Core Section · Third module in the course
From professional duty, through business law, into the tax code itself
REG covers two broad domains under one exam. Area I and Area II are the lighter-weighted, knowledge-heavy areas: Circular 230, preparer standards, IRS procedure, and business law (agency, contracts, UCC, business structures, securities regulation). Areas III, IV, and V are where REG lives or dies — federal taxation of property transactions, individuals, and entities — tested heavily at the Application and Analysis levels. Area V (entity taxation) and Area IV (individual taxation) together make up roughly half the exam.
How this module is organized
- Read — all five Blueprint Areas, with definition tables, worked numerical examples you step through, and concept checks.
- Interactive tools — six calculators: filing status/standard deduction lookup, capital gain holding-period classifier, QBI (§199A) estimator, MACRS/§179 depreciation calculator, S corporation basis tracker, and a partnership distribution analyzer.
- Practice — a bank of 117 MCQs, filterable by Area, topic, Blueprint skill level, and difficulty.
- Assessment — build a timed test and get a published attainment report by Area and by skill level (pass line: 75, matching the real exam's scoring scale).
- Case studies & readings — seven exam-pattern TBS-style scenario prompts, plus a further-reading list.
The five Blueprint Areas & their weight
| Area | Focus | Weight |
|---|---|---|
| I | Ethics, Circular 230, IRS procedure & authoritative hierarchy | 10–20% |
| II | Business law: agency, contracts, UCC, entities, securities | 15–25% |
| III | Property transactions: basis, depreciation, dispositions | 5–15% |
| IV | Individual taxation: income, deductions, credits, AMT | 22–32% |
| V | Entity taxation: C corps, S corps, partnerships, exempt orgs | 23–33% |
Like FAR, REG is tested only at three Blueprint skill levels — Remembering & Understanding, Application, and Analysis — with no Evaluation-level testing (that's AUD-only). Areas I and II lean toward Remembering & Understanding; Areas III–V lean heavily on Application and Analysis.
Certain provisions of the One Big Beautiful Bill Act (OBBBA), signed July 2025, became eligible for testing on REG starting July 1, 2026 — affecting REG and TCP specifically. This module presents settled, foundational tax law; for provisions tied to specific effective dates or dollar thresholds that change year to year (SALT cap, bonus depreciation percentage, contribution limits), always verify the current-year figure against the AICPA's published Blueprint and current IRS guidance before an exam window.
Grab a scratch pad. REG's TBS prompts are usually numeric or scenario-based — work through the facts yourself first, then click Show next step to check your reasoning line by line rather than jumping to the final figure.
Ethics, Professional Responsibilities & Federal Tax Procedures
1 · Circular 230, preparer standards & liability
Circular 230 is the rulebook for anyone who practices before the IRS — CPAs, attorneys, enrolled agents. Its core theme: a practitioner who learns a client is noncompliant must promptly tell the client what that means, but cannot unilaterally amend a return or report the client without authorization. Separately, IRC §6694 sets the standard a preparer must meet for a position taken on a return: substantial authority for undisclosed positions, or the lower reasonable basis standard if the position is adequately disclosed (e.g., on Form 8275).
| Position type | Required standard |
|---|---|
| Undisclosed position | Substantial authority |
| Disclosed position (e.g., Form 8275) | Reasonable basis |
| Tax shelter / reportable transaction | More likely than not (regardless of disclosure) |
Facts: A CPA prepares a client's return. Research turns up a position with weak support — not quite enough authority to be considered "substantial" if left undisclosed, but the position isn't frivolous either.
Recognize the fork: if the CPA takes the position without any disclosure, the required standard is substantial authority — which this position doesn't clear.
Consider disclosure: attaching Form 8275 to adequately disclose the position lowers the bar to reasonable basis, a standard this position likely does meet.
Weigh the consequence of getting this wrong: taking an undisclosed position without substantial authority exposes both the client (accuracy-related penalty) and the preparer (§6694 penalty) if the position understates tax.
