2012 Becker CPA Review REG1

CPA EXAM R EVI EW

Jij~BECKERPROFESSIONAL EDUCATION

BECKER PROFESSIONAL EDUCATION - CPA EXAM REVIEW COURSE DEVELOPMENT TEAM

Timothy F. Gearty, CPA, MBA, JD Editor in Chief, FAR National Editor, Regulation (Tax) Editor

Lisa M. Thayer, CPA Business National Editor

Angeline S. Brown, CPA, MAC Auditing and Financial National Editor

Tom Cox, CPA, CMA, CHFP Financial (GASB & NFP) National Editor

Steve Levin, BA, JD Regulation (Law) National Editor

Peter Olinto, JD, CPA Regulation (Law) Nationai Editor

John B. Pillatsch, MAS, CPA/PFS Director, Course Development Operations

Richard Sykes Director, Course Production

Stephen Bergens Manager, Quality Assurance

Anson Miyashiro Course Production Manager

AI Glodan Bookstore Purchasing Manager

Pete Console System Support Manager

Shelly McCubbins Course Production Supervisor

CONTRIBUTING EDITORS

Eric J. Brunner, PhD

Robert A. DeFilippis, CPA, MBA

Mike Farrell, JD

Dennis J. Green, CPA, MBA

Liliana Hickman-Riggs, CPA, CITP, CMA, CIA, CFE, FCPA, DABFA, MS

Cindy Lawrence, CPA, MBA

Edward McTague, CPA, MBA

Permissions

Michael Meriwether, CPA, MBA

Mike Potenza, JD

Ray Rigoli, CPA, MBA

Karen Tarbet, CPA, JD

Jennifer B. Deutsch, CPA, MS

Chris Cocozza, CPA, JD, LLM

Material from Uniform CPA Examination Questions and Unofficial Answers, 1989, 1990, 1991, 1992, 1993, 1994,

1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009 and 2010 copyright ©by American Institute of Certified Public Accountants, inc. is reprinted (or adapted) with permission.

Copyright © 2010 by DeVry/Becker Educational Development Corp. All rights reserved.

Printed in the United States of America.

No part of this work may be reproduced, translated, distributed, published or transmitted without the prior written

permission of the copyright owner. Request for permission or further information should be addressed to the

Permissions Department, DeVry/Becker Educational Development Corp.

LICENSE AGREEMENT

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agreement carefully before opening the Software package and/or using these materials. Do not open theSoftware package and/or use these materials unless you agree with~ terms of this agreement.

NOTE: You may already be a party to this agreement if you registered for a Becker CPA Review program (the

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Grant: Upon your acceptance of the terms of this agreement, in a manner set forth above, DeVry/Becker Educational

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You may:

• use the Printed Materials and the Software for the Program, for preparation for one or more parts of the CPA exam (the

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• use the Software on any single computer;

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digitally, or otherwise) during the Program relating to the subject matter of the Program. Printed Materials may include, but

are not limited to, one or more textbooks for each of the financial, auditing, regulation, and business subject matter areas of

the Exam and/or flashcards.

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Your Limited Right to Terminate this License and Receive a Refund: You may terminate this license for the in-class and onlinePrograms in accordance with Becker's refund policy as provided athttp://www.becker.com/accounting/cpaexamreview/students/pdfs/Policies_and_Procedures.pdf. You may terminate thislicense for the self study CD/DVD Program in accordance with Becker's refund policy as provided athttp://www.becker.com/accounting/cpaexamreview/courses/CPA-Review/policy_cd .cfm.

limited Warranty: Becker warrants that the media containing the Software, if prOVided by Becker, is free from defects inmaterials and workmanship and will remain so for 90 days from the date you acquired the Software. Becker's sole liability forany breach of this warranty shall be, in Becker's discretion, to repair or replace your defective media without charge or torefund the license fee you paid for the Software. Defective media may be returned for replacement or refund during the 90day warranty period unless the media has been damaged by your actions or while under your control. Due to the complexnature of computer software, Becker does not warrant that the Software is completely error-free, will operate withoutinterruption, or is compatible with all equipment and software configurations. You expressly assume all risk for use of theSoftware.

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Consent to Use of Your Name: As further consideration for the license granted to you under this agreement, after you pass thelast part of the CPA Exam, you agree to have your name used on a listing of "Successful Former Students" which is mailed, alongwith announcements of the Program, to prospective students.

Becker Professional Education J CPA lXilnl Review

REGULATIONprogram attendance record

Regulation

Student _ Location:, _

REGULATION 1 REGULATION 2

~ ~

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REG U LAT ION 3 REGULATION 4

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REGULATION 5 REGULATION 6

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REGULATION 7

~

E

Ei•ucro~c•!1

IMPORTANT NOTES TO STUDENTS REGARDING "THE BECKER PROMISE"

• You must stamp this sheet at the end of each class attended. This is the only acceptable record of your classroom attendance.

• An overall percentage correct of 90% or higher is required of the homework to qualify for The Becker Promise.

• Please fax documentation to 86R6-398-7375 no later than 30 days following the completion of each section.

© 2010 DeVry/Becker Educational Development Corp. All rights reserved. v

Regulation

vi

NOTES

Becker Professional Education I CPA Exam Review

© 2010 DeWy/Becker Educational Development Corp. All rights reserved.


REGULATIONtable af contents

Program attendance record ..

Introduction ..

REGULATION 1

Regulation

. v

. Intra-1

1. Individual taxation: Filing status Rl-7

2. Individual taxation: Exemptions Rl-10

3. Individual taxation: Gross income Rl-15

4. Individual taxation: Capital gains and losses Rl-48

5.

6.

Task-based simulation samples Rl-71

Class questions Rl-75

REGULATION 2

1. Adjustments and itemized deductions R2-3

2. Tax calculations and credits R2-33

3. Individual taxation: Other taxes R2-49

4. Individual taxation: Other items R2-55

5. Class questions R2-57

REGULATION 3

1. Ccorporations, depreciation, and MACRS R3-3

2. Small business corporations (S corporations) R3-52

3. Exempt organizations R3-60


REGULATION 4

1. Partnership taxation R4-3

2. Estate, trust, and gift taxation R4-22

3. Ethics and professional responsibilities in tax services R4-43

4. Federal tax procedures and legislative process R4-68

5. Sole proprietorship and joint venture R4-91

6. General partnership R4-92

7. Limited liability partnership R4-104

8. Limited partnership R4-105

9. Limited liability company R4-108

10. Corporation R4-111


© 2010 DeVrV!Becker Educational Development Corp. All rights reserved. vii

Regulation Becker Professional Education I CPA Exam Review

REGULATION 5

1. Contracts Rs-3

2. Sales Rs-31

3. Employer-employee law R5-47


REGULATION 6

1. Commercial paper R6-3

2. Documents of title R6-27

3. Secured transactions R6-32

4. Suretyship and creditor's rights R6-47

5. Money laundering R6-57

6. Task-based simulation samples R6-65


REGULATION 7

1. Agency R7-3

2. Bankruptcy R7-16

3. Securities regulation R7-39

4, CPA legal liability,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,.,,.,,.,,,,,,."""""""""".""""""."."''''''''''''''''''''''''''''''''''''''''''''''''''''"." ,,·53

5. Antitrust law R7-59

6. Copyrights and patents R7-67


Class questions explanations cQ-1

Glossary Glossary-1

Index , Index-1

viii © 2010 DeVry/Becker Educational Development Corp. All rights reserved.

COURSE INTRODUCTION

1. Content Specification Outline Intro-3

2. Becker's CPA Exam Review-Course Introduction lntro-7

Introduction lntro-7

Lecture series Intro-7

Textbooks lntro-7

Software Jntro-8

Flashcards and mobifeflashcard applications Intro-9

Course updates and academic support Intra-ii

The Uniform CPA Exam - overview , Intro-13

Passing the CPA Exam lntro-15

Before the examination Intro-17

Surviving the examination itself lntro-18

1

Regulation

Intro-2

NOTES


{)2010 DeVry/Becker Educational Development Corp. All rights reserved.


REGULATION CONTENT SPECIFICATION OUTLINE

REGULATION3 hours

Regulation

<--------- 60 Points ----------> ~40points~

Testlet #1 Testlet #2 Testlet #3 Testlet #4

24 24I- 24 6

MC MC MC Task-basedQuestions Questions Questions simulations

35-40 minutes I I 35-40 minutes I I 35-40 minutes I I 60-70 minutes

I Ethics and professional and legal responsibilities 15-19%

A. Ethics and responsibilities in tax practice

1. Treasury Department Circular 230

2. AICPA Statements on Standards for Tax Services

3. Internal Revenue Code of 1986, as amended, and

regulations related to tax return preparers

B. Licensing and disciplinary systems

1. Role of state boards of accountancy

2. Requirements of regulatory agencies

C. Legal duties and responsibilities

1. Common law duties and liability to clients and third parties

2. Federal statutory liability

3. Privileged communications, confidentiality, and privacy acts

II BUSiness law 17-21%

A. Agency

1. Formation and termination

2. Duties and authority of agents and principals

3. Liabilities and authority of agents and principals

B. Contracts

1. Formation

2. Performance

3. Third-party assignments

4. Discharge, breach, and remedies

C. Debtor-creditor relationships

1. Rights, duties, and liabilities of debtors, creditors, and

guarantors

2. Bankruptcy and insolvency

D. Government regulation of business

© 2010 DeVry/Becker Educational Development Corp. All rights reserved

1. Federal securities acts

2. Other federal laws and regulations (antitrust, copyright,

patents, money-laundering, labor, employment, and ERISA)

E. Uniform commercial code

1. Sales contracts

2. Negotiable instruments

3. Secured transactions

4. Documents of title and title transfer

F. Business structures (selection of a business entity)

1. Advantages, disadvantages, implications, and constraints

2. Formation, operation, and termination

3. Financial structure, capitalization, profit and loss allocation,

and distributions

4. Rights, duties, legal obligations, and authority of owners and

management

Intro-3


A. Federal tax legislative process

B. Federal tax procedures

1. Due dates and related extensions of time

2. Internal Revenue Service (IRS) audit and appeals process

3. Judicial process

4. Required disclosure of tax return positions

5. Substantiation requirements

6. Penalties

7. Statute of limitations

C. Accounting periods

D. Accounting methods

1. Recognition of revenues and expenses under cash, accrual,

or other permitted methods

2. Inventory valuation methods, including uniform

capitalization rules

3. Accounting for long-term contracts

4. Installment sales

E. Tax return elections, including federal status elections,

alternative treatment elections, or other types of elections

applicable to an individual or entity's tax return

F. Tax planning

1. Alternative treatments

2. Projections of tax consequences

3. Implications of different business entities

4. Impact of proposed tax audit adjustments

5. Impact of estimated tax payment rules on planning

6. Role of taxes in decision-making

G. Impact of multijurisdictional tax issues on federal taxation

(including consideration of local, state, and multinational tax

issues)

H. Tax research and communication

1. Authoritative hierarchy

2. Communications with or on behalf of clients

IV Federill tilxillion of property transactrons 12-16%

A. Types of assets G. Estate and gift taxation

B. Basis and holding period of assets 1. Transfers subject to the gift tax

C. Cost recovery (depredation, depletion, and amortization) 2. Annual exclusion and gift tax deductions

D. Taxable and nontaxable sales and exchanges 3. Determination of taxable estate

E. Amount and character of gains and losses, and netting process 4. Marital deduction

F. Related party transactions 5. Unified credit

A. Gross income

1. Inclusions and exclusions

2. Characterization of income

B. Reporting of items from pass-through entities

c. Adjustments and deductions to arrive at taxable income

D. Passive activity losses

Intro-4

E. Loss limitations

F. Taxation of retirement plan benefits

G. Filing status and exemptions

H. Tax computations and credits

I. Alternative minimum tax

()201O DeVrv/Becker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA Exam Review Regulation

VI Federal taxation-entities 18-24%

A. Similarities and distinctions in tax treatment among business

entities

1. Formation

2. Operation

3. Distributions

4. Liquidation

B. Differences between tax and financial accounting

1. Reconciliation of book income to taxable income

2. Disclosures under schedule M-3

c. Ccorporations

1. Determination of taxable income/loss

2. Tax computations and credits, including alternative

minimum tax

3. Net operating losses

4. Entity/owner transactions, including contributions and

distributions

S. Earnings and profits

6. Consolidated returns

D. Scorporations

1. Eligibility and election

2. Determination of ordinary income/loss and separately

stated items

3. Basis of shareholder's interest

©2DID DeVry/Becker Educational Development Corp. All rights reserved.

4. Entity/owner transactions, including contributions and

distributions

5. Built-in gains tax

E. Partnerships

1. Determination of ordinary income/loss and separately

stated items

2. Basis of partner's/member's interest and basis of assets

contributed to the partnership

3. Partnership and partner elections

4. Transactions between a partner and the partnership

S. Treatment of partnership liabilities

6. Distribution of partnership assets

7. Ownership changes and liquidation and termination of

partnership

F. Trusts and estates

1. Types of trusts

2. Income and deductions

3. Determination of beneficiary's share of taxable income

G. Tax-exempt organizations

1. Types of organizations

2. Obtaining and maintaining tax-exempt status

3. Unrelated business income

Intro-5

Regulation

Intro-6

NOTES


e2010 DeWy/Becker Educational Development Corp. All rights reserved.


BECKER'S CPA EXAM REVIEW - COURSE INTRODUCTION

INTRODUCTION

Becker Professional Education's CPA Exam Review products were developed with you, the candidate, in mind.

To that end we have developed a series of products designed to tap all of your learning and retention

capabilities. Our course is first and foremost a time management system. The Becker lecture series,

comprehensive texts, PassMaster™ software, and Simulation Software are designed to be fully integrated; but

each can also stand alone. The best results are achieved when all the components are used collectively.

Passing the CPA Exam is difficult, but the professional rewards a CPA enjoys make this a challenge all

accounting professionals should meet. Almost all CPA candidates have the ability to pass the exam. Yet,

nationwide, only 10% of candidates sitting pass all parts. Why? Approximately 50% of all candidates have no

formal preparation and, therefore, lack the key element to succeSS---<lxam focus.

You will pass the CPA Examination if you prepare properly. Keep this in mind as you work with our course

materials. We created our CPA Exam Review after evaluating the needs of CPA candidates and analyzing the

CPA Exam over the years. Those efforts have enabled us to produce a CPA Exam Review unparalleled in

today's market. Our course materials comprehensively present topics you must know in order to pass the

examination, teaching you the most effective tactics for learning the material.

As part of the course you received a Course Disc, which contains the following:

./ New Student Orientation

./ Software Tutorial

./ CPA Exam Structure Tutorial

./ CPA Exam Registration Tutorial

./ Software User Manual

All of these resources should be viewed prior to attending your first class or viewing your first lecture.

LECTURE SERIES

In our course you will see and hear the most dynamic CPA Exam Review lecturers in the country. Our

lecturers are exam-oriented and spend countless hours analyzing past exams and developing strategies to

help you pass-this time.

TEXTBOOKS

Our textbooks, written by our teaching staff, are specifically designed for and geared toward our course.

Written in outline form, they follow the same sequence as the lectures-providing reduced note-taking and

allowing students to concentrate their attention on the presentation.

€l2Q10 DeVrv/Becker Educational Development Corp. All rights reserved. Intro-7

Regulation

Textbook Icons


Throughout the Becker materials you will find icons that have been designed to assist with your preparation for

the CPA Examination. These icons are located in the margins of your textbook for easy identification of

important information.

Pass Keys

Memorize Notations

Keyword Search

Throughout the course materials you will find Pass Keys that have beenprepared to assist in your understanding of major concepts. Pass Keys will beidentified with this icon in the margins.

For important items within the materials that should be memorized, it will beidentified with this icon in the margins.

When working with the new task-based simulations, it will be necessary forcandidates to search professional literature to find the solution to a givenquestion. A keyword search ofthe given literature is a candidate's most timeeffective tool. Potential keywords to search with will be identified with thisicon in the margins.

FASB Accounting II'lIl1\'I IStandards Codification ~

Notes, Exceptions, etc. IIIThese numbers represent the location of this topic in the FASB AccountingStandards Codification. These will be identified with this icon in the margins.

When important notes, exceptions, etc. are included within the materials, itwill be identified with this icon in the margins.

IFRS-speci/ic Content

International

Comparison

When IFRS-specific information is included within the materials, it will beidentified with this icon in the margins.

When international comparison information is included within the materials, itwill be identified with this icon in the margins.

