focus on Other Taxation Topics—Module 39 265 Tax Due Tentative Amount Total taxable transfers × Tax rates (from table) = Tentative tax amount Unified Credit • • Credit designed to remove relatively small gifts and estates from the transfer tax The exemption equivalent of the credit is $5.25 million, for both gift and estate tax purposes for 2013 Focus on Other Taxation Topics—Module 39 266 Other Credits Credit for death tax paid to foreign country on real estate owned in that country Gift taxes paid on prior transfers (actually considered prepayment of liability rather than credit, but has same effect as credit to reduce balance due) Generation-Skipping Tax Owed on transfers (both gifts and inheritances) two or more generations below transferor • • • • Transfers to grandchildren, great-nieces, and great-nephews normally included Not applicable if immediate generation below is deceased (no GST on transfer to grandchild if the transferor’s child is deceased) Exemption equivalent for GST same dollar amount as gift and estate tax exemption ($5.25 million for 2013) GST owed in addition to applicable gift and estate taxes Focus on Other Taxation Topics—Module 39 267 Property Received by Inheritance or Gift Inheritance Excluded from recipient’s gross income Basis—Fair market value reported on estate return • • Value at date of death (use this if no estate tax return filed) Value at alternate valuation date if elected on estate return (earlier of date of distribution to recipient or fair value exactly six months after death) Holding period—automatically long-term Focus on Other Taxation Topics—Module 39 268 Gift Receipt of gift excluded from recipient’s gross income Donee’s basis for gain—Basis (and holding period) same as donor’s Donee’s basis for loss—Lesser of gain basis, or FMV at date of gift • • If FMV at date of gift is used to determine a loss, then holding period begins on date of gift If donee’s selling price is below gain basis and above loss basis, then no gain or loss Focus on Other Taxation Topics—Module 39 269 Tax Return Due Dates Assuming taxable year ended December 31 Tax Return Due Date Individual income tax return Amended individual income tax return April 15 of following year Within years from when original return filed (early return treated as filed on due date) April 15 of following year April 15 of following year April 15 of following year April 15 of following year Gift tax return Trust income tax return Estate income tax return Partnership tax return Corporate tax return March 15 of following year S corporation tax return March 15 of following year S corporation status election March 15 of current year Exempt organization tax return May 15 of following year Estate tax return months after date of death Focus on Other Taxation Topics—Module 39 270 INCOME TAX RETURN PREPARERS Procedures for Return Preparation Make reasonable effort to obtain client information to answer all questions on return, except • • • Information not readily available and not significant in determining tax liability Meaning of question is unclear Answer is voluminous and return states data will be supplied upon examination Need not verify client information • • • Must make reasonable inquiries when information appears incorrect or incomplete Should ask about availability of support where required by IRS (e.g., log for travel and entertainment expenses or receipt for charitable contributions over $250) Should refer to past returns of client when feasible Focus on Other Taxation Topics—Module 39 271 Procedures in Preparation (continued) When CPA becomes aware of error on return • • • Inform the client (written communication of important advice preferred, but not required) Recommend appropriate correction or notification Consider withdrawing from relationship if client refuses to correct (must not notify IRS without client permission) Focus on Other Taxation Topics—Module 39 272 Tax Preparer Penalties Minor violations • • • • • • Disclose confidential information from client’s return Endorse or deposit client’s refund for preparer’s benefit Fail to sign return as preparer Fail to provide client with copy of filed return Fail to keep copies of client