Concept check — If a position is adequately disclosed on the return, the required standard generally drops to —
2 · IRS procedure, appeals & the authoritative hierarchy
When the IRS proposes an adjustment, the taxpayer's first stop — short of court — is the IRS Independent Office of Appeals. If that doesn't resolve things, a statutory notice of deficiency ("90-day letter") opens a unique door: the taxpayer can petition Tax Court without first paying the disputed tax, unlike refund litigation elsewhere, which requires paying first and suing to get it back. On the authority side, the Code sits at the top of the hierarchy, then final Treasury Regulations (which carry the force of law), then progressively less authoritative guidance — with a private letter ruling binding only the taxpayer who requested it.
Facts: A taxpayer's return, filed on time, omits gross income equal to 30% of the gross income actually reported on the return.
Start with the general rule: the IRS generally has three years from the later of the filing date or due date to assess additional tax.
Check for an extension trigger: a substantial omission of gross income — defined as more than 25% of the gross income stated on the return — extends the period to six years. 30% clears that 25% threshold.
Distinguish from the no-limit cases: fraud or failure to file leaves the assessment period open indefinitely — but that's not what happened here; this is a substantial (not fraudulent) omission on a timely filed return.
Concept check — A key advantage of petitioning Tax Court after a notice of deficiency is that the taxpayer —
Business Law
3 · Agency & contracts
An agency relationship needs only mutual consent — no writing, no payment required. The tricky part is apparent authority: it comes from the principal's conduct toward a third party, not the agent's own say-so, and it can survive actual termination of authority if the principal fails to notify parties who'd dealt with the agent before. On the contracts side, four building blocks matter most for the exam: offer/acceptance/consideration/capacity/legality for validity; the UCC Statute of Frauds ($500+ goods) for what must be written; the parol evidence rule for what evidence can contradict a final written contract; and expectation damages as the default remedy for breach.
Facts: A principal terminates an agent's authority to purchase inventory on the principal's behalf. The principal does not notify a supplier who had regularly sold to the agent (on the principal's account) for the past two years. A week after termination, the agent orders inventory from that same supplier, on credit, in the principal's name.
Identify what changed and what didn't: actual authority is gone, but apparent authority depends on the third party's reasonable belief — which depends on what the principal communicated, not on the internal fact of termination.
Ask whether the supplier had reason to expect continued authority: two years of regular dealing on the principal's account is exactly the kind of history that creates a reasonable expectation of continued authority absent notice.
Apply the rule: because the principal gave no notice to this specific, known trading partner, apparent authority persists as to that supplier even though actual authority ended.
Concept check — Under the parol evidence rule, evidence of a prior oral agreement contradicting a fully integrated written contract is generally —
4 · UCC, debtor-creditor & entities
Under UCC Article 9, a security interest is usually perfected by filing a financing statement, establishing priority over most later creditors. In bankruptcy, Chapter 7 liquidates non-exempt assets and discharges most remaining debt, while Chapter 11 lets the debtor keep operating under a reorganization plan. On entity choice, the exam-relevant contrast is liability and taxation: general partners carry unlimited personal liability; shareholders (C or S corp) and LLC members generally have limited liability; and taxation ranges from full pass-through (partnership, S corp, single-member LLC) to double taxation (C corp).
| Entity | Owner liability | Entity-level tax? |
|---|---|---|
| General partnership | Unlimited (joint & several) | No — passes through |
| Limited partnership (LP) | Limited for LPs; unlimited for GPs | No — passes through |
| C corporation | Limited | Yes — double taxation |
| S corporation | Limited | No (generally) — passes through |
| LLC (default) | Limited | No — passes through |
Facts: A debtor, aware that bankruptcy is imminent, transfers a valuable asset to a friend for no consideration, one month before filing.