SOFTWARE

An integral part of Becker's CPA Exam Review program is the use of the PassMaster™ and Simulation

Software. All homework questions are contained on these two software programs. PassMaster™ contains

thousands of prior exam questions for use in your preparation. The homework is necessary to reinforce the

concepts introduced in the materials, and is organized on a lecture-by-Iecture basis. The Simulation Software

contains task-based simulations organized by lecture for each section of the exam. The software also provides

a comprehensive Final Exam for each part. The Business section will include simulations that test the

candidate's writing skills. We believe exposure to the technology and content tested in these areas is

advantageous to the candidate. We encourage you to watch the Written Communications Tutorial. It will help

you gain an understanding of what the examiners are looking for in a well-written communication response.

Intro-8 "2010 DeWy/Seeker Educational De~elopment Corp. All ,ights reselVed.

Becker Professional Education I CPA txilm Review Regulation

FLASHCARDS AND MOBILE FLASHCARD APPLICATIONS

Flashcards are an important tool to assist in your preparation for the exam. While we believe preparing your

own flashcards is a valuable learning tool, we recognize time is a precious commodity when preparing for the

exam. For that reason, we also offer enrolled students the opportunity to purchase pre-printed flashcards and

mobile fiashcard applications. Flashcards will help you commit to memory the most important principles and

rules tested in each section of the exam. The flashcards have been designed to work in unison with the course

and textbooks and are indexed by class session to allow you to focus your preparation in your weakest areas.

Pre-printed Flashcards Example:

Basi( Framework

Front Side

c=---------

Name the single source of authoritallvenongovernmental U_S. GAAP_

Mobile Flashcards Application Example:

Front Side

FARl-l

Back Side

The FASB "Accounting Standards Codification" (ASC)

Back Side

fARl-l

iPod --;' 10:05 AM iPod ; 10:05 AM

Hom, AUDIT 1 0 I)

Audltmg & Attestation 1

-.JI AUDIT 1"4~ Nol",..Ie,.d

Audited Financial Statements The Basics

What are the three standards offieldwork?

[~lik~ a piece of PIE'

Question 4 01 41~<lg l),.v",. B kcO EdJ at o"al [)" 'Ioprr~nl Co p

Hom, AUDIT 1 0 I)

Auditing & Attestation 1

-.JI AUDIT 1-4~ No'n,.".,.d

The auditor must adequately PLANthe work and must properly superviseany assistants.

The auditor must obtain a sufficientunderstanding of the entity and itsenvironment, including its INTERNALCONTROL, to assess the risk ofmaterial misstatement of the financialstatements whether due to error orfraud, and to design the nature,timing, and extent of further auditprocedures.

Answer 4 of 41:00, D~V , B" ,et E~ ,,' L< a D"'lelopn or' ("'0

The flashcards and mobile flashcard applications for the most popular mobile platforms can be purchased by

calling our National Student Service Center at 1-800-868-3900 or online by simply logging on to

www.becker.com/cpa and select "Flashcards" from the Courses & Products drop-down menu.

© 2010 DeVry/8ecker Educational Developmem Corp. All rights reserved Intro-9


In preparing your own flashcards, we recommend the following:

• Prepare flashcards as you review your lecture notes prior to working the multiple-choice questions. You

can identify those flashcards you would like to create by making a mark, such as "Fe," in the margin of

your outline while viewing the lecture.

• Select major concepts from your class materials (outlines). Do not prepare flashcards for everything in

the outlines (the outlines are already in a summarized format). Only make a flashcard for the major

concepts, general rules and exceptions, mnemonics, formulas, and 'Important lists. Items to consider:

,( Mnemonics

,( Formulas

,( "Heavy on exam" notations

,( "Memorize" notations

,( Other major concepts (noted while reading the explanations to the multiple-choice questions)

,( General rules and exceptions

• Keep your flashcards as simple as possible, but do not sacrifice correctness for brevity.

• Use 3" x 5" or 5" x 7" cards (whichever size is easiest for you to carry around). Write the question, the

general rule, or the title of the list you are trying to memorize on the front, and write the answer, the

exceptions, or the list, as applicable, on the back.

Example:

'thmber

A-I

N""Vo\e t-he'3 ItGe\\eY'""llr st-",,\\A""Y'As

A-I +--Codewlclass nu

Ge\\€Y'",,1 '5+",,\\A""Y'As (liP)

.,.. IY"",i"i"B & f'Y~icie,,<.y ~ "",v..~it-oy

I 1"J.epe"J.e"ce ~ w.e"t-"",l ",t+it-v..J.e & "",ppYo",ch

P Dv..e c"",Ye ill, pey.('!oYlMQl,,,ce ~ WOY\:.

Front side:

Back side:

• After each class, review all of your flashcards for all of the previous classes. When you believe that you

have a concept memorized, place those cards in a separate pile. Do not stop reviewing those cards, but

it is not necessary to review them as often. The more frequently you can review all your cards, the better

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THE UNIFORM CPA EXAM

Exam Sections

The CPA Examination consists of four sections:

OVERVIEW

Regulation

{;iral(ct'alllccQal(ttir! &- Re-/Q,.ttir!The Financial section consists of a 4-hour exam covering all financial accounting & reporting,

governmental & not-far-profit accounting, inciuding International Financial Reporting Standards (I FRS).

lIar!/trir! &- IItte-J'tattpl(The Auditing section consists of a 4-hour exam. This section covers all topics related to auditing, including

audit reports and procedures, generally accepted auditing standards, attestation and other engagements,

and governmental auditing.

Re-!alattPI(The Regulation section consists of a 3-hour exam, combining topics from business law and federal

taxation.

8a,frire-,f,f £'V'r;'QI((t(e-l(t &- eQl(ce-/t,fThe Business section consists of a 3-hour exam/ covering general business topics such as economics,

financial management, information technology, managerial accounting, and process & project

management.

Question Formats

The chart below illustrates the question format breakdown by exam section.

I To;k bo;cd S'mulat,o", mMultiple chOice Questions Written Communication Tasks

Section Percentage Number Percentage Number

Financial 60% 90 40% 7

Auditing 60% 90 40% 7

Regulation 60% 72 40% 6

Business 85% 72 15% 3

Each exam will contain testlets. A tesllet is either a series of multiple-choice questions (either 24 or 30depending on the section) or one task-based simulation. For example, the Financial examination will contain 4testlets. The first three testlets will be multiple-choice questions and the last one will contain seven short taskbased simulations. In completing the exam, each testlet must be finished and submitted before continuing onto the next. Candidates cannot go back and view a previously completed tesllet or go forward to view asubsequent testlet before closing and submitting the earlier testlet. Our final exam contains these types ofrestrictions, so familiarizing yourself with them by taking the final exam is very important.

fi:l2010 DeVryjBeder Educational Development Corp. All rights reserved. Intro-13

Regulation

Exam Schedule


The computer-based CPA exam is offered during two of every three months of the calendar year. Oncedetermined to be eligible to sit, candidates can schedule an exam date directly with Prometric.

Eligibility and Applicatian Requirements

Each state sets its own rules of eligibility for the examination, so the requirements vary from state to state.Please visit www.becker.comistate as soon as possible to determine your eligibility to sit for the exam.

Application Deadlines

With the computer-based exam format, set application deadlines generally do not exist. To ensure that youhave a thorough understanding of your state's requirements, you should apply as early as possible.

Grading System

You must pass all four parts of the examination to earn certification as a CPA. You must score 75 or better ona part to receive a passing grade.

About the Pass Rate

You probably are aware that the pass rate for first-time candidates is very low. Fewer than 10% of allcandidates pass all four parts of the examination on their first attempt. However, in spite of the low initial passrate, 80% of all candidates who sit for the examination multiple times eventually pass.

As you might expect, the low initial pass rate results from many causes. Some candidates do literally nopreparation for the exam; while other candidates prepare minimally, improperly, or inefficiently. By preparingproperly, you can succeed the first time you take the exam.

Intro-14 (Q2010 DeVry/Becker Educational Development Corp. All rights reseNed.


PASSING THE CPA EXAM

Regulation

Strategy and Tactics for Taking the Examination

Most successful candidates pass the examination with scores between 75 and 78. To ensure that you initiallyearn a passing grade, you should follow these tips.

Tips for Multiple-choice Questions

T't 1 Control the amount of time you spend on each question.

The exam time limits mentioned above are overall time limits. The exam will not display a timer for each

testlet. The recommended time for completion on most task-based simulations will be 25 - 40 minutes. As

such, you'll be forced to closely control the amount of time you spend on multiple-choice questions. For

Financial, you should spend approximately lY2 - 2 minutes on each multiple-choice question; for Auditing, you

should spend approximately 2 minutes per question. For Regulation and Business, you should spend

approximately l-lY2 minutes per question.

Ttl2 Become familiar with the format.

The exam does not contain the typical multiple-choice format such as lettered answers (a, b, c, and d).

Instead, candidates will be required to click on the radio dials or the text portion of the answer they are

choosing as correct. You will see this functionality in our Final Exams.

T't 3 Read all four choices before choosing one as your answer.

Given that you're working under time constraints, you may be tempted to choose as your answer for any given

question the first choice that seems right. That can be a costly mistake; the examiners may include two or

more good answers among the choices, one of which is the best answer. You'll get no credit for choosing the

wrong "good" answer.

T;'" Answer every multiple-choice question.

Two reasons support this suggestion. First, the examiners don't penalize you for guessing; they don't subtract

wrong answers from right answers.

Therefore, guess when you must, and realize that you always have at least a 25% chance of getting the right

answer. In fact, on some questions you may have a 50% chance of guessing the right answer because you may

immediately recognize that two of the four choices are wrong.

If you're uncertain about an answer you can mark that question for later review. Remember, you can go back

to questions within the current testlet you are working to review. You will see this marking functionality in our

Final Exams. Prior to exiting the testlet, you must make sure you have answered all questions.

When you're answering multiple-choice problems that require mathematical calculations and you're unable to

arrive at one of the four given numerical answers, you should perform the follOWing procedure before you

record a guess as an answer. First, check the mathematical accuracy of your calculations; that alone may lead

you to the correct answer. If that doesn't produce a correct answer, check for an error in your logic by

rereading the question. If that doesn't clear the ambiguity, choose your guess to answer the question, and

mark it for review at the end of the current testlet if time permits. Remember though that once you submit a

testlet, you cannot go back and review it.

© 2010 DeVry/Becker Educational Development Corp_ All rights reserved Intra-1S

Regulation

Tactics for Simulations


Tt! f Work all homework simulations.

We have developed extensive task-based simulations for you to work as homework. You should familiarize

yourself with the types of questions and functionalities covered by the tasks. This familiarity will save you

time on the actual exam by removing any barriers to understanding how to maneuver, thus allowing you to

focus on the content covered by the tasks.

Tt! 2 Follow recommended progression through tasks.

It is important to have a basic approach when beginning a testlet. Following the same consistent approach

will provide you an opportunity to increase the time you have to focus on the task's requirements. We

recommend the following:

./ Review each task's instructions.

./ Allocate your time amongst the tasks. Remember, the AICPA approximate timeframe for all task

based simulations to be worked. However, be sure and take into account any additional time you

saved while completing earlier testlets and the difficulty of the particular simulation you are

working.

./ Be sure that you have answered all requirements for each task.

Tt! J Use the keyword search function when completing research tasks.

When working through the task-based simulations, a common work tab will be entitled "Research." This tab

will require a candidate to answer a question using the research materials available to you. The details of how

to work within the Authoritative Literature or the Standards function are covered in the course manual

included with the Course Disc you received. It should be noted that the most time efficient manner to search

the Authoritative Literature available on the exam is through the use of a keyword search. Please be sure and

have read through the manual for additional details and tips on utilizing the functionalities within the

simulations.

Intro-16 t) I010 O",Vry!Becker £ducational Development Corp. All rights reserved.


BEFORE THE EXAMINATION

Regulation

You should have scheduled your preparation and exam date so that you have time to do a final review prior to

sitting for your exam. This should entail setting aside approximately a week to review each section for which

you have a scheduled exam date. During this final review period, don't begin to study new topics, as you don't

have the time to master them; knowing that you don't have enough time may upset you, which in turn will

disrupt your ability to show the examiners what you do know.

Therefore, you should review only what you have studied-and you should do that in a manner that heightens

rather than reduces your confidence. By this time, if you've followed your plan carefully, you'll know your

strengths (many) and your weaknesses (few). Of course, your last week's review should focus on your areas

of weakness, but don't focus on those areas exclusively. If you work only on your weak points, you'll

strengthen them, but you'll be so focused on your weaknesses you may become distressed. Instead, you may

want to associate each review of an area of relative weakness with a review of an area of relative strength in

order to keep your confidence intact.

Be sure to have located directions to the Prometric testing center where you chose to sit and have information

regarding the parking and other accommodations available there. We suggest you contact the Prometric site

or consult the website (www.2test.com)foradditional information regarding taking a test at a Prometric

location.

Expect to feel tense and uncertain during the week before the examination. You can manage stressby following several tips.

r;i' 1 Remember, every candidate taking the exam likely feels as tense as you do.

Take some comfort from that shared misery. Realize also that the examiners indirectly recognize that

stress by curving scores on the examination and by re-grading failed parts.

r;i' 2 Use those activities you usually employ to reduce stress.

Get as much rest as you can, exercise regularly, and eat balanced nutritional meals. The evidence is

overwhelming that adequate rest, exercise, and nutrition minimize the harmful and disruptive physical

and psychological effects of tension.

l?t J Do not work until you drop.

You'll impair your health and threaten your performance on the examination. Treat yourself to time

away from concentrated study. Focus on the fact that the time to study and learn new material is behind

you.

Ttl'" You may want to try a technique called "imaging."

Some people report that they improve their performance on difficult or stressful tasks by visualizing that

they've already succeeded at the task. Imagine that you're taking the examination and handling its

demands well. Or, imagine you've received your passing grade. This may boost your confidence.

r;i' 5 Remember, the examiners cannot test on every conceivable subject.

The examiners must limit the amount of detail they demand and the scope of topics on which they can

focus during the time allowed for the examination.

(l2010 OeVrv/Becker Educational Development Corp. All rights relerved. Intro-17

Regulation Becker Professional Education J CPA Exam Review

'{;'t 6 Remember, if a question pops up with which you are unfamiliar, don't panic.

The odds are that it will be a surprise to most exam takers. Simply gather your wits about you and

prepare the best answer you can. Do not omit the question simply because you are unfamil"lar with the

topic. Most likely, the examiners are looking for you to exercise professional judgment in tackling the

topic.

'{;'t1 Remember, if you have followed your study plan, you are well prepared.

You will be able to answer most of the questions on the examination easily, and you'll know how to

wrestle with the harder problems in ways that will earn you a passing grade. Even if you've accomplished

only most or some of your study goals, take comfort in the knowledge that you're better prepared than

many other candidates.

SURVIVING THE EXAMINATION ITSELF

Make sure that you've arranged your transportation so you arrive with 30 minutes to spare before your set

appointment time. This margin should enable you to handle any unexpected delays in travel that may arise.

Second, dress in comfortable clothing. The "layered look" should serve you best. The room in which you take

the examination may be perfectly comfortable, but it may be over- or under-heated for the season, and you'll

want to be able to adjust to prevailing conditions.

Additional test center administration procedures should be available on either the AICPA exam website

(www.cpa-exam.org) or at the Prometric test center website (www.2test.com).

Intro-iS © 2010 DeVry/Becker Educational Development Corp. All rights reserved.


PREPARE TO SUCCEED...

Regulation

Congratulations on your decision to join the most trusted and recommended CPA Exam Review Course

in the industry - Becker Professional Education!

Upon the successful completion of our course and passing the CPA Exam, we invite you to consider

joining the esteemed faculty of Becker Professional Education. We employ a strong cadre of carefully

selected professionals with advanced academic degrees and years of practical experience. Our faculty

help students relate to the business world, make tangible connections between theory and practice, and

bring immediate relevance to you.

Becker's culture of passion among its faculty and its commitment to keeping themselves professionally up

to date are the key factors driving all aspects of our mission.

As a Becker faculty member, you will help others achieve their career goals and personal potential while

earning a suppiemental income. You get the satisfaction of making a positive impact on the quality of the

CPA profession. You also get a unique opportunity to grow personally and professionally:

./ Teach part time without interrupting your full-time career

./ Experience the satisfaction of making a difference

./ Expand your own expertise

./ Enhance your communication and leadership skills

./ Network with other professionals in your field

If you are an experienced professional with a CPA and/or an advanced degree, knowledge of the CPA

profession with strong communication skills and a desire to help others succeed, you could become a

faculty member at Becker Professional Education. Specialty areas of need include financiai accounting

and reporting, governmental and not for profit accounting, taxation, business law, auditing and attestation,

economics, cost and managerial accounting.