returns for at least three years Fail to keep list for at least three years of employees preparing returns Major violations • • Understatement of tax liability due to an undisclosed position for which there is not substantial authority (at least 40% probability of success): penalty is greater of $1,000 or 50% of income to be derived from return or claim Willful attempt to understate tax liability, or intentional or reckless disregard of rules and regulations; penalty is greater of $5,000 or 50% of income to be derived from return or claim Focus on Other Taxation Topics—Module 39 273 Tax Preparer Penalties (continued) No violation • • • • Adequate disclosure and a showing that there was a reasonable basis (at least 20% probability of success) for the position Reasonable cause for the understatement and the preparer acted in good faith Use estimates when client did not maintain adequate records Rely on information supplied by client not appearing incorrect or inconsistent Focus on Other Taxation Topics—Module 39 274 INDEX Acceptance, 53, 66 Accountants’ Liability, Accounting Method, 155 Accumulated Earnings Tax, 232 ADA & Rehabilitation Act, 138 Additional for AGI Deductions, 171 ADEA, 137 Adjusted Basis, 208 Adjustments for AGI, 163 Affirmative Action, 139 Agency, 117 Alternative Minimum Tax (AMT), 190, 233 Alternatives to Bankruptcy, 112 Amount Realized, 207 Articles of Incorporation, 39 Assignment, 61 Attachment, 94 Auditor Common Law Liability, Auditor Liability Under Federal Securities Laws, Avoidance, 102 Avoiding Liability, 87, 88 Bailments, 149 Bankruptcy, 100 Breach of Contract, 63, 76 Business Combinations, 49 Business Expenses (Schedule C), 165 Business Reorganizations – Chapter 11, 109 Buyer’s Remedies, 77 C.O.D., 72 Carryover Rules, 197 Characteristics of Corporations, 37 Child Tax Credit, 187 Civil Rights Act (CRA), 136 Claims for Refunds, 200 Clean Air Act, 122 COBRA, 133 Commercial Paper, 79 Compensation for Services, 156 Comprehensive Environmental Response Compensation and Liability Act, 125 Computing Corporate Income Tax, 225 Computing Taxable Income of Trusts & Estates, 256 Concurrent Interests, 146 Consideration, 54 Contracts, 51 Contributions, 174 Contributions to Retirement Plans, 168 Conversion To S Corporation, 246 Corporate Formation, 223 Corporate Income Tax, 223 Corporate Reorganizations, 241 Corporate Termination, 240 Corporations, 37 Cosureties, 116 Coverdell Education Savings Accounts (ESAs), 170 Credit Card Debt, 99 Credit for Aged or Disabled, 186 Credits, 185 Deductions, 227 Default by Debtor, 98 Defenses Against a Negotiable Instrument, 84 Defenses of Sureties, 115 Delegation, 61 Denial of Discharge, 108 275 Dependent Care Credit, 187 Dependent Exemptions, 183 Depreciable Personal Property, 204 Depreciable Real Property, 202 Depreciation, 202 Depreciation Recapture, 209 Directors & Officers, 41 Discharge, 62 Dissolution, 50 Distributable Net Income (DNI), 258 Distributions, 219 Distributions to Stockholders, 238 Dividends, 45, 159 Dividends-Received Deduction, 230 Documents of Title, 89, 90 Duties of Directors & Officers, 44 Earned Income Credit, 186 Employee Retirement Income Security Act (ERISA), 131 Employment, 126 Enforceability, 58, 67 Environmental Law, 121 Equal Pay Act, 136 Estate & Gift Tax, 260 Estates, 252 Exceptions to Discharge, 107 Excess Payroll Taxes, 193 Exemptions, 182 Express Warranties, 74 Federal Insurance Contributions Act (FICA), 130 Federal Securities Regulations, 16 Federal Unemployment Tax Act (FUTA), 132 Federal Water Pollution Control Act, 123 Filing Status, 195 Firm offer, 65 FLSA, 134 FMLA, 133 Foreign Tax Credit, 236 Formation of Contracts, 51 Formation of Partnerships, 32, 214 Formation of S Corporations, 244 Fraud, Generation Skipping Tax, 267 Gift, 269 Goods In Transit, 68 Gross Income, 226 Guaranteed Payments to Partners, 217 Half-Year Convention, 205 Index Holder in Due Course (HDC), 83 Income Tax Return Preparers, 271 Independence, Integrity, & Objectivity, 13 Individual Income Tax, 153 Inheritance, 268 Insider Trading, 23 Interest, 158 Interest Expense, 179 Investment Securities, 91 Involuntary Filing – Chapter 7, 101 Itemized Deductions, 173 Leases, 149 Liability