Identify the two elements that matter: was the transfer made with intent to hinder/delay/defraud creditors (or for less than reasonably equivalent value while insolvent)? Here, both are present — no consideration, and timing suggests intent.
Check the timing against the trustee's lookback period: transfers within the applicable lookback window before filing are subject to avoidance.
Consider the remedy: the trustee can avoid (unwind) the transfer, pulling the asset back into the estate for the benefit of creditors generally.
Concept check — A general partner's liability for partnership obligations is generally —
Federal Taxation of Property Transactions
5 · Basis, depreciation & dispositions
Nearly every property question starts with basis. Purchased property: cost. Gifted property (for gain purposes): carryover from the donor. Inherited property: stepped up (or down) to fair market value at death. From there, MACRS recovers most tangible personal property using accelerated declining-balance methods, while real property uses straight-line (27.5 years residential, 39 years nonresidential) with the mid-month convention. On disposition, realized gain/loss = amount realized − adjusted basis, and §1245 recaptures depreciation as ordinary income up to the amount of gain recognized.
Facts: A corporation sells equipment (§1245 property) for $80,000. Original cost was $100,000; accumulated depreciation is $60,000, so adjusted basis is $40,000.
Compute realized gain: $80,000 amount realized − $40,000 adjusted basis = $40,000 gain.
Apply §1245: recapture as ordinary income up to the lesser of the gain recognized or the depreciation taken. Depreciation taken was $60,000 — more than the $40,000 gain.
Cap the recapture at the gain itself: recapture cannot exceed the total gain, so all $40,000 is ordinary, not just a portion.
Concept check — Property received as a gift generally takes, for GAIN purposes, a basis equal to —
Federal Taxation of Individuals
6 · Gross income to taxable income
The individual tax formula is the backbone of Area IV: gross income (broadly everything, unless specifically excluded) − above-the-line adjustments = AGI − the greater of the standard deduction or itemized deductions − QBI deduction (where applicable) = taxable income. Know your exclusions cold (life insurance proceeds, muni bond interest, employer-paid health premiums) versus your traps (unemployment compensation is fully taxable, unlike workers' comp).
| Step | What happens |
|---|---|
| Gross income | Everything unless specifically excluded (§61) |
| − Adjustments | Above-the-line: ½ SE tax, traditional IRA, student loan interest, etc. |
| = AGI | Key threshold figure for many phase-outs |
| − Standard or itemized deduction | Taxpayer takes whichever is larger |
| = Taxable income | (after QBI deduction, where applicable) |
Facts: A taxpayer's 22-year-old child is a full-time student, lived at home more than half the year, and earned $8,000 from a part-time job (all of which the child spent on personal expenses, not their own support beyond that).
Check the qualifying child age test: under 19, or under 24 if a full-time student. At 22 and a full-time student, this child passes the age test.
Check the support test: the child must not have provided more than half of their own support. $8,000 of earnings, if it didn't cover more than half the child's total support, doesn't disqualify them.
Note what does NOT apply here: unlike a qualifying relative, there's no gross income limit for a qualifying child — so the $8,000 income, by itself, is irrelevant to qualifying-child status.
Concept check — Unemployment compensation, for federal tax purposes, is —
7 · Credits, passive losses & AMT
A credit beats a deduction of the same size, dollar for dollar, because it hits tax liability directly rather than taxable income. Passive losses can generally only offset passive income, with a notable carve-out: up to $25,000 of rental real estate losses can offset nonpassive income for active (not necessarily material) participants, phasing out at higher AGI. AMT is a parallel system — compute tentative minimum tax, and if it exceeds regular tax, the excess is the AMT owed.
Facts: A taxpayer actively (but not materially, at real-estate-professional levels) participates in a rental property that produces a $30,000 loss for the year. The taxpayer's AGI, before considering this loss, is well under the phase-out threshold.
Recognize the default rule: rental real estate is a passive activity, so losses would normally only offset passive income — of which this taxpayer may have none.