In addition to competitive compensation, Becker Professional Education faculty may be eligible for CPE

credit (decided by each jurisdiction). Please send a resume or CV to [email protected] if you are

interested in preparing the future CPAs. If you have questions, you can also contact a Becker faculty

recruiter at (630) 706-3406.

1)2010 DeVry/Becker Educational Development Corp. All rights reserved. Intro-19


INSTRUCTOR EVALUATION FORM

Becker Professional Education is committed to providing quality education to our students. If you are taking this course in a liveclassroom, you will be receiving a short instructor evaluation at the end of this section by email. Please take the 5 to 10 minutesneeded to complete this evaluation. Your input is very important to us. If you do not receive this evaluation by email, pleasecomplete the evaluation below for all instructors in your section. FAX the completed evaluation to (630) 706-3577.

To ensure you receive the email invitation, be sure to add [email protected] to your address book or safe senders list.For your convenience, please find the instructions for the most commonly used e-mail services and programs at:hltp:llimages.ed4.neUimages/htdocs/addressbook.

During the evaluation period, the evaluations are directly available at http://beckereval.com. If you do not evaluate all yourinstructors, you will continue to receive periodic reminders from [email protected] until you complete the evaluationforms, or the evaluation period has ended. We thank you in advance for your cooperation.

Please list your class location:

Please list your instructors' names: I I I IPlease answer the questions belowby checking the box to the right ofthe question:

This instructor communicated in a waythat helped me learn in the class.

This instructor demonstratedknowledge of the subject matter bygiving examples, working questionsduring the lecture and answeringquestions while at the class.

""

~

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'" " ~~

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e ~ '5 ...~'" "

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This instructor motivated me tocomplete the homework and to dowhat I could to ensure that I wasprepared for the exam.

This instructor showed agenuineinterest in preparing me for the exam.

I would recommend this instructor toothers.

ITIIIJ ITIIIJ ITIIIJITIIIJ ITIIIJ ITIIIJ

I would give this instructor thefollowing grade:

Describe at least one characteristic oraspect of your instructor's teachingthat could be improved in order toprovide students with a better learningexperience.

(Use the back ofihis page foradditional space, if needed.)

Describe at least one of yourinstructor's teaching strengths thatyou found helpful or valuable.

(Use the back of this page foradditional space, if needed.)

A B c D F A B c D F

Intro-20 g) 2010 DeVryjBecker Educational Development Corp. All rights reserved.


INSTRUCTOR EVALUATION FORM-ADDITIONAL NOTES

©2010 DeVrv/Becker Education.1 Development Corp. All rishts reserved.

Regulation

Intro-21

Regulation

Intro-22

NOTES


"2010 DeVry/Becker Educational Development Corp. All rights re,erved.

REGULATION 111II ~,.. ~ ~ ",,"'( ~ ffl -. "."1 (~

Individual Tax -Income

1. Individual taxation: Filing status 7

2. Individual taxation: Exemptions 10

3. Individual taxation: Gross income 15

4. Individual taxation: Capital gains and losses 48

5. Task-based simulations 71

6. Class questions 75

NOTE TO REGULATION STUDENTS

Becker Professional Education is committed to keeping you up~to-date with the most recent effects of changes in the tax

law. The impact of the current economic environment and other factors have resulted in tax law changes that are

continually superseding, amending, and/or clarifying several portions of the Internal Revenue Code. We expect this to

continue throughout 2009 and 2010. Depending on the timing of your particular exam [Note that tax law in effect 6 months

prior to your exam is "fair game" for testing.L periodic updates to the 2010 Regulation textbooks may be required. Please

be sure to check the Regulation Course Updates posted on the Becker Knowledgebase

(www.beckercpa.com/knowledgebase). You can subscribe to automatic e~mail notification of updates by clicking on the

"Notify me by email ..." button on the Course Updates page.

Regulation 1

Rl-2

NOTES


© 2010 DeVry/t1ecker Educational Development Corp. All right~ re~erved.

Becker Professional Education I CPA Exam Review Regulation 1

I N D I V I D U A L T A X A T I ON

GROSS INCOME

<ADJUSTMENTS>

ADJUSTED GROSS INCOME

/ STANDARD DEDUCTION)

\ GITEMIZED DEDUCTIONS

< EXEMPTIONS>

TAXABLE INCOME

FEDERAL INCOME TAX

< TAX CREDITS>

OTHER TAXES

< PAYMENTS>

TAX DUE G REFUND

(J 2010 DeVI)'!Becker Educational Development Corp. All rights reserved. Rl-3

Regulation 1 Becker Professional Education I CPA Exam Review

I N D I V I D U A L TAXA flO N

GROSS INCOME

< ADJUSTMENTS>

ADJUSTED GROSS INCOME

< ITEMIZED DEDUCTIONS>

Wages

Interest

Dividends

State Tax Refunds

Alimony Received

Business IncomeCapital Gain/Loss

IRA Income

Pension and Annuity

Rental Income/Loss

K-llncome/Loss

Unemployment Compensation

Social Security Benefits

Other Income

Educator Expenses

IRA

Student Loan Interest Expenses

Tuition & Fee Deduction

Health Savings Account

Moving Expenses

One-Half Self-Employment FICA

Self-Employed Health Insurance

Self-Employed Retirement

Interest Withdrawal Penalty

Alimony Paid

Medical (in excess of 712% of AGI)

Taxes - State/Local (Income/Sales & Property)

Interest Expense (Home & Investment)

Charity (up to 50% of AGI)

Casualty/Theft (in excess of 10% of AGI)

Miscellaneous (in excess of 2% of AGI)

Other Miscellaneous

< EXEMPTIONS>

TAXABLE INCOME

{ Taxpayer

x Spouse

Dependents

Rl-4 ~ 2010 DeVryjBecker EduCiltional Development Corp. All rights reserved.


... Check here If you, or your spouse If fIling JOintly, want $3 to go to thiS fund (see page 14)" 0 You 0 SpouseElection Campaign

~1040Department ot the Treasury..--Jntemal Revenue Service

~(Q)o91U.S. Individual Income Tax Return (99) lAS Use Only-Oo not write or s!ap~ in tills space.

Label For the year Jan. 1-Dec. 31, 2009, or other tax yWI beginning ,2009, ending ,20 '\ OMB No. 1545-0074

L Your first name and initial Last name Your social security number

(800 A iinstructions 6on page 14.) E If a joint return, spouse's first name and initial Last name Spouse's social security number

Use the IRSL j

label. H Home address (numbel" and slreet).lf you have a P.O. box, see page 14.

IApt. no. : You must enter

Otherwise, E i .. your SSN(s) above. ..please print R

or type. E City, lown or post office, state, and ZIP code. If you have a foreign address, see page 14. ) Checking a box below will not

Presldentlalchange your tax or refund.

Filing Status

Check only onebo,

1 0 Single 4 0 Head of household (with qualifyin9 person). (See page 15.) lithe

2 0 Married filing jointly (even if only one had income) quelifying person is a chlld but not your dependent, enter this

3 0 Married filing separately. Enter spouse's SSN above child's name here...and fUll name here .. 5 0 Qualifying widow(er) with dependent child (see page 16)

Dlines above.Total number of exemptlons c1mmedd

6a o Yourself. If someone can claim you as a dependent, do not check box 6a

fBoxes checked

Exemptions on 58 and 6bb o Snouse No. of children

--

c Dependents: (2) Dependent's (3) Dependent's (4) I if Qtlalifying on 6c who:• lived with you

(1) First name Last name social security number relationship to you c~~ I~C~I~e'f71 • did not live with--

: 0 you due to divorceor separation

If more than four : 0 lsee page 18) --dependents, see 0 Dependents on 6cpage 17 and not entered ebove --check here .. 0 : 0 Add numbers on

7saIncome

Attach Form(s)W-2 here. Alsoattach FormsW-2G and1099-R if taxwas withheld.

If you did notget a W-2,see page 22.

Enclose, but donot attach, anypayment. Also,please useForm 1040-V.

AdjustedGrossIncome

7sa

b

96

b

10

11

12

131.lsa16a

17

18

19

20a21

22

232.

2526

27

28293031a

32333435

3637

Wages, salaries, tips, etc. Attach Form(s) W-2

Taxable interest. Attach Schedule B if required

Tax-exempt interest. Do not include on line 8a '-'8,b'--' '--_-j"=MIOrdinary dividends. Attach Schedule B if required 9a

Qualified dividends (see page 22) . ,-,9~b'-L c-::c_~_-j'~~'1

Taxable refunds, credits, or offsets of state and local income taxes (see page 23) f-',0'--j-------t---Alimony received 11

Business income or (loss). Attach Schedule C or C-EZ 12

Capital gain or (loss). Attach Schedule D if required. If not required, check here'" D 13

Other gains or (losses). Attach Form 4797 . 14

IRA distributions. lisa 1 I .1 b Taxable amount (see page 24) 15b

Pensions and annuities ~ c=J b Taxable amount (see page 25) 16b

Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

Farm income or (loss). Attach Schedule F 18

Unemployment compensation in excess of $2,400 per recipient (see page 27) . .. 19

Social security benefits I 20a I I I b Taxable amount (see page 27) 20b

Other income. List type and amount (see page 29) . . 21

Add the amounts in the far right column for lines 7 through 21. This is your total income" 22

Educator expenses (see page 29) f-'2~3+------+-

Certain business expenses of reservists, perlorming artists, and

fee-basis govemment officials. Attach Form 2106 or 21D6-EZ f-'2~'+------+

Health savings account deduction. Attach Form 8889 1-'2~5'_j-------t_

Moving expenses. Attach Form 3903 r26"'-t_-------t--One-half of self-employment tax. Attach Scheclule SE f-'2~7-+ +_Self-employed SEP, SIMPLE, and qualified plans f-'2~8+ +_Self-employed health insurance deduction (see page 30) f-'29"'-+- --1__Penalty on early withdrawal of savings. f-'30"'-+------+--Alimony paid b Recipient's SSN .. f-"31~a,+ +_IRA deduction (see page 31) f-"32~I--_---+--

Student loan interest deduction (see page 34) f-'33"'-+--------1--Tuition and fees deduction. Attach Form 8917 f-'34"'-+-------+--Domestic production activities deduction. Attach Form 8903 '-'35"'--'-- --L__

Add lines 23 through 31a and 32 through 35 .

Subtract line 36 from line 22. This is your adjusted gross Income ..

© 2010 OeVrvj6ecker Educational Deveklpment Corp. All rights reserved. Rl-S


Form 1040 (2009) Page 2

f--"51'-+_~ +---11 "52

p47'--t-~---t-----11 \

r 46=-t----t--i149 "50

55

54

43

45

41

46

44

42

53

Amount from line 37 (adjusted gross income) r--+-'f38'f-of------~+--

Check ( D You were born before January 2, 1945, D Blind.) Total boxes L ·)';} .•.·~dif: D Spouse was born before January 2, 1945, D Blind. checked ~ 39a·';'"'-,

If your spouse itemizes on a separate retum or you were a dual-status alien, see page 35 and check here" 39b[] ,,',,;,

Itemized deductions (from Schedule A) or your standard deduction (see left margin) f-40=a'-!-------f--If you are increasing your standard deduction by certain real estate taxes, new motor

vehicle taxes. or a net disaster loss, attach Schedule L and check here (see page 35) . ~ 4Ob[]

Subtract line 40a from line 38

Exemptions. If line 38 is $125,100 or less and you did not provide housing to a Midwestern

displaced individual, multiply $3,650 by the number on line 6d. Otherwise, see page 37

Taxable Income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0-

Tax (see page 37). Check if any tax is from: a 0 Form(s) 8814 b 0 Form 4972.

Alternative minimum tax (see page 40). Attach Form 6251

Add lines 44 and 45

Foreign tax credit. Attach Form 1116 if required.

Credit tor child and dependent care expenses. Allach Form 2441

Education credits from Form 8863, line 29

Retirement savings contributions credit. Attach Form 8880

Child tax credit (see page 42)

Credits from Form: a 0 8396 b 0 8839 c 0 5695

OthercreditsfromFonn: a 03800 b 0 8801 cD _

Add lines 47 through 53. These are your total credits

Subtract line 54 from fine 46. If line 54 is more than Hne 46, enter -0-

4344

45

46

4746

49

50515253

5455

41

42

3839a

b

~a

b

StandardDeductionfor-

• People whocheck anybox on line3ga, 3gb, or40b or whocan beclaimed as adependent,see page 35.• All others:Single orMarried filingseparately,$5,700Married filingiointlyorQualifyingwidow(erj,$11,400Head ofhousehold,$8,350

Tax andCredits

OtherTaxes

5657

5859

60

Self-employment tax. Allaeh Schedule SEUnreported social security and Medicare tax from Form: a 0 4137 b 0 8919

Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 jf required

Additional taxes: a 0 AEIC payments b 0 Household employment taxes. Attach SChedule H

Add lines 55 throuah 59. This is our total tax ...

5657

5859

60

Payments 6162

63If you have aqualifyingchild, attachSchedule EIC.

540

b

65

6667

6869

70

71

Federal income tax withheld from Forms W-2 and 1099 p6e1-+ f-_12009 estimated tax payments and amount applied from 2008 return 62 .': ',..

Making work pay and government retiree credits. Attach Schedule M 63 .. ~".

Earned income credit (EIC) . . . I f-54=a'+------t--1" •Nontaxable combat pay election '1 64b f "~ )Additional child tax credit. Attach Form 8812 f-'65"--I--------t---t >Refundable education credit from Form 8863, line 16 66 I>'First-time homebuyer credit. Attach Form 5405 67 !,·,'i;;".Amount paid with request for extension to file (see page 72) 68 I:>,,':'Excess social security and lier 1 RRTA tax withheld (see page 72} 69 :: i'

Credits from Form: a 0 2439 b 0 4136 c 0 8801 d 0 8885 70 I·~,·'·Add lines 61, 62, 63, 64a, and 65 through 70. These are your total payments ~ 71

RefundDirect deposit?See page 73and fill in 73b,73c, and l3d,or Form 8888.

7273a

~ b

~ d

74

If line 71 is more than line 60, subtract line 60 from line 71. This is the amount you overpaid f-:'7~2'-t-------t---

Amount of line 72 you want refunded to you. If Form 8888 is attached, check here ... 0 1-"73.a'i I-__Routing number i : : , ! ! ! i : ; ... ,c Type: .0 ~h8?king 0 SaVings I:-,,'c'Account number j iii I 'Amount of line 72 vou want aoolied to vour 2010 estimated tax ~ 74

AmountYou Owe

75

76

Amount you owe. Subtract line 71 from line 60. For details onhTOW to pay, see page 74 . 1 ~ f-'7~5'-l_---~=~!_ccc-

Estimated tax oenallv (see oaae 741 . . . . . 76 I 1,;) .'': ,:-c.;'·i':'-:X;';:.),;

Third PartyDesignee

SignHere

Do you want to allow another person to diSCUSS thiS return With the IRS (see page 75)? 0 Yes, Complete the follOWing. 0 No

Designee's Phone Personal identification 'I"T,-"name ~ no. .... number (pIN) ~ I

Under penalties of perjury, I declare lhat I have examined this refum and accompanying schedules and statements, and to the best of my knowledge and belief,they are true. correct. and complete, Declaration of preparer (other than taxpayer) is based on ali informatkm of which preparer has any knowledge

Joint return? Your signafure Date Your occupation Daytime phone number

See page 15. ..Keep a copy r Spouse's signature. If a joint return, both must sign. Date Spouse's occupation " '."> .'"'"' ,"'for yourrecords. ..".' : ",'"' :(",," "."

Preparer's ~ Date Preparer's SSN or PTiNPaid signature ICheck if 0self-employedPreparer's

Finn's name (or ~ I EINUse Only yours if self-employed),

Phone no.address. and ZIP code

Fonn 1040 (2009)

Rl-6 {J2010 DeVryjBecker Educational Development Corp. All rights reserved.


INDIVIDUAL TAXATIONFiling Status

I. FILING

A. Requirement for Filing (who must file?)

1. General Rule

Generally, a taxpayer must file a return if his or her income is equal to or greater thanthe sum of:

a. The personal exemption plus

b. The regular standard deduction (except for married filing separately) plus

c. The additional standard deduction amount for taxpayers age 65 or over or blind(except for married persons filing separately).

2. Exceptions

Certain individuals must file income tax returns even if their income is lower than the"general rule" requirement.

a. Individuais whose net earnings from self-employment are $400 or more must file.

b. Individuals who can be claimed as dependents on another taxpayer's return,have unearned income, and gross income of $950 (2010) or more must file.

c. Individuals who receive advance payments of earned income credit must file.

B. When to File

1. Due Date - Apri/15

Individual taxpayers must file on or before the fifteenth day of the fourth monthfollowing the close of the taxpayer's taxabie year, which is April 15.

2. Extension

a. Automatic Six-Month Extension - October 15

An automatic six-month extension (until October 15) is available for thosetaxpayers who are unable to file on the Aprii 15 due date. The automatic sixmonth extension is not an extension for the payment of any taxes owed.Although granted automatically, the six-month extension must be requested bythe taxpayer by filing Form 4868 by April 15th.

b. Payment of Tax

With either extension, the due date for payment of taxes remains April 15.

3. Taxpayers Who are Out of the Country

Taxpayers who are outside of the United States on the filing date and have theirprincipal place of business outside the United States or are stationed outside theUnited States have an automatic two-month extension to file, but not to pay. Suchpersons need not file for the extension, but must include documentation if the extensionis taken. They can also request the other extensions under the same ruies as for othertaxpayers.

V2DlO DeVryfBe,ker Edu,ational Development Corp. All rights reserved. Rl-7

Regulation 1

II. FILING STATUS

I'W-Wiiir.'1


Filing Status

Check only onebox.

1 D Single

2 D Married tiljng jointly (even jf only one had income)

3 D Married filing separately. Enter spouse's SSN aboveand full name here....

4 D Head of household (with qualifying person). (See page 15.) If the

qualifying person is a child but not your dependent, enter this

child's name here....

5 D Qualifying widow(er) w-c;,c-h--Cde-p-eo--cd--ceoc-,--cCh--cild--cl-se-e-p,-ge-,CCC6--c1-

2.

Rl-8

A. Single - Use the End-of-Year Test

Any taxpayer who does not qualify for one of the other filing classes must use the singlestatus by default.

1. Single at year end

2. Legally separated

B. Joint Returns - Use the End-of-Year Test

In order to file a joint return, the parties must be married at the end of the year, living togetherin a recognized common law marriage, or married and living apart (but not legally separatedor divorced).

1. If married during the year, a joint return may be filed, provided the parties are marriedat year end.

2. If divorced during the year, a joint return may not be filed.

3. If one spouse dies during the year, a joint return may be filed.

C. Married Filing Separately

A married taxpayer may file a separate return even if only one spouse has income for theyear. In a separate property state, a husband and wife who elect to file using the marriedfiling separately status must separately report their own income, exemptions, credits, anddeductions on their own individual income tax returns. In a community property state, most ofthe income, deductions, credits, etc., are split 50/50.

D. Qualifying Widow(er) (Surviving Spouse) with Dependent Child

1. Two Years After Spouse's Death

A qualifying widow(er) is a taxpayer who may use the joint tax return standarddeduction and rates (but not the exemption for the deceased spouse) for each of twotaxable years following the year of death of his or her spouse, unless he or sheremarries. In the event of a remarriage, the surviving spouse will file a tax return Uointor separate) with the new spouse.

Principal Residence for Dependent Child

The surviving spouse must maintain a household that, for the whole taxable year, wasthe principal place of abode of a son, stepson, daughter, or stepdaughter (Whether byblood or adoption). The surviving spouse must also be entitled to a dependencyexemption for such individual.

© 2010 OeVryjBecker Educational Oevelopment Corp. All rights reserved.


E. Head of Household

Head of household status entitles certain taxpayers to pay lower taxes. The lower tax resultsfrom a larger standard deduction and "wider" tax brackets. To qualify, the followingconditions must be met:

1. The individual is not married, is legally separated, or is married and has lived apartfrom hislher spouse for the last six months of the year as of the close of the taxableyear.

2. The individual is not a "qualifying widow(er)."

3. The individual is not a nonresident alien.

4. The individual maintains as his or her home a household that, for more than half thetaxable year, is the principal residence of:

a. A Dependent Son or Daughter (or descendent)

(1) Legally adopted children, stepchildren, and descendents qualify as sonsand daughters.

(2) Working Families Act: The definition of head-of-household conforms withthe uniform definition of a child. To qualify for head-of-household status,the child must either be a qualifying child or qualify as the taxpayer'squalifying relative.

(3) Divorced Parents: Assuming all other requirements are met, a noncustodialparent is entitled to the head of household status if the custodial parent haswaived the right to the dependency exemption by completing a Form 8332.

b. Father or Mother (not required to live with laxpayer)

A dependent parent is not required to live with the taxpayer, provided thetaxpayer maintains a home that was the principal residence of the parent for theentire year. Maintaining a home means contributing over half the cost of upkeep.This means rent, mortgage interest, property taxes, insurance, utility charges,repairs, and food consumed in the home.

c. Dependent Relatives (must iive wilh taxpayer)

Parents, grandparents, brothers, sisters, aunts, uncles, nephews, and nieces (aswell as stepparents, parents-in-law, etc.) qualify as relatives. A dependentrelative (other than a father or mother) must live with the taxpayer. Note thatcousins, foster parents, and unrelated dependents do not qualify.

5. Summary

Lives with

Dependent Taxpayer

Child or Descendent Yes Yes

Parents Yes No

Relative Yes Yes

PASS KEY

In order to avoid confusing the required time period for different filing statuses, just remember:o Widow/widower Whole yearo Head of household Half ayear (more than)

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INDIVIDUAL TAXATIONExemptions

Dlines above to-d Total number of exemptions claimed

Exemptions 6. o Yourself. If someone can claim you as a dependent, do not check box 6a . } Boxes checked

o Spouseon 6a and 6b

b No. of chlldren--

c Dependents: (2) Dependenl's (3) Dependent's (4) I il qualifying on 6cwho:

social security number relationship to you c~~:r t~eC~~de~~_lived with you --(1) Firsl name Last name _ did not live with

: 0 you due to divorceor separation

If more than four . 0 (see page 16) --dependents, see . , 0 Dependents on 50page 17 and not entered above --check here .... 0 : 0 Add numbers on

IMl.ilt.il

C.

I. PERSONAL EXEMPTIONS

Generally, an individual is entitled to a personal exemption that is indexed annually for inflation. For2010, this amount is $3,650 ($3,750 for 2011).

A. Persons Claimed as Dependents

Persons eligible to be claimed as dependents on another's tax return will not be allowed apersonal exemption on their own returns.

B. Married Taxpayers

1. Each Spouse Receives Personal Exemption

Each married taxpayer claims his or her own personal exemption on the joint orseparate return, as the case may be. The exemption for a spouse is alwaysconsidered to be a personal exemption (not a dependency exemption), even if thespouse does not work.

2. Spouse as Personal Exemption on a Separate Return

Usually, a married taxpayer filing separately is entitled to claim only his or her ownpersonal and dependency exemption. However, a married taxpayer filing separatelymay claim his or her spouse's personal exemption if both of the following tests are met:

a. The taxpayer's spouse has no gross income; and

b. The taxpayer's spouse was not claimed as a dependent of another taxpayer.

Birth or Death During Year

If a person is born or dies during the year, he or she is entitled to either a personal or adependency (as appropriate) exemption for the entire year. Exemptions are not prorated.

PASS KEY

The CPA Examination will intentionally test on the qualifications for exemptions (both personal and

dependency). The actual dollar amounts (which change each year due to indexing) are rarely tested.

Rl-IO 02010 DeVry{Becker Educational Development Corp. All rights re~lVed.


II. DEPENDENCY EXEMPTIONS

A taxpayer is entitled to an exemption for each qualifying child and qualifying relative. Eachcategory has requirements:

Qualifying Child

Close Relative

Age limit

Residency and Filing Requirements

Eliminate Gross Income Test

Support Test Changes

Qualifying Relative

Support (over 50%) test

Under a specific amount of (taxable) gross income test

Precludes dependent filing a joint tax return test

Only citizens (residents of U.5.jCanada or Mexico) test

Relative test

Taxpayer lives with individual for whole year test

The amount of this exemption is the same as the personal exemption and is $3,650 for 2010($3,750 for 2011). Taxpayers must obtain a Social Security number for any dependent who hasattained the age of one as of the close of the tax year.

PASS KEY

A taxpayer will be entitled to a full dependency exemption for anyone that a taxpayer lICARES" for, or that they1I5UPORT," even if the dependent:

• Was born during the year, or

• Died during the year.

A. Qualifying Child

If the parents of a child are able to claim the child but do not, no one else may claim the childunless that taxpayer's AGI is higher than the AGI of the highest parent.

In general, a child is a qualifying child of the taxpayer if the child satisfies the following:

ICARES' 1.

I CARES I 2.

Close Relative

Under the close relationship test, to be a qualifying child of a taxpayer, the child mustbe the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother,stepsister, or a descendant of any of these. An individual legally adopted by thetaxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption bythe taxpayer, is treated as a child of the taxpayer by blood. A foster child who is placedwith the taxpayer by an authorized placement agency or by jUdgment, decree, or otherorder of any court of competent jurisdiction also is treated as the taxpayer's child.

Age Limit

The age limit test varies depending on the benefit. In general, a child must be youngerthan the taxpayer, and under age 19 (or age 24 in the case of a full-lime student) to bea qualifying child (although no age limit applies with respect to individuals who aretotally and permanently disabled at any time during the tax year). A "full time" studentis a student who attends an educational institution for at least part of each of fivemonths during the taxable year. An "educational institution" is one that maintains fulltime faculty and a daytime program. School attendance only at night does not qualify.

11J2010 DeVry/Becker Educational Oe~elopment Corp. All right~ reserved. Rl-11


I CARES I 4.

I CARES I 3.

I CARES I 5.

Residency and Filing Requirements

Under the residency and filing requirement tests, a child must have the same principalplace of abode as the taxpayer for more than one half of the tax year. Further, the childcannot file a joint tax return for the year (unless it was filed only for a refund claim).

Eliminate Gross Income Test (but exemption is required)

The gross income test (see S!!.PORT) does not apply to a qualifying child. However,the child is a qualifying child only if the taxpayer can and does claim an exemption forthe child.

Support Test Changes

The support test has been modified to determine if the child did not contribute morethan one-half of his or her own support. The requirement that the taxpayer (parent)provides over one-half of the child's support is eliminated.

B. Qualifying Relative

Taxpayers can apply the "SUPORT" dependency exemption rules to claim a dependencyexemption for a qualifying relative who does not satisfy the qualifying child requirements.

ISUPORT I

Rl-12

1.

2.

Support Test

The taxpayer must have supplied more than one-half (greater than 50%) of the supportof a person in order to claim him or her as a dependent. Support means the actualexpenses incurred by or on behalf of the dependent. Scholarships received by adependent student child or stepchiid are not included in determining the student's totalsupport. However, Social Security and state welfare payments are included in thedependent's total support, but only to the extent that such amounts are actuallyexpended for support purposes.

a. Multiple Support Agreements

Where two or more taxpayers together contribute more than 50% to the supportof a person but none of them individually contributes more than 50%, thecontributing taxpayers, all of whom must be qualifying relatives of (or lived theentire year with) the individual, may agree among themselves which contributormay claim the dependency exemption.

(1) A contributor must have contributed more than 10% of the person'ssupport in addition to meeting the other dependency tests in order to beable to claim him or her as a dependent.

(2) The joint contributors are required to file a mUltiple support declaration,Form 2120.

Under Exemption Amount of (Taxable) Gross Income

A person may not be claimed as a dependent unless the dependent's gross income isless than the exemption amount ($3,650 during the taxable year 2010, and $3,750 for2011 ).

a. Definition of Taxable Income

Only income that is taxable is included for the purpose of determining whetherthe dependent has earned less than the exemption amount.

© 2010 DeVry{6ecker I:ducctioncl Development Corp_ All rights reserved


ISUPORTI 3.

ISUPORTI 4.

ISUPORTI 5.

b. Non-taxable Income

(1) Social Security (at low income levels)

(2) Tax-exempt interest income (state and municipal interest income)

(3) Tax-exempt scholarships

Precludes Dependent Filing a Joint Return

A taxpayer will lose the exemption for a married dependent who files a joint returnunless the joint return is filed solely for a refund of all taxes paid or withheld for thetaxable year (Le., the tax is zero).

Married children may be claimed as dependents provided they do not file joint returnswith their spouses (except to claim a refund of all taxes paid) and provided they satisfyall other requirements for dependency.

Only Citizens of the United States or Residents of the United States, Mexico, orCanada

The dependent must be either a citizen of the United States or a resident of the UnitedStates, Mexico, or Canada.

Relative

Children, grandchildren, parents, grandparents, brothers, sisters, aunts and uncles,nieces and nephews (as well as stepchildren, in-laws, etc.) can be claimed asdependents. Children include legally adopted children, foster children, andstepchildren. Foster parents and cousins must live with the taxpayer the entire year.

Remember. A child born at any time during the year may be claimed as a dependent(Le., the deduction is not prorated).

6. Taxpayer Lives with the Individual (if Non-relative) for the Whole Year

A non-relative member of a household (Le., a person living in the taxpayer's home forthe entire year) may be claimed as a dependent.

C. Children of Divorced Parents

ISUPORTI

1. General Rule - Custodial Parents

Generally, the parent who has custody of the child for the greater part of the year takesthe exemption (determined by a "time" test, not the divorce decree). It does not matterwhether that parent actually provided more than one-half of the child's support. If theparents have equal custody during the year, the parent with the higher adjusted grossincome will claim the exemption.

~ 2010 OeVryfBecker Educational Oe~elopment Corp. All rights reserved. Rl-13

Regulation 1

2.


Exception - Custodial Parent Waives Right

A noncustodial parent is not allowed a dependency exemption based solely uponlanguage written in a divorce agreement. A noncustodial divorced or separated parentmay claim the exemption for his or her child if the custodial parent waives the right tothe exemption. This is done by the custodial parent's signing of a written declarationthat is attached to the noncustodial parent's return. Form 8332 is used as the requiredwritten declaration. The custodial parent may revoke the release of claim using theForm 8332, provided (1) notice is given to the noncustodial parent at least one tax yearin advance (i.e., if notice is given in 2009, the revocation is effective no earlier than2010) and (2) a copy of Form 8322 claiming the revocation is attached to the custodialparent's tax return.

EXAMPLE

Peter, who is single and lives alone in Idaho, has no income of his own and is supported in full by thefollowing people:

Tim (an unrelated friend)

Rick (peter's brother)

Dennis (Peter's son)

AmountofSupport

$2,400

2,150

--.12Q

$5000

Percentof Total

48

43

-2100%

Rl-14

Under a multiple support agreement, Peter's dependency exemption can be claimed by:

a. NoOneb. Timc. Rickd. Dennis

Tim Rick Dennis

Support test Yes Yes No

Under $ gross income Yes Yes

Preclude joint filing Yes YesOnly U.S. citizens Yes YesRelative, or No Yes

Taxpayer lived with No NA

PASS KEY

Remember the following rule and don't let the CPA Examination trick you. There is an increasedstandard deduction (NOT an additional exemption) for being:

• Old (age 65 or older)

• Blind

© 2010 DeVrvjBe<:ker Educational Development Corp. All rights reserved.


INDIVIDUAL TAXATIONGross Income

I. GROSS INCOME IN GENERAL

The first step in determining tax liability is to compute gross income.

A. Gross Income Defined

Generaiiy, gross income means aii income from whatever source derived, unless specificallyexcluded. (For example, if the taxpayer finds $4,000 under a floorboard in his house, cannotfind the owner, and keeps the money, the $4,000 is income regardless of the fact that thetaxpayer did not "earn" it.)

B. Computation of Income - General Rule

Except in the cases of gain derived from dealings in property (discussed below), income isdetermined by the amount of cash, property (FMV), or services obtained. In cases ofnoncash income, the amount of the income is the fair market value of the property or servicesreceived.

PASS KEY

EventTaxable

Non-taxable

IncomeFMV

N -0- N E

EXAMPLE

BasisFMVNBV

Ataxpayer performs services and receives a car with a fair market value of $3,000 as compensation. The$3,000 is income to the taxpayer.

C. Realization and Recognition

In order to be taxable, the gain must be both realized and recognized.

1. Realization

Realization requires the accrual or receipt of cash, property, or services, or a change inthe form or the nature of the investment (a sale or exchange).

2. Recognition

Recognition means that the realized gain must be included on the tax return (i.e., thereis no provision that permits exclusion or deferral under the Internal Revenue Code).