as a Tax Preparer, 11 Liability of Entering and Exiting Partners, 31 Liability Under 33 Act, Liability Under 34 Act, Lifetime Learning Credit, 188 Limited Liability, 48 Limited Liability Arrangements, 34 Limited Liability Companies (LLCs), 36 Limited Liability Partnerships, 35 Limited Partnerships, 34 Liquidating Distributions, 220 Medical Expenses, 176 276 Midmonth Convention, 203 Midquarter Convention, 205 Miscellaneous Expenses, 177 Modified HOPE Credit, 188 Moving Expenses, 164 National Labor Relations Act (NLRA), 135 Negligence, Negotiable Instruments, 79 Noise Control Act, 124 Nonliquidating Distributions, 219 Obligations of Common Carriers, 70 Occupational Safety & Health Act (OSHA), 127 Offer, 52 Order of Distribution, 104 Other Income, 161 Other Itemized Deductions, 175 Other Rights of Shareholders, 46 Parent-Subsidiary Transactions, 242 Parol Evidence Rule, 59 Partner’s Basis, 218 Partners’ Authority, 29 Partners’ Liability, 30 Partners’ Property Rights, 28 Partners’ Rights, 27 Partnership, 27 Partnership Characteristics, 27 Partnership Dissolution, 32, 33 Partnership Taxation, 214 Penalties for Late Payment, 194 Perfection, 95 Personal defenses, 85 Personal Exemptions, 182 Personal Holding Company (PHC) Tax, 231 Personal Property, 144, 146 Powers of Bankruptcy Trustee, 102 Powers of the Board of Directors, 42 Primary Liability, 86 Priorities Among Claims, 96, 97 Priority Claims, 105 Private Securities Litigation Reform Act of 1995, Prizes & Awards, 157 Product Liability, 75 Promoters, 40 Property, 144 Property Dispositions, 207 Property Received by Inheritance or Gift, 268 Index Proxies, 23 Real Defenses, 84 Real Property, 145 Realized Gain or Loss, 207 Rejection, 53 Related Party Sales, 211 Rent & Royalty Expenses (Schedule E), 166, 167 Repayment Plans – Chapter 13, 111 Reporting, 22 Requirements for Combinations, 49 Requirements for Negotiability, 80 Rights & Obligations, 60 Rights of Directors, 41 Rights of Officers, 43 Rights of Sureties, 114 Risk of Loss, 69 Roth IRAs, 169 S Corporation Earnings, 248 S Corporations, 38, 244 Sale of Partnership Interest, 221 Sale on Approval, 71 Sale or Return, 72 Sales, 65 Sarbanes-Oxley Act of 2002, 24, 25 277 Schedule M-1, 237 Schedule M-2, 237 Secondary Liability, 86 Section 1244 Stock, 243 Secured Creditors, 104 Secured Transactions, 93 Securities Act of 1933, 16 Securities Exchange Act of 1934, 21 Securities Exempt from Registration, 18 Self-Employment Tax, 189 Seller’s Remedies, 76 Seller’s Warranties, 73 Shareholder’s Basis, 250 Shareholders, 45 Special Transactions, 212 Standard Deduction, 172 Standards for Consulting Services, 14 Standards for Tax Practice, 15 Statutes of Limitations, 201 Summary of Auditor Liability, Superfund, 125 Suretyship, 113 Tax Payments, 193 Tax Preparer Penalties, 273, 274 Tax Return Due Dates, 270 Tax Return Schedules, 198 Tax Year, 215 Taxable Estate, 263 Taxable Gifts, 261 Taxation of Beneficiaries, 258 Taxation of Estates & Trusts, 252 Taxation of Gains & Losses, 210 Taxation of Partnerships, 216 Taxation of S Corporations, 247 Taxation of Trusts, 255 Taxes, 180 Terminating Agent’s Authority, 120 Termination of S Corporation Status, 251 Theft or Casualty Losses, 181 Title, 68, 69 Transactions Exempt from Registration, 19, 20 Transfers of Negotiable Instruments, 81 Trust Operations, 254 Index Trusts, 253 Types of Agency, 117 Types of Endorsements, 82 Types of Sureties, 113 Unified Credit, 266 Unions & Collective Bargaining, 135 Unsecured Creditors, 106 Validity, 56 Validity & Enforceability, 55 Voidable preferences, 103 Voluntary Filing – Chapter 7, 100 Warranty of Fitness, 74 Warranty of Merchantability, 73 Warranty of Title, 73 When to File, 199 Who Must File, 199 Workers’ Compensation, 128, 129 278 ... 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES REGULATION Cover Design by David Riedy Cover image: © turtleteeth/iStockphoto Copyright © 2014. .. take control of the CPA exam This simplified and focused approach to studying for the CPA exam can be used: • • • As a handy and convenient reference manual To solve exam questions To reinforce... simplified study program It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately This tool