Apply the exception: active (not material) participants get a special allowance of up to $25,000 of rental losses against nonpassive income (wages, interest, etc.), subject to an AGI phase-out.
Apply the cap: even though the loss is $30,000, only $25,000 can be used under this special allowance in the current year.
Concept check — AMT liability equals —
Federal Taxation of Entities
8 · C corporations & distributions
C corporations pay entity-level tax, then shareholders pay tax again on dividends — the double taxation everyone talks about. When a corporation distributes cash or property to a shareholder, the ordering matters: dividend to the extent of current + accumulated E&P, then nontaxable return of basis (reducing stock basis), then capital gain for any excess.
Facts: A corporation with $50,000 of current E&P and no accumulated E&P distributes $80,000 to its sole shareholder, whose stock basis is $20,000.
Dividend layer first: $50,000 of the distribution is a taxable dividend, matching total E&P.
Return of basis next: of the remaining $30,000, apply it against the shareholder's $20,000 stock basis — nontaxable, but basis is now reduced to zero.
Capital gain for the rest: the final $10,000 (the amount still remaining after basis hits zero) is capital gain.
Concept check — A corporate distribution is a taxable dividend to the extent of —
9 · S corporations & partnerships
Both S corps and partnerships are pass-through entities, but their mechanics diverge: S corp allocations are strictly pro rata by ownership percentage (one class of stock, no flexible allocations), while partnerships allow special allocations under §704(b) if they have substantial economic effect. Both track basis dynamically — up for income and contributions, down for distributions and losses — and in both cases, losses are deductible only to the extent of basis, with excess suspended and carried forward.
Facts: A shareholder starts the year with $15,000 of stock basis (no debt basis). Their allocable share of the S corporation's ordinary loss is $22,000. No distributions were received.
Identify the limiting rule: loss deductibility for an S corp shareholder is capped at total basis (stock + debt), and basis can't go negative.
Compare the loss to available basis: $22,000 loss vs. $15,000 basis — the loss exceeds basis by $7,000.
Apply the cap: deduct up to $15,000 currently (reducing stock basis to zero); the excess $7,000 is suspended, not lost.
Concept check — Unlike an S corporation, a partnership can generally —
Six REG calculators
Interactive tools
REG's TBS prompts are heavy on structured calculation and classification — these mirror that: enter the facts, see the reasoning broken into steps, not just a final number.
1 · Filing status & standard deduction lookup
Pick a filing status to see the associated standard deduction figure and key notes. (Figures shown are illustrative placeholders — always confirm the current tax year's actual amounts, which are inflation-adjusted annually.)
2 · Capital gain holding-period classifier
Enter the acquisition and disposition dates for a capital asset. The tool computes the holding period and classifies the gain/loss as short-term or long-term.
3 · QBI (§199A) deduction estimator
A simplified estimator for the below-threshold case: 20% of the lesser of qualified business income or (taxable income minus net capital gain). Real-world QBI involves W-2 wage/UBIA limits and SSTB restrictions once income exceeds the applicable threshold — not modeled here.
4 · MACRS & §179 first-year deduction calculator
Enter an asset's cost and recovery period. The tool shows the first-year MACRS percentage (half-year convention, 200% declining balance for 5/7-year property) and lets you layer in a §179 election on top.
5 · S corporation shareholder basis tracker
Enter beginning stock basis and the year's activity. The tool applies the ordering rules (income first, then distributions, then losses) and flags any suspended loss.
6 · Partnership distribution analyzer
Enter a partner's outside basis before a current (non-liquidating) distribution and what they received. The tool determines gain recognition (cash only) and resulting basis.
Filterable bank ·
Practice questions
Timed · exam pattern
Assessment
Build a timed test drawn from the practice bank, then get a published attainment report broken down by Area and by Blueprint skill level (target line: 75 — the CPA Exam's actual passing score).
Set up your test
Exam-pattern TBS prompts