EXAMPLE

Ataxpayer owns stock for which he paid $100 and the stock goes up in value to $150. There is norealized gain even though there has been an increase in the taxpayer's wealth. Gain is realized whenthe shares are sold for $150 or exchanged for other property worth $150. If the gain is taxable, itwould also be recognized on the tax return.

102010 OeVrv{Becker Educational Development Corp. All right~ reserved. Rl-15

Regulation 1 Becker Profess'lonal Education I CPA Exam Review

D. Timing of Revenue Recognition

1. Accrual Method

Under the accrual method, recognition occurs according to the rules of GAAP (withsome exceptions); that is, revenue is taxable when earned.

2. Cash Method

Under the cash method, recognition occurs in the period the revenue is actuaily orconstructively received in cash or (FMV) property.

Income7 Wages. salaries, tips, etc. Attach Formes) W·2 . 7Sa Taxable interest. Atlach Schedule B if required ..

ISbi8a

b Tax-exempt interest. Do not include on line 8a.

Attach Form(s) 9a Ordinary dividends. Attach Schedule B if required ......1 9bl

9aW·2 here. Also b Ouall.d divs

attach Forms(see Ins!rs) .

W·2G and lO99-R 10 Taxable refunds, credits, or offsets of state and local income taxes (see instructions) 10if tax was withheld. 11 Alimony received. . 11

If you did not12 Business income or ~oss). Attach Schedule C or C·EZ 12

g€t aW·2, 13 Capital gain or (loss). Att Sch Dif reqd. If not reqd, ck here.. ··~D 13see instructions. 14 Other gains or (losses). Attach Form 4797 14

15a IRA distributions. ~ Ib Taxable amount (see instrs) .. 15b16a Pensions and annuities.. 16a b Taxable amount (see Instrs). 16b17 Rental real estate, royalfles. partnerships, S corporations, trusts, etc. Attach Schedule E . 17

Enclose, but do 18 Farm income or (loss). Attach Schedule F .. 18not attach, any 19 Unemployment compensation. ............................ 19payment. AlSO,

20a Social security benefits. I 20al I b Taxable amount (see instrs) 20b~Iease usearm 1040-V. 21 Other income 21

22 Add the am"Ounts in the fur-riahtcoi;:;mnf~ Iines7Ih~o-;:;gh21--:- ThiS is~oortotai inZo;'e to- 22

E. Characterizations of Income

All income can be characterized and placed into one of four "baskets" of income.Understanding the baskets of income will be helpful in calculating the limitations on taxabilityor deductibility of various items, such as passive activity losses, capital gains and losses, andthe investment interest deduction.

1. Ordinary

Ordinary income includes salaries and wages, state and local tax refunds, alimony, IRAand pension income, self-employment (SchedUle C) income, unemploymentcompensation, social security, prizes, the taxable portion of scholarships andfellowships, gambling income, and anything not falling into one of the other threebaskets.

2. Portfolio

Portfolio income includes income a taxpayer would earn on his portfolio of assets, suchas interest and dividends.

3. Passive

The definition of "passive" generally means an activity in which a taxpayer did notactively participate (active includes working in a business, etc.). Only passive lossesmay offset passive income, and a net passive loss is not deductible on the tax return (Itis suspended and carried forward until passive income exists to offset it), unless anexception exists and the requirement for passive treatment is removed.

Rl-16 © 2010 DeVryjBecker Educatiollal Development Corp. All rights reserved.


II.

a. Rental Income and Royalties

Rental income received on a property that a taxpayer owns and rents (asopposed to capital gain or loss that may exist when the property is sold) isgenerally deemed "passive," unless exceptions exist.

b. Beneficiaries of Trusts and Investments in Partnerships, LLCs, andS Corporations

Individuals (and companies) with investments in S Corporations, partnerships,limited liability companies, and beneficiary interests in trusts and estates willreceive a Form K-1 from the entity each year. This K-1 is the investor's share ofthe earnings and deductions of each company. A Schedule K is fiied for eachcompany (entity), and the Schedule K-1 s are attached for all of the investors(beneficiaries). The sum of the K-1s by line item equals the reported Schedule Knumbers. K-1 s can report income from any basket. If an investment in acompany is deemed limited (as opposed to general) for the investor, the incomefrom the business activities will be deemed passive for tax purposes, and thepassive activity ioss rules will apply. In addition, even general partners mayreceive passive income on their K-1s (e.g., a partnership may have a rentalactivity). This will be separated from regular business activities and on a differentline item on the K-1 as "rental." [K-1s will be discussed in detail in the R4 class.]

4. Capital

Sales of capital assets create capital gains and losses. A capital asset is generally anyproperty (personal or business), but there are some exceptions. An explanation of thedefinition of capital and non-capital assets is presented later in this lecture. It isimportant to become familiar with the definitions, as it will assist in understanding thetreatment of sales of various types of property. The calculation of the capitai gain orloss is rather straight-forward once the components of the formula are determined. Thedifficult parts of the process are determining if the gain or loss is, in fact, capital, andthen whether the gain or loss is actually reportable on the tax return.

SPECIFIC ITEMS OF INCOME AND EXCLUSIONS

A. Salaries and Wages

Gross income includes many forms of compensation for services.

1. Money

All money received, credited, or available. (constructive receipt)

2. Property

The fair market value (FMV) of all property is included as gross income.

3. Cancellation of Debt

All debts cancelled are included in gross income (except for certain cancellations ofmortgage debt on principal residences, which have very detailed guidelines forexcluded amounts and debts cancelled when Insolvency exists).

4. Bargain Purchases

If an employer sells property to the employee for less than its fair market value, thedifference is income to the employee.

©2010 DeVry!Becker Educational Development Corp. All rights reserved.

Regulation 1

5.

6.

7.

8.


Guaranteed Payments to a Partner

Guaranteed payments are reasonable compensation paid to a partner for servicesrendered (or use of capital) without regard to the partner's ratio of income. This earnedcompensation is also subject to self-employment tax.

Taxable Fringe Benefits (non-statutory)

The fair market value of a fringe benefit not specifically excluded by law is includable inincome. For example, an employee's personal use of a company car is included aswages in an employee's income. Further, the amount included is subject toemployment taxes and withholding.

Partially Taxable Fringe Benefits - Portion of Life Insurance Premiums

Premiums paid by an employer on a group-term life insurance policy covering hisemployees are not income to the employees up to the cost on the first $50,000 ofcoverage per employee (non-discriminatory plans only). Premiums above the first$50,000 of coverage are taxable income to the recipient and normally included in W-2wages. (This amount is calculated from an IRS table, and it is not the entire amount ofthe premium in excess of the $50,000 coverage,)

Non-taxable Fringe Benefits

a. Life Insurance Proceeds

The proceeds of a life insurance policy paid because of the death of the insuredare generally excluded from the gross income of the beneficiary.

(1) The interest income element on deferred payout arrangements is fUllytaxable.

(2) Accelerated death benefits received by a terminally ill insured (certified thatthe insured is expected to die within 24 months) are not taxable, or achronically ill insured (or requiring assisted living), if the proceeds are usedto pay for long-term care.

(3) For policies issued after 8/17/06, if the policy is company-owned (COLI),the beneficiary may exclude from gross income benefits received only upto the total amount of premiums and other amounts paid by thepolicyholder-any excess would be taxable. Of course, exceptions apply.If proper notice and consent requirements are met and the incurred was aqualified highly compensated officer, director, or employee and aU,S.citizen or resident, proceeds were paid to a member of the insured's family,the beneficiary is a family member or another individual (not thepolicyholder), or the beneficiary is a trust for the benefit of the insured'sfamily (or the estate of the insured), the gross income inclusionrequirement for the COLI is not applicable,

b. Accident, Medical, and Health Insurance (employer paid)

Premium payments are excludable from the employee's income when theemployer paid the insurance premiums, but amounts paid to the employee underthe policy are includable in income unless such amounts are:

(1) Reimbursement for medical expenses actually incurred by the employee

(2) Compensation for the permanent loss or loss of use of a member orfunction of the body,

Rl-18 02010 DeVry{Becker Educational Development Corp. All rights reserved.


c. De Minimis Fringe Benefits

De minimis fringe benefits are so minimal that they are impractical to account forand may be excluded from income. An example is an employee's personal useof a company computer.

d. Meals and Lodging

The gross income of an employee does not include the value of meals or lodgingfurnished to him or her in kind by the employer for the convenience of theempioyer on the employer's premises. Additionally, in order to be nontaxable,the lodging must be required as a condition of employment.

e. Employer Payment of Employee's Educational Expenses

Up to $5,250 may be excluded from gross income of payments made byemployer on behalf of an employee's educationai expenses. The exclusionapplies to both undergraduate and graduate level education.

f. Qualified Tuition Reductions

Employees of educational institutions studying at the undergraduate level whoreceive tuition reductions may exclude the tuition reduction from income.Graduate students may exclude tuition reduction only if they are engaged inteaching or research activities and only if the tuition reduction is in addition to thepay for the teaching or research. To be excludable, tuition reductions must beoffered on a nondiscriminatory basis.

g. Qualified Employee Discounts

Employee discounts on employer-provided merchandise and service areexcludable as follows:

(1) Merchandise Discounts

The excludable discount Is limited to the employer's gross profitpercentage. Any excess must be reported as income.

(2) Service Discounts

The excludable discount on services Is limited to 20% of the fair marketvalue of the services. Any excess discount must be reported as income.

(3) Employer-provided Parking

The value of employer-provided parking up to $230 (for 2010) per monthmay be excluded. The exclusion is available even if the parking benefit istaken by the employee in place of taxable cash compensation.

(4) Transit Passes

The value of employer-provided transit passes up to $230 (for 2010) permonth may be excluded.

h. Qualified Pension, Profit-sharing, and Stock Bonus Plans

(1) Payments Made by Employer (non-taxable)

Generally, payments made by an employer to a qualified pension, profitsharing, or stock bonus plan are not income to the employee at the time ofcontribution.

©201O DeVrv/Becker {ducational Development Corp. All dghts reserved Rl·19

j.


(2) Benefits Received (taxable)

The amount that is exempt from tax (plus any income earned on suchamount) is taxable to the employee in the year in which the amount isdistributed or made available to the employee.

i. Flexible Spending Arrangements Stems (FSAS)

A Flexible Spending Arrangement Stems from a Section 125 employee flexiblebenefit plan and is a plan that allows employees to receive a pre-taxreimbursement of certain (specified) incurred expenses.

(1) Pre-tax Deposits into Employee's Account

Employees have the ability to elect to have part of their salary (generally upto $5,000 per year) deposited pre-tax into a flexible spending accountdesignated for them. These deposits must be done via salary reductiondirectly by the employer, and the employee is not taxed on that income.The employee has the option to use the deposited funds to pay forqualified healthcare and/or qualified dependent care costs and submitsclaims to the plan administrator for reimbursement.

(2) Forfeit Funds Not Used within 2 % Months after Year-end

Funds not used within 2 Y, months after the year-end or not claimed withina period of time (usually 6 months) are forfeited. However, this graceperiod only applies if the employer amended the plan accordingly.

Economic Recovery Payments

For 2010, economic recovery payments ($250 per person) are not taxable.

Rl-20 ©2010 DeVry!Becker Educational Development Corp. All rights relerve<l.


B. Interest Income

Regulation 1

Interest and Ordinary DividendsSCHEDULE B(Fonn 1040A or 1040)

Department of the Treasurylntemal Revenue Se!vice (99)

Name{s) shown on retlJrn

"Attach to Fonn 1040A or 1040. .. see instructions on back.

OMB No. 1545-0074

~(Q)09AttachmentSoolJence No. 08

Your social SeClJrity number

Part IInterest(See instructionson back and theinstructions forForm 1040A, orForm 1040,line8a.)

Note. If youreceived a Form1099-INT, Form1099-010, orsubstitlJtestatement froma brokerage firm,list the firm'sname as thepayer and enterthe total interestshown on thatform.

Part IIOrdinaryDividends(See instrlJctionson back and theinstructions forForm 1040A, orForm 1040,Iine9a.)

Ust name of payer. If any interest is from a seller-financed mortgage and thebuyer used the property as a personal residence, see instructions on back and listthis interest first. Also, show that buyer's social security number and address ...

2 Add the amounts on line 1

3 Excludable interest on series EE and U.S. sav'lngs bonds issued after 1989.Attach Form 8815.

4 Subtract line 3 from line 2. Enter the result here and on Form 1040A, or Form1040 line 8a . ...

Note. If line 4 is over $1 500 au must complete Part III.5 List name of payer'" _

Amount

2

3

4Amount

5

Note. If youreceived a Form1099-0IVorsubstitutestatement froma brokerage firm,list the firm'sname as thepayer and enterthe ordinarydividends shownon that form. ~~~~~~~~~~~~~~~~ f---I---+--

6 Add the amounts on line 5. Enter the total here and on Form 1040A, or Form1040 line 9a ... 6

Note. If line 6 is over $1 500, vou must complete Part III.

You must complete this part if you {a} had over $1,500 of taxable interest or ordinary dividends; (b) had aPart III foreian account; or Ie) received a distribution from, or were a arantor of, or a transferor to, a foreian trust.

Foreign 7a At any time during 2009, did you have an interest in or a signature or other authority over a

Accounts ~~:~~::: a~~~~~~ i~:e ~~~~~~ti~~~n~~'b:~~~0~:x~e~~~~sa~~~~~i~9S~~u~:~~~e~~~~~~~o~~~~e;and Trusts 90~22.1 . .(see b If uYes," enter the name of the foreign country'" • . _instructions on 8 During 2009, did you receive a distribution from, or were you the grantor of, or transferor to, aback.) foreian trust? If "Yes," vou may have to file Form 3520_ See instructions on back.

Yes No

For Paperwork Reduction Act Notice. see Form 1040A or 1040 instructions. Cal. No. 17146N Schedule B(Fonn 1040A or 1040) 2009

(12010 OeVrvjBecker Educational Development Corp. All riChts reserved. R1~21

3.

Regulation 1

Rl-22

Becker Professional Education I CPA !:x;Hn [{eview

1. Taxable Interest Income

a. Federal bonds.

b. Industrial development bonds.

c. Corporate bonds.

d. Premiums received for opening a savings account (e.g., prizes and awards) areincluded at FMV.

e. Part of the proceeds from an installment sale is taxable as interest.

f. Interest paid by federal or state government for late payment of tax refund istaxable.

g. For certain taxpayers and certain bonds, the amortization of a bond premium isan offset (reduction) to the interest received and a reduction to the bond's basis,and the amortization of a bond discount is an addition to the interest receivedand an addition to the bond's basis.

2. Tax Exempt Interest Income (reportable but not taxable)

a. State and Local Government Bonds/Obligations

Interest on state and local bonds/obligations is tax exempt. Further, mutual funddividends for funds invested in tax-free bonds are also tax exempt.

b. Bonds of a U.S. Possession

Interest on the obligation of a possession of the United States is tax exempt.

c. Series EE (U.S. savings bond)

(1) Interest on Series EE Savings Bonds is tax exempt when:

(a) It is used to pay for higher education, reduced by tax-freescholarships, of the taxpayer, spouse, or dependents;

(b) There is taxpayer or joint ownership (spouse);

(c) Taxpayer is over age 24 when issued; and

(d) The bonds are acquired after 1989.

(2) Phase-out starts when modified AGI exceeds an indexed amount. (For2010, phase-out begins at $70,100 for single and head of household andat $105,100 for married filing joint. There is no exclusion for those usingthe married filing separately status.)

d. Veterans Administration Insurance

Interest on Veterans Administration Insurance is tax exempt.

Unearned Income of a Child Under 18 ("kiddie tax')

The net unearned income of a dependent child under 18 years of age (or, a child overage 18 to under age 24 who does not provide over half of his/her own support and is afull-time student) is taxed at the parent's higher tax rate. Net unearned income iscalculated by taking the child's total unearned income (from dividends, interest, rents,royalties, etc.) and subtracting $1,900: the child's allowable 2010 standard deduction of$950 (or investment expense, if greater) plus an additional $950 (which is taxed at thechild's rate). Although the income in excess of $1 ,900 is taxed at the parent's marginaltax rate, it is nonetheless reported on the child's tax return.

© 2010 DeVry!8ecker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA [Xdl1l Review Regulation 1

Parents may elect to include on their own return the unearned income of the applicablechild provided the income is between $950 and $9,500 and consists solely of interestand dividends.

2010 Child'sUnearned

Income0-$950

$951- $1,900$1,901 and over

TaxRate0%

Child'sParent's

4. Forfeited Interest (Adjustment) - Penalty on Withdrawal from Savings

Forfeited interest is a penalty for early withdrawal of savings (generally on a timedeposit, such as a certificate of deposit, at a bank). The bank credits the interest to thetaxpayer's account and then, in a separate transaction, removes certain interest as apenalty for withdrawing the funds before maturity. The interest received is taxable onthe taxpayer's income tax return, but the amount forfeited is also deductible as anadjustment in the year the penalty is incurred. Thus, the taxpayer only pays tax on theamount of interest actually received. Note, however, that the amount of forfeitedinterest is reported separately and not netted with interest income on the tax return.

C. Dividend Income

1. Source Determines Taxability

The source of the distribution dictates the character. The following four sources exist:

a. Earnings & Profits/Current = Distribute by Current Year End

b. Earnings & Profits/Accumulated = Distribution Date

c. Return of Capital = No Earnings & Profits

d. Capital Gain Distributions = No Earnings & Profits / No Basis

2. Three Categories of Dividends

a. Taxable Dividends

All dividends that represent distributions of a corporation's earnings and profits(similar to retained earnings) are includible in gross income.

(1) Taxable Amount (to shareholder receiving)

(a) Cash = Amount Received

(b) Property = Fair Market Value

(2) Special (Lower) Tax Rate

(a) Qualified Dividends Holding Period

The stock must be held for more than 60 days during the 120-dayperiod that begins 60 days before the ex-dividend date (the date onwhich a purchased share no longer is entitled to any recentlydeclared dividends).

(b) Disqualified Dividends

(i) Regulated Investment Companies

(ii) REIT (real estate investment trust)

(!lOIO DeVry/Becker Educational De~elopment Corp_ All rights reserved Rl-23


(iii) Employer stock held by an ESOP

(iv) Amounts taken into account as investment income (forpurposes of the limitation on investment expenses)

(v) Short sale positions

(vi) Certain foreign corporations

(c) Tax Rates (2010)

(i) 15% - Most taxpayers

(ii) 0% - Low income taxpayers (those in the 10% or 15% incometax bracket)

Note: For 2011, the current tax law provides that qualified dividends be taxed atthe regular income tax rates, not any special lower rates as in 2010.

b. Tax-free Distributions

The following items are exempt from gross income:

(1) Return of Capital

Return of capital exists when a company distributes funds but has noearnings and profits. The taxpayer will simply reduce (but not below zero)his/her basis in common stock held.

Rl-24

c.

(2) Stock Split

When a stock split occurs, the shareholder will allocate the original basisover the total number of shares held after the split.

(3) Stock Dividend (unless cash or other property option/taxable FMV)

Unless the shareholder has the option to receive cash or other property(which would then be taxable at the FMV of the dividend), the basis of theshares after distribution depends on the type of stock received.

(a) Same stock-original basis is divided by totai shares

(b) Different stock-original basis is allocated based on the relative FMVof the different stock

(4) Life Insurance Dividend

Dividends caused by ownership of insurance with a mutuai company(premium return).

Capital Gain Distribution

Distributions by a corporation that has no earnings and profits, and for which thesharehoider has recovered his or her entire basis, are treated as taxabie grossincome.

()2010 o...Vry/8e<:~erEducational Development Corp. All rights re,erve<!.

Becker Professional Education I CPA Exarn Review Regulation 1---------

D. State and Local Tax Refunds IIlIIIIThe receipt of a state or local income tax refund in a subsequent year is not taxableif the taxes paid did not result in a tax benefit in the prior year.

1. Itemized in prior year =state or local refund is taxable (unless a competing tax law, such

as alternative minimum tax, caused the initial taxes paid to be nondeductible)

2. Standard deduction used in prior year =nontaxable state or local refund

EXAMPLE

DeFilippis, a single individual, used the standard deduction on his Year 10 federal personal tax return.In Year 11, he received a $150 state income tax refund. The $150 tax refund is not includible in hisYear 11 income because he did not itemize in Year 10 and, therefore, did not receive a tax benefitfrom the state income taxes paid. If he had benefitted from deducting the state taxes when paid in

Year 10, a Year 11 (or later) refund of those taxes would be taxable income for federal purposes whenreceived, regardless of whether or not the taxpayer itemized deductions in the year the refund wasreceived.

b.

3.

2.

Payments Pursuant to a Divorce

1. Alimony/Spousal Support (income)

Payments for the support of a spouse are income to the spouse receiving the paymentsand are deductible to arrive at adjusted gross income (adjustment) by the contributingspouse. To be deemed alimony under the tax law:

a. Payments must be legally required pursuant to a written divorce (or separation)agreement;

b. Payments must be in cash (or its equivalent);

c. Payments cannot extend beyond the death of the payee-spouse;

d. Payments cannot be made to members of the same household;

e. Payments must not be designated as anything other than alimony; and

f. The spouses may not file a joint tax return.

Child Support

a. Non-taxable

If any portion of the payments is fixed by the decree or agreement as being forthe support of minor children (or is contingent on the child's status, such asreaching a certain age), such portion is not deductible by the spouse makingpayment and is not includibie by the spouse receiving payment.

Payment Applies First to Child Support

If the decree or agreement specifies that payments are to be made both foralimony and for support, but the payments subsequently made fall short offUlfilling these obligations, the payments will be allocated first to child support(until the entire child support obligation is met) and then to alimony.

Property Settlements (non-taxable)

If the divorce settlement provides for a lump-sum payment or property settlement by aspouse, that spouse gets no deduction for payments made, and the payments are notincludible in the gross income of the spouse receiving the payment.

E.

() 2010 DeVry/Beder Educational De~elopment Corp. All rights reserved. Rl-25


F. Business Income or Loss, Schedule C or C-EZ

Net income from self-employment is computed on Schedule C. The net income from the soleproprietorship is then transferred to Form 1040 as one amount.

Gross Business Income

< Business Expenses>

Profit

Gloss

SCHEDULEC(Form 1040)

Department of the TreaSU1YIntemal Revenue Service (99)

Profit or Loss From Business OMS No_ 1545·0074

(Sole Proprietorship) ~@09

.. Partnerships, joint ventures, etc., generally must file Form 1065 or 1065-8. Attachment

"Attach to Form 1040, 1040NR, or 1041. "See Instructions for SchedUle C (Form 10401. S uenceNo.09Name of proprietor Social se<::urity number (SSN)

A

c

Principal business or profession, including product or service (see page C-2 of the instructions)

Business name. If no separate business name. leave blank. o Employer 10 number {EIN}, if any

I I I II I I IE BUSiness address ~ncludlngsUite or room no.) .. _

City, town or post office state, and ZIP code

328 0 All investment is at risk.32b 0 Some investment is not

at risk.

}

}

Accounting method: {1} 0 Cash (2) 0 Accrual (3) 0 Other (specify) ..Did you ~rnaterial\y participate" in the operation of this business during 2009? If "No," see page C-3 for li~ii-~~-I~~;---··-----trYes--trNo--

If trted dth' b d 2009 h kh .. 0

• If a loss, you must go 10 line 32.

32 If you have a loss, check the box that describes your investment in this activity (see page C-7).

• If you checked 32a, enter the loss on both Form 1040, line 12, and Schedule SE, line 2, or on

Form 1040NR, line 13 ~f you checked the box on line 1, see the line 31 instructions on page C-7).

Estates and trusts, enteron Form 1041, line 3.

• If you checked 32b. you must attach Form 6198. Your loss may be limited.

F

G

H you s a or acquire " uSlness unng . c '" '"aifiliU Income1 Gross receipts or sales. Caution. See page C-4 and check the box If:

• This income was reported to you on Form W-2 and the ~Statutory employee" box

)on that form was checked, or

~D• You are a member of a qualified joint venture reporting only rental real estate 1

income not subject to self-employment tax. Also see page C-3 for limit on losses.

2 Returns and allowances 2

3 Subtraclline 2 from line 1 3

4 Cost of goods sold (from line 42 on page 2) 4

• Gross profit. Subtract line 4 from line 3 •• Other income, including federal and state 9asoline or fuel tax Credit or refund (see page C-4). •7 Gross income. Add lines Sand 6 ~ 7

IaIlI Expenses, Enter ex Jenses for business use of fOur home only on line 30.

8 Advertising. • 18 Office expense ,.• Car and truck expenses (see ,. Pension and profit-sharing plans ,.

page C-4) • 20 Rent or lease (see page C-6):

1. Commissions and fees ,. • Vehicles, machinery, and equipment 2••

11 Contract labor (see page C-4) 11 • Other business property 20.

12 Depletion 12 21 Repairs and maintenance 21

13 Depreciation and section 179 22 Supplies (not included in Part III) 22

expense deduction (not 23 Taxes and licenses. 23

included in Part III) (see page 24 Travel, meals, and entertainment: ,

CoS) • 13 • Travel. ""14 Employee benefit programs • Deductible meals and

(other than on line 19). 14 entertainment (see page C-6) . 24.,. Insurance (other than health) ,. 2. Utilities 2.,. Interest 2. Wages Oess employment credits) . 2.

• Mortgage (paid to banks, etc.) 10. 27 Other expenses (from line 48 on

• Other lOb page 2) 27

17 Legal and professionalIi:' i' .C Iii

services. 1726 Total expenses before expenses for business use of home. Add lines 8 through 27 ~ 26

29 Tentative profit or ~oss). SUbtract line 28 from line 7 . 29

30 Expenses for business use of your home. Attach Form 8829 30

31 Net profit or (loss). Subtract line 30 from line 29.

• If a profit, enter on both Form 1040, line 12, and Schedule SE, line 2, or on Form 1040NR, line13 (If you checked the box on line 1, see page C-l). Estates and trusts, enter on Fonn 1041, line 3. 31

For Paperwo~Reduction Act Notice, see page C·g of the instructions. Cal. No. 11334P Sch&clule C (Form 1040) 2009

.,-26 © 2010 DeVry/Beder Educational Development Corp. All rights reserved.


Schedule C (Form 1040) 2009':Mi'"' Cost of Goods Sold (see page C-B)Page 2

33 Method(s) used to

value closing inventory: a D Cost b D lower of cost or market c 0 Other (attach explanation)

34 Was there any change in determining quantities, costs, or valuations between opening and closing inventory?

If "Yes.~ attach explanation 0 Yes D No

and are not required to file Form 4562 for thiS bUSiness. See the Instructions for line 13 on page C-5 to findout if you must file Form 4562.

35 Inventory at beginning of year. If different from last year's closing inventory, attach explanation 35

36 Purchases less cost of items withdrawn for personal use 35

37 Cost of labor. Do not include any amounts paid to yourself . 37

36 Materials and supplies 36

35 Other costs. 3•

.., Add lines 35 through 39 ..,41 Inventory at end of year 41

4' Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on page 1, line 4 4'. Infannation on Your Vehicle. Complete th!s pa~ only if you are claiming car or.truck expenses on line.9

43 When did you place your vehicle in service for business purposes? (month, day, year) ~

44 Of the total number of miles you drove your vehicle during 2009, enter the number of miles you used your vehicle for:

a Business b Commuting (see instructions) c Other

45 Was your vehicle available for personal use during off-duty hours? DYes D No

46 Do you (or your spouse) have another vehicle available for personal use? DYes D No

478 Do you have evidence to support your deduction? DYes D No

b If "Yes," is the evidence written?

Other Expenses. Ust below business expenses not included on lines B 26 or line 30.DYes D No

48 Total other expenses. Enter here and on paae 1, line 27 . 48

Schedule C (Fonn 1040) 2009

Q2010 DeVry!8e<:ker Educational Development Corp. All rights reserved. Rl-27

Regulation 1 Becker Professional Education I CPA tx<lnl Review

1. Gross Income

Those items that would normally be revenue in a trade or business or other selfemployed activity (such as director or consulting fees) are included as part of grossincome on Schedule C.

./ Cash = Amount Received (cash basis)

v' Property = Fair Market Value

./ Cancellation of Debt

2. Expenses

Expenses include those items that one would expect to find in business, such as:

a. Cost of goods (inventory is expensed when sold).

b. Salaries and commissions paid to others.

c. State and local business taxes paid.

d. Office expenses (e.g., supplies, equipment, and rent).

e. Actual automobile expenses (depreciation expense is limited to only that portionused for business) or a standard mileage rate (50¢ per mile in 2010)).

f. Business meal and entertainment expenses at 50% (when all proceeds go tobenefit a charity, 100% may be deductible as an itemized deduction forcharitable contributions).

g. Depreciation of business assets

h. Interest expense on business loans (interest expense paid in advance by a cashbasis taxpayer cannot be deducted until the tax year/period to which the interestrelates).

i. Employee benefits.

j. Legal and professional services.

k. Bad debts actually written off for an accrual basis taxpayer only (the direct writeoff method, not the allowance method, is used for tax purposes).

3. Nondeductible Expenses (on Schedule C)

a. Salaries paid to the sole proprietor (they are considered a "draw").

b. Federal income tax.

c. Personal portion of:

(1) Automobile, travel, and vacation expenses.

(2) Personal meals and entertainment expenses - 100% of country club duesare nondeductible.

(3) Interest expense - This may be reported as an itemized deduction ifmortgage interest or investment interest is paid.

Rl-28 © 2010 D",Vry!Becker educational Development Corp. All right, reserved


(4) State and local tax expense - Report as an itemized deduction onSchedule A.

Regulation 1

(5) Health insurance of a sole proprietor - While this is not reported onSchedule C as an expense, it is reported as an adjustment to arrive at AGI.

d. Bad debt expense of a cash basis taxpayer (who never reported the income).

e. Charitable contributions - Report as an itemized deduction on Schedule A.

PASS KEY

The CPA examination often attempts to confuse the candidate by providing personal itemized

deductions as expenses of a sole proprietorship. It is important to only subtract business expensesfrom business income. Expenses that qualify as itemized deductions and/or other adjustments are

deducted elsewhere on the personal income tax return.

4. Net Business Income or Loss

a. Net Business Income is Taxable

There are two taxes on net business income:

(1) Income tax.

(2) Federal self-employment (S/E) tax.

(a) An adjustment to income is allowed for one-half (which is 7.65% ofup to $106,800 of self-employment income in 2010 plus 1.45% ofself-employment income thereafter, if applicable) of SIE tax(Medicare plus Social Security) paid.

(b) This allows the sole proprietor the ability to "deduct" the employerportion of the SIE tax as an adjustment to gross taxable income (ofwhich the net Schedule C amount is a part).

(c) All self-employment income is subject to the 2.9% Medicare tax, butonly up to $106,800 in 2010 is subject to the 12.4% Social Securitytax (i.e., a total of 15.3% on self-employment earnings up to$106,800 in 2010).

b. Net Taxable Loss

A business with a loss may deduct the loss against other sources of income.When the loss exceeds these amounts, the excess net operating loss ispermitted as a carryover (at taxpayer's election, it may be used as a carryforwardonly):

(1) 2-year carryback (possibly up to 5 years for 2009-2011)

(2) 20-year carryforward

19 2010 OeVry/Becker Educational Development Corp_ All rights reserved. Rl·29

Regulation 1

R1·30


5. Husband and Wife Qualified Joint Venture Election

Certain married persons who operate a business together may elect to simplify their taxreporting requirements by not filing a partnership income tax return (Form 1065) andinstead reporting on their jointly filed personal income tax return.

a. Requirements

When a husband and wife operate a business as materially participatingbusiness partners and the only members of the joint venture business are thehusband and wife, the spouses may elect to report their respective portions ofincome, expenses, gains, losses, and credits related to the business on theirpersonal income tax return, just as if they were operating their own trades orbusinesses.

b. Election

The election is made on the jointly-filed Form 1040 by having each spouse reporthislher respective portions of the business activity (based on ownership interest)separately as a sole proprietor on either a Schedule C or a Schedule F. SocialSecurity and Medicare taxes will apply to each spouse separately.

6. Uniform Capitalization Rules

The uniform capitalization rules apply to all business enterprises that meet the criteriafor implementation (including sole proprietorships, partnerships, and corporations) andprovide guidelines with respect to capitalizing or expensing certain costs (i.e., taxespaid in connection with the acqUisition of property are capitalized as part of theproperty's cost). In the first year of implementation, they generally cause an increase inthe carrying cost of ending inventory and a decrease in operating expense. Thisresults in an increase to taxable income.

a. Types of Property

Uniform capitalization rules apply to the following:

(1) Produced for Use

Real or tangible personal property produced by the taxpayer for use in hisor her trade or business (e.g., machine tools for use in the production lineof a machine tool manufacturer).

(2) Produced for Sale

Real or tangible personal property produced by the taxpayer for sale to hisor her customers (i.e., manufacturer's inventory).

(3) Acquired for Resale

Real or tangible personal property acquired by the taxpayer for resale (i.e.,retailer's inventory). However, the uniform capitalization rules do not applyto (inventory) property acquired for resaie if the taxpayer's average grossreceipts for the preceding three tax years do not exceed $10,000,000annually.

© 2010 DeVry/8ecker Educational Development Corp. All right~ re~erved


b. Costs Required to be Capitalized

Costs required to be capitalized include direct materials, direct labor (e.g.,compensation, vacation pay, and payroll taxes), and applicable indirect costs(i.e., those to which an allocation must be applied, such as factory overhead).Examples of applicable indirect costs (capitalizable expenses) include utilities,warehousing costs, repairs, maintenance, indirect labor (e.g., supervisory), rents,storage, depreciation and amortization, insurance, pension contributions,engineering and design, repackaging, spoilage and scrap, and administrativesupplies.

c. Costs Not Required to be Capitalized

Costs not required to be capitalized include selling, advertising, and marketingexpenses, certain general and administrative expenses, research, and officercompensation not attributed to production services.

PASS KEY

For inventory, even a sale proprietor will be required to apply the following rules:

Capitalized as Inventory

• Direct materials

• Direct labor

• Factory overhead

AN C' L LA R '( MAT E R I A l (for Independent Review)

Period Expense

• Selling

• General

• Administrative

• Research & development

7. Long-term Contracts

Special tax rules are required of most taxpayers who operate under long-term contracts(exceptions exist). A long-term contract is generally defined as a contract that Isincomplete at the end of a tax year in which it was started (i.e., it does not start andfinish within the same tax year) and relates to the manufacture, installation, building, orconstruction of real or personal property.

a. Income Recognition - General

(1) Percentage-of-Completion Method Required for Tax for Non-ExemptLong-term Contracts

Unless an exemption exists for a taxpayer or a contract, long-termcontracts must be accounted for using the percentage-of-completionmethod to determine taxable income for a partiCUlar contract (note that ataxpayer may use other methods for other contracts if an exemption exists;thus, contracts are evaluated on a contract-by-contract basis).

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(2) Exemptions

Certain contracts are exempt from the requirements long-term contractincome recognition for tax purposes and may use other methods (e.g.,completed contract method) to calculate their taxable income under thecontract for regular income tax purposes. These include:

(a) Small contractors (projects that are expected to last no more thantwo years and are performed by a taxpayer who has average annualgross receipts not exceeding $10 million for the three years thatprecede the tax year in question.)

(b) Home construction contractors (where at least 80% of the totalcontract costs are related to the construction or rehabilitation ofcertain dwelling units, which do not include hotels, etc., where themajority of the use is on a transient basis). [Note that theseresidential contactors generally use the special rule of thepercentage-of-completion capitalized cost method, which isessentially when 70% of the items are accounted for under thepercentage-of-completion method and 30% under any allowabiemethod.]

(c) A long-term construction contract that includes land and where lessthan 10% of the total contract costs relates to the actual constructionof property on the land.

(d) Services performed by architects, engineers, designers, constructionmanagement advisors, and software implementation personnelrelated to the long-term project (i.e., those who are contracted by ataxpayer involved in a long-term contract to perform services but arenot generally responsible for the final product under contract).

(e) Services performed under warranty and maintenance agreementsrelated to the long-term contract.

b. Cost Allocation Rules - General

(1) Cost Allocation Rules Required for Tax for Long-term ConstructionContracts

Unless an exemption exists for a taxpayer or a contract, those involved inlong-term contracts must use cost allocation rules to account for their longterm projects. In addition to all the direct costs associated with a project,other costs that relate to the activities of the long-term contract (e.g.,storage costs, production period interest, pension plan contributions, etc.)must be allocated to the cost of the long-term project. Essentially, theUniform Capitalization Rules discussed above apply to long-term contracts.Note that costs associated with marketing, advertising, selling, andresearch and development are not subject to such cost allocation(capitalization).

Rl-32 l;l2010 DeVry/Bec~erEducational Development Corp. All riSht5 reserved.


(2) Exemptions

Small contractor and home construction contractors are not required toemploy the costs allocation rules identified above. However, (i) they arerequired to allocate production period interest related to the contract to thecosts of the project and (ii) home construction projects that are not alsosmall constructions projects must use the Uniform Capitalization Rules ofCode Section 263 (discussed in the above section). Also, interest for theproduction period need not be capitalized if the total cost of the project is$1 million or less and the project is estimated to take less than 12 monthsto complete.

c. Production Period Defined

(1) Start Date

For cash basis taxpayers, the starting date of production is generally thedate on which the contractor either incurs costs (other than the start-upengineering, design, etc., costs that are excluded from cost allocation, asdiscussed above) under the contract. For accrual basis taxpayers, thestarting date is the later of the date for cash basis taxpayers or the date thetaxpayer has incurred at least 5% of the total costs initially estimated underthe contract.

(2) End Date

The end date of the production period is generally the date on which thework under the contract is complete (per contract provisions) or on the datethe taxpayer has incurred at least 95% of the total costs expected underthe contract.

d. Calculation for Percentage-of-Completion Method Income Recognition

In simple terms, the amount of gross income under the contract that isrecognized on the tax return is the portion of income that relates to thepercentage of the contract that has been completed during the year.

(1) Cost-to-Cost Method (to determine percentage)

The percentage is calculated under the cost-to-cost method, which is aratio of the total cumulative costs incurred to date at the end of the tax yeardivided by the total expected costs to be incurred under the contract. Thisratio provides a total "percent-complete" amount for the contract as of theend of the tax year.

(2) Gross Income Recognition Calculation

To calculate the amount of income that will be recognized under thecontract for a given tax year, multiply the ratio determined using the costto-cost method (above) by the total contract price and subtract the amountof income that was recognized in prior years for the contract.

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Regulation 1 Becker Professional Education I CPA Exarn Rpview

e. Impact on Alternative Minimum Tax

The details of Alternative Minimum Tax are presented in the next lecture;however, certain items should be noted with regard to the effects from long-termcontracts.

(1) The percentage-of-completion method is required to be used forAlternative Minimum Taxation, regardless of the method used for regulartax (except for home construction contracts).

(2) Even if the percentage-of-completion method is used for regular taxpurposes, there are still likely to be differences in the calculation of taxableincome because the calculation of alternative minimum taxable incomemust take into account not only the method of income recognition, but alsoother alternative minimum tax rules (e.g., depreciation methods).

f. Miscellaneous Impacts

(1) Corporate earnings and profits (discussed in the R3 lecture) must becalculated using the percentage-of-completion method, even if thecorporation uses the completed-contract method for regular tax purposes.Thus, positive adjustments are generally reflected in the calculation of thecorporation's current E&P throughout the construction period (assumingthe contract is expected to make a profit) and a negative adjustment isreflected in the calculation of the corporation's current E&P at the end ofthe contract.

(2) Change in accounting method - The method used by a taxpayer for theincome recognition on a contract is deemed a "method of accounting" bythe IRS and cannot be changed for the contract without consent of the IRS.Further, if a taxpayer desires to sever a contract into various contracts oraggregates several contracts into one larger contract, IRS approval isgenerally required, and a statement explaining the changes must beattached to the original tax return for the year.

(3) "Unique" rules for personal property contracts - In order for themanufacture of personal property to qualify as a long-term contract, notonly must the contract not be completed within the year it was started, butit also must be for the manufacture of a "unique" item (i.e., an item that ismade specifically for a customer and could not be sold to others, is notgenerally part of a taxpayer's normal inventory, and requires significantpre-production costs).

(4) Related parties - Unless the exception exists where over 50% of the3-year average annual gross receipts of the same items stem fromunrelated parties, if a taxpayer performs services for a contractor that isrequired to account for a long-term contract entered into with a relatedparty using the percentage-of-completion method, the taxpayer (eventhose providing engineering or design services) must also use thepercentage-of-completion method because of the related party impact.

END OF ANCillARY MATERIAL

Rl-34 © 2010 DeVry/Becker Educ~tion~1 Development Corp_ All rights re~elVed

Becker Professional Education I CPA [Xilnl Review

SCHEDULE SE(Form 1040)

Department of the TreasuryInlemal Reveflue Sef\lice (99) ~ Attach to Form 1040.

Self-Employment Tax

~See Instructions for Schedule SE (Form 1040).

Regulation 1

OMS No. 1545-0074

~@09AttachmentS uence No. 17

Name of pefSon with self-employment income (as shown on Form 1040) Social securi1y number of personwith self-employment income ~

Who Must File Schedule SEYou must file Schedule SE if:• You had net earnings from self-employment from other than church employee income (line 4 of Short Schedule SE or line 4c of

Long Schedule SE) of $400 or more, or

• You had church employee income of $108.28 or more. Income from services you performed as a minister or a member of areligious order is not church employee income (see page SE-l).

Note. Even if you had a loss or a small amount of income from self-employment, it may be to your benefit to file Schedule SE and useeither "optional method" in Part II of Long Schedule SE (see page SE-4).Exception. If your only self-employment income was from earnings as a minister, member of a religious order, or Christian Sciencepractitioner and you filed Form 4361 and received IRS approval not to be taxed on those earnings, do not file Schedule SE. Instead,write "Exempt-Form 4361" on Form 1040, line 56.

May I Use Short Schedule SE or Must I Use Long Schedule SE?Note. Use this flowchart only if you must file Schedule SE. If unsure, see Who Must Fife Schedule SE, above.

I Did you receive wages or tips in 20091 INo V..•Are you a minister, member of a religious order, or Christian

Was the total of your wages and tips subject to social securityScience practitioner who received IRS approval not to be taxed

~ or railroad retirement (tier 1) tax piUS your net earnings from~on earnings from these sources, but you owe self-employmentself-employment more than $106,8001

tax on other eamings?

~NO ~NO

A<, yoo oolog 0" of Ih' oplioool m,lhod, 10 f'go" yooc 0,1~ Did you receive lips subject to social security or Medicare tax~earnings (see page SE-4}1 that you did not report to your employer?

!NO~NO

Uncollected Social~Did you receive church employee income reported on Form~

~l Did you report any wages on Form 8919,

W-2 01 $10828 or more?SecUrity and Medicare Tax on Wages?

~NO

You may use Short Schedule SE below You must use Long Schedule SE on page 2

Section A-5hort Schedule SE. Caution. Read above to see jf you can use Short Schedule SE.

1. Net farm profit or (loss) from Schedule F, line 36, and farm partnerships, Schedule K-1 (Form1065), box 14, code A . 1.

b If you received social security retirement or disability benefits, enter the amount of Conservation ReserveProgram payments included on Schedule F, line 6b, or listed on SchedUle K-1 (Form 1065), box 20, code Y 1b ( )

2 Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-l (Form 1065),box 14, code A (other than farming); and Schedule K-l (Form 1065-8), box 9, code J1.Ministers and members of religious orders, see page SE-1 for types of income to report on thisline. See page SE-3 for other income to report 2

3 Combine lines 1a, lb, and 2. 34 Net earnings from self-employment. Multiply line 3 by 92.35% (.9235). If less than $400, do

not file this schedule; you do not owe self-employment tax ~ 45 Self-employment tax. If the amount on line 4 is:

• $106,800 or less, multiply line 4 by 15.3% (.153). Enter the result here and on Form 1040,line 56.• More than $106,800, multiply line 4 by 2.9% (.029). Then, add $13,243.20 to the result.

Enter the total here and on Form 1040, line 56. 56 Deduction for one-half of self-employment tax. Multiply line 5 I I

I I " "« " .;;;<Y,

by 50% (.50). Enter the result here and on Form 1040, line 27 6

For Paperwork Reduction Act Notice, see Form 1040 instructions.

tl2010 DeVry/Be(~erEducational Development Corp. All rights reserved

Cat. No. 11358Z Schedule SE (Form 1040) 2009

Rl-35

cR"e",gc:u"la"ti"o"n"l,-~~~~~~~~ ~~~~~~_~ B_ecck"e"r-,-PC-'-rofessional Education I CPA Exam Review

Schedule SE (Form 1040) 2009 Attachment Sequence No. 17 Page 2Name 01 person with self-employment income (as shown on Form 1040) Social security number of person

with self-employment income ...

Section B-Long Schedule SE

'pm" Self·Employment Tax

e arm pro I r c e ue , Ine , an arm pa ners I - ormbox 14, code A. Note. Skip lines 1a and 1b if you use the farm optional method (see page SE-4) 1a

b If you received social security retirement or disability benefits, enter the amount of Conservation ReserveProgram payments included on Schedule F, line 6b, or listed on Schedule K-l (Form 1065), box 20, code Y 1b ( )

2 Net profit or (loss) from Schedule C, line 31; Schedule C-EZ, line 3; Schedule K-l (Form 1065),box 14, code A (other than farming); and Schedule K-l (Form 1065-B), box 9, code J1.Ministers and members of religious orders, see page SE-l for types of income to report on thisline. See page SE-3 for other income to report. Note. Skip this tine if you use the nonfarmoptional method (see page SE-4) 2

3 Combine lines 1a, 1b, and 2 . 34a If line 3 is more than zero, multiply line 3 by 92.35% (.9235). Otherwise, enter amount from line 3 4a

b If you elect one or both of the optional methods, enter the total of lines 15 and 17 here 4be Combine lines 4a and 4b. If less than $400, stop; you do not owe self-employment tax.

Exception. If less than $400 and you had church employee income, enter -0- and continue ... 4e5a Enter your church employee income from FOIm W-2. See page I I

ISE-l for definition of church employee income. . . . .. 5a

b Multiply line 5a by 92.35% (.9235). If less than $100, enter -0- 5b6 Net earnings from self-employment. Add lines 4c and 5b 67 Maximum amount of combined wages and self-employment earnings subject to social security

tax or the 6.2% portion of the 7.65% railroad retirement (tier 1) tax for 2009 7 106,800 00

6a Total social security wages and tips (total of boxes 3 and 7 onForm(s) W-2) and railroad retirement (tier 1) compensation.If $106,800 or more, skip lines 8b through 10, and go to line 11 8a

b Unreported tips subject to social security tax (from Form 4137, line 10) 8be Wages subject to social security tax (from Form 8919, line 10) 8e ,

d Add lines 8a, 8b, and 8c . 8d9 Subtract line 8d from line 7. If zero or less, enter -0- here and on line 10 and go to line 11 ,~ 9

10 Multiply the smaller of line 6 or line 9 by 12.4% (.124) 1011 Multiply line 6 by 2.9% (.029) 1112 Self-employment tax. Add lines 10 and 11. Enter here and on Form 1040, line 56. 1213 Deduction for one-half of self-employment tax. Multiply line 12 I I ,',

by 50% (.50). Enter the result here and on Form 1040, line 27 . 13 I ". " ,),

. Optional Methods To Fiaure Net Earnings (see paQe SE-4)Farm Optional Method. You may use this method only if (a) your gross farm income1 was not morethan $6,540, or (b) your net farm profits2 were less than $4,721.

14 Maximum income for optional methods 14 4,360 00

15 Enter the smaller of: two-thirds (213) of gross farm income1 (not less than zero) or $4,360. Alsoinclude this amount on line 4b above. 15

Nonfarm Optional Method. You may use this method only if (a) your net nonfarm profits3 were lessthan $4,721 and also less than 72.189% of your gross nonfarm income,4 and (b) you had net earningsfrom self-employment of at least $400 in 2 of the prior 3 years. Caution. You may use this method-nomore than five times.

16 Subtract line 15 from line 14 . 1617 Enter the smaller of: two~thirds (213) of gross nonfarm income4 (not less than zero) or the

amount on line 16. Also include this amount on line 4b above. 17

Note. If your only income subject to self-employment tax is church employee income, skip lines 1 through 4b. Enter -0- on line 4cand go to line 5a. Income from services you perfonned as a minister or a member of a religious order is not church employeeincome. See page SE-1.

A If you are a minister, member of a religious order, or Christian Science practitioner and you filed Form 4361, but youhad $400 or more of other net earnings from self-employment, check here and continue with Part I . ... 0

1a N t f fit a (loss) from S h d I F I' 36 d f rt h'ps Schedule K 1 (F 1065)

1 From Sch. F, hne 11. and Sch. K-l (Form 1065), box 14, code B.

2 From Sch. F, line 36, and Sch. K-1 (Form 1065), box 14, code Aminus the amount you would have entered on nne 1b had you notused the optional method.

3 From Sch. C, hne31; Sch. C-EZ, line 3; Sch. K-1 (Form 1065), box 14,code A; and Sch. K-1 (Form 1065-B). box 9, code J1.

4From Sch. C, line 7; Sch. C-EZ, line 1; Sch. K-l (Form 1065), box 14,code C; and Sch. K-1 (Form 1065-8), box 9, code J2.

Schedule SE (Fonn 1040)2009

.,-36 V2DlO DeVry/Becker Educational Development Corp. All rights , ...served.


AN CIII A R Y MAT E R I A l (for Independent Review)

Regulation 1

o._----,G. Farming Income

1. General

A person (or entity) who engages in the management or operation of a farm with theintent of earning a profit will report income and expenses (either cash or accrual basis)using a Schedule F (which carries to the face of the Form 1040, line 18, in the sameway that net income reported on a Schedule C carries to the Form 1040 on line 12).Essentially, income from farming activities is treated the same as income from otherbusiness activities.

2. Cash Basis and Accrual Method

a. Cash Basis

(1) Most farmers use the cash basis.

(2) Inventories of produce, livestock, etc., are not considered.

(3) Gross income includes cash and the value of all other items received fromthe sale of produce, livestock, etc., that has been raised by the farmer.

(4) For livestock or other items a farmer may have bought, profit is computedby subtracting the purchase price (cost) from the sales price.

b. Accrual Method

(1) The accrual method is required for certain corporate and partnershipfarmers as well as for all farming tax shelters.

(2) Inventories must be used and maintained. and they must be taken at thestart and end of the tax year.

(3) Gross profit equals the value of inventories at year-end plus the proceedsreceived from the sales during the year, less the value of inventories at thebeginning of the year, less the cost of inventory purchased during the year.

END OF ANCIllARY MATERIAL o

~ 2010 DeVry/llecker Educational Development Corp. AH right5 reserved. Rl-37


SCHEDULE F(Form 1040)

Deparlment of the TreasuryInternal Revenue service (99)

Profit or Loss From FarmingIi>- Attach to Form 1040, Form 1040NR, Form 1041, Form 1065, or Form 1065-8.

Ii>- See Instructions for Schedule F (Form 1040).

OMB No. 1545-0074

~@09AttachmentSequence No. 14

Name of proprietor Social security number (SSN)

A Principal product. Describe in one or two words your principal crop or activity for the current tax year.

C Accounting method: (1) 0 Cash (2) 0 Accrual

E Old you "matenatly participate" in the operation of thiS business dunng 2009? If "No," see page F-2 for limit on passive losses. 0 Yes ONo

iIiIEIiIIIII Farm Income-Cash Method. Complete Parts I and II (Accrual method. Complete Parts II and III, and Part I, line 11.)Do not include sales of livestock held for draft breeding sport or dairy purposes Report these sales on Form 4797

1 Sales of livestock and other items you bought for resale 1 Ii<;2 Cost or other basis of livestock and other items reported on line 1 2 I

3 Subtract line 2 from line 1 3

• Sales of livestock, produce, grains, and other products you raised

t=j •5a Cooperative distributions (Form(s) 1099-PATR) . . ~ 5b Taxable amount 5.

6a 6. Taxable amount 6.Agricultural program payments (see page F-3) . 6a

7 Commodity Credit Corporation (CCG) loans (see page F-3): ,

a CCC loans reported under election.

I 7~ I7a

• CCC loans forteited I I 7e Taxable amount 7e

6 Crop insurance proceeds and federal crop disaster payments (see page F-3): ..

• Amount received in 2009 I 8a I I I 8. Taxable amount 8.

e If election to defer to 201 0 is attached, check here li>- D 8d Amount deferred from 2008 8d

• Custom hire (machine work) income •,. Other income, including federal and state gasoline or fuel tax credit or refund (see page F-3) ,.11 Gro$$ income. Add amounts in the right column for lines 3 through 10. If you use the accrual method to

figure your income, enter the amount from Part III, line 51 ~ 11

IlIiIiIII Farm Expenses-Cash and Accrual Method.Do not include personal or living expenses such as taxes insurance or repairs on your home

37a 0 All investment is at risk.

37b 0 Some investment is not at risk.}_If a loss, you must go to line 37.

37 If you have a loss, you must check the box that describes your investment in this activity (see page F-7).

_If you checked 37a, enter the loss on both Form 1040, line 18, and Schedule SE, line 1aj on Form

1040NR, line 19j oron Form 1041, line 6._If you checked 37b, you must attach Form 6198. Your loss may be limited.

12 Car and truck expenses (see page 2. Pension and profit-sharing

F-5). Also attach Form 4562 12 plans 25

13 Chemicals 13 28 Rent or lease (see page F-6):,. ConselVation expenses (see • Vehicles, machinery, and

"page F-5) " equipment. 26a,. Custom hire (machine work) . 15 • Other ~and, animals, etc.) 26.

16 Depreciation • ,d section 17• 27 Repairs and maintenance 27

expense deduction not claimed 28 Seeds and plants. 28

elsewhere (see page F-5) 16 29 Storage and warehousing 29

17 Employee benefit programs other 3. Supplies 30

than on line 25 17 31 Taxes 31

18 Feed 18 32 Utilities. 32,. Fertilizers and lime ,. 33 Veterinary, breeding, and medicine 33

20 Freight and trucking 20 34 Other expenses (specify):

21 Gasoline, fuel, and oil. 21 a ---------------------------------- -_._.- 34.22 Insurance (other than health) 22 • ------------------------------_._-"-"._-- 34.23 Interest: " e 34c

a Mortgage (paid to banks, etc.) 23. d 34d----

• Other 23. e --------- ._--- 34a24 labor hired ~ess employmlffif credits) 2' f 341

35 Total expenses. Add lines 12 through 34f. If line 34f is negative, see instructions ~ 35

38 Net farm profit or (loss). Subtract line 35 from line 11. Partnerships, see page F-7.

}_ If a profit, enter the profit on both Form 1040, line 18, and Schedule SE, line 18j

on Form 1040NR, line 19j or on Form 1041, line 6. 38

For Paperwork Reduction Act Notice, see page F-7 of the instructions. Cal. No. 11346H Schedule F (Form 1040)2009

R1-38 © 2010 OeVry!llecker Educational Development Corp. All rights reserved.


H. Gains and Losses on Disposition of Property

Gain or loss on the disposition of property (covered in detail in a later section of this chapter)is measured by the difference between the amount realized and the adjusted basis. Gainsand losses are given tax effect (recognized) only when the asset is sold or disposed by othermeans. Whether on a cash or accrual method of accounting, taxpayers who sell stock orsecurities on an established securities market must recognize gains and losses as of thetrade date, not the settlement date. The basic formula in determining the gain or loss is asfollows:

Amount Realized

< Adiusted Basis of Assets Sold>Gain or Loss Realized

IRA Income •I.

1. General RUles (taxable when withdrawn)

Generally, retirement money cannot be withdrawn until the individual reaches the ageof 59Y. (except in certain situations, covered later) or the individual elects to receiveequal periodic distributions over his life expectancy. A taxpayer is required to startwithdrawals by the age of 70Y. (this is often referred to as the "required minimumdistribution" or ''RMD''). Benefits are not taxable until the taxpayer receives thedistribution.

2. Taxation of Distributions (benefits)

a. Regular Tax

(1) Ordinary Income (traditional deductible IRA distributions)

When a person retires, the funds will be taxed as ordinary income whenreceived (regardless of what type of income, such as capital gain, wasearned while the funds were invested.)

(2) Distributions/Benefits from Non-deductible IRAs

(a) Roth IRA

All qualified benefits received from a Roth IRA are non-taxable.

(b) Traditional Non-deductible IRA

Benefits received from a traditional non-deductibie IRA are partiallytaxable. Return of capital is not taxable; thus, the amount receivedmust be prorated between the contributed and non-contributoryportions of the account.

(1) Principal - non-taxable

(2) Accumulated earnings - taxable (when withdrawn)

b. Penalty Tax (10%)

Generally, a premature distribution is subject to a 10% penalty tax (on top of anyincrease in regular income tax) if the individual has not met an exception.

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Regulation 1 Becker Professional Education I (PI\ barn Review

Disability (permanent or indefinite disability, but not temporary disabiiity)

Education: College tuition, books, fees, etc.

and

Death

o (3)

o (4)o (5)

oo (6)

c. Exception (to penalty tax)

There is no penalty if the premature distribution was used to pay:

o (1) Home buyer (1st time): $10,000 maximum exclusion applies if the

distribution is used toward the purchase of a first home (within 120 days of

the distribution)

o (2) Insurance (medical)

(a) Unemployed with twelve consecutive weeks of unemployment

compensation

(b) Self-employed (who are otherwise eligibie for unempioyment

compensation)

Medical expenses in excess of 7.5% of AGI

d. Excess Contributions

Excess contributions to the plan are subject to a cumulative 6% excise tax each

year until the excess is corrected.

3. Investment of Funds

The amounts invested in an IRA can be placed into a domestic trust or a custodial

account or can be invested directly in individual annuity contracts issued by an

insurance company. An individual's interest in the pian must be non-forfeitable.

J. Annuities

The investment amount is divided by a factor representing the number of months over which

the investment will be recovered. This factor is based on the age of the annuitant at the start

of the payout period. Factors range from 360 for starting ages under 56 to 160 for starting

ages over 70.

EXAMPLE

General Rules

If the investment in the contract is $60,000 and the annuitant is 64 years old (factor is 260 months) at thestart ofthe payout period, then:

$60,000 $ I 'b230.77 exc udl Ie from each of the first 260 payments260

In this example, the first $230.77 of the first 260 payments received is not taxable. Amounts of each paymentin excess of $230.77 are taxable.

Live Longer than Actuarial Payout Period

If the annuitant lives longer than 260 months, then further payments are fully taxable.

Death Before Full Recovery

If the annuitant dies before the 260 payments are collected, the unrecovered portion of the $60,000 is amiscellaneous itemized deduction on the annuitant's final income tax return not subject to the 2% of AGIfloor.

Rl-40 © 2010 DeVry{Becker Educational Development Corp. All rights reserved.


K. Rental Income (passive activity)

Schedule E is used to compute supplemental income and/or loss from:

• Rental real estate

• Royalties

• Partnerships and Limited Liability Companies (from Schedule K-1)

• S Corporations (from Schedule K-1)

• Estates (from Schedule K-1)

• Trusts (from Schedule K-1)

SCHEDULE E Supplemental Income and Loss OMeNo_ 1545-0074

(Form 1040) {From rental real estate, royalties, partnerships, ~(Q)09Departmenl of tt>e Treasury 5 corporations, estates, trusts, REMICs, etc.) AtlachmentInternal Revenue Service (99) ~Attach to Form 1040, 1040NR, or Form 1041. ~See Instructions for Schedule E (Form 1040). S uenea No 13Narne(s) shown on 'etum Your social security number

see page you are an 10 IVI LJ ,r <om ",m .,1 Ust the tvne and address of each rental real estate .. e , 2 For each rental real estate property Ye, No

A ._-_.._.. listed on line 1, did you or your familyuse it during the tax year for personalpurposes for more than the greater of: A

B et4days or

e 10% of the total days rented at fair B

C rental value?

{See paqe E-3) C

Income:Properties Totals

A B C (Add columns A. B. and C.)

3 Rents received 3 3

• Rovalties received • •Expenses:

5 Advertising ~6 Auto and travel (see page E-4) 67 Cleaning and maintenance 76 Commissions. 6

• Insurance. •,. Legal and other professional fees ,.11 Management fees 1112 Mortgage interest paid to banks,

etc. (see page E-S) . 12 1213 Other interest. 13,. Repairs. ,.15 Supplies 1516 Taxes

~17 Utitities. 1716 Other (list) ~ _

18

,. Add lines 5 through 18. 1. 1.2. Depreciation expense or depletion

(see page E-S) 20 2021 Total expenses. Add lines 19 and 20 21

22 Income or ~oss) from rental real ~

estate m royalty properties.Subtract line 21 from line 3 (rents) ortine 4 (royalties). If the result is a

~~oss), see page E-S to find out ifyou must file Form 6198. 22

23 Deductible rental real estate loss. I ~',.Caution. YOlJr rental real estate losson line 22 may be limited. See page .E-5 to find out if you must file Fonn8582. Real estate protessionals mustcomplete line 43 on page 2 23 I II ){ ) ..'

2. Income. Add positive amounts shown on line 22. Do not include any losses 2.25 Losses. Add royally losses from line 22 and rental real estate losses from line 23. Enter total losses here. 25 ( )

26 Total rental real estate and royalty income or Ooss). Combine lines 24 and 25. Enter the result here.If Parts II, III, IV, and line 40 on page 2 do not apply to you, also enter this amount on Form 1040, line17 or Form 1040NR line 18. Otherwise include this amount in the total on line 41 on Dace 2. 26

Income or Loss From Rental Real Estate and Royalties Note. II you are in the business of renting personal property, useSchedule C or C EZ ( E 3) If d- 'd al eport farm renlal income or loss f F 4835 on page 2 I'ne 40

For Paperwork Reduction Act NotIce, see page E-8 of the Instructlons. Cal. No, 11344L Schedule E (Form 1040)2009

()2010 DeVrv{t1ecker Educational Development Corp. All rights reserved. Rl-41

Regulation 1

Schedule E(Form 1040) 2009

.~------------Becker Professional Education I CPA Exam Review

Attachment Sequence No. 13 Page 2Name(s) shown on retum. Do not enter name and social security number if shown 00 othel" side. Your social security number

Caution. The IRS compares amounts reported on your tax return with amounts shown on Schedule(s) K-1.

IifiIIIIiII Income or Loss From Partnerships and S Corporations Note. If you report a loss from an at-risk activity for whichany amount is not at risk, you must check the box in column (e) on line 28 and attach Form 6198. See page E-1.

27 Are you reporting any loss not allowed in a prior year due to the at-risk or basis limitations, a prior yearunallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed 0 Yes 0 NooartnershiD eXDenses? If vou answered "Yes," see Dace E-7 before comoletinc this section.

28 Ie) Name(h) Enter Pfor Ie} Check jf ld) Employer (e) Check ifpartnership; S foreign identification any amount is

for Scorooration oartnershio number not at riskA D DB D Dc D D0 D D

Passive Income and Loss Nonpassive Income and Loss

(f) Passive loss allowed (g) Passive income (h) Nonpassive loss (i) Section 179 expense OJ Nonpassive income(attach Form 8582 if required) from Schedule K-1 from Schedule K-1 deduction from Form 4562 from Schedule K-1

ABC029a Totals I- ...... . , .. .'

b Totals I I I I30 Add columns (g) and 0) of line 29a . 3031 Add columns (t), (h), and (i) of line 29b 31 ( )32 Total partnership and 5 corporation income or (loss). Combine lines 30 and 31. Enter the

result here and include in the total on line 41 below 32

· Income or Loss From Estates and Trusts

33 la) Name lbl Employeridentification number

AIBI

Passive Income and Loss Nonpassive Income and Loss(c) Passive deduction or loss allowed (d) Passive income Ie} Deduction or loss (f) Othel" income from

(attach Form 8582 jf required) from Schedule K-1 from Schedule K-1 Schedule K-1

AI I IBI I I34a Totals I.;;' >.·c· ....

b Totals I I .' . 1

35 Add columns (d) and (f) of line 34a . 3536 Add columns (c) and (e) of line 34b 36 ( )

37 Total estate and trust income or (loss). Combine lines 35 and 36. Enter the result here andinclude in the total on line 41 below 37

· Income or Loss From Real Estate Mortgage Investment Conduits (REMICs) Residual Holder

38 (h) Employel" identification (c) Excess inclusion from !d1 Ta>cable income (net loss) (e) Income fromtal Name number SC~~~a~'~~~; 2c fromScl1edules C, line Ib Schedules Q, line 3b

I I I I39 Combine columns (d) and (e) onlv. Enter the result here and include in the total on line 41 below 39 I I· SummarY40 Net farm rental income or (loss) from Form 4835. Also, complete line 42 below. 401 I41 Total income or Ooss). Combine lines 26, 32, 37, 39, and 40. Enter the result here and 011 F0ffi11040, line 17, or Form 1040NR, line 18" 41 I I42 Reconciliation of farming and fishing income. Enter your gross

... , .,farming and fishing income reported on Form 4835, line 7; Schedule

'.

K-1 (Form 1065), box 14, code B; Schedule K-1 (Form 1120S), box 17,code U; and SChedule K-1 (Form 1041), line 14, code F (see page E-8) 42 I

43 Reconciliation for real estate professionals. If you were a real estateprofessional (see page E-2), enter the net income or Ooss) you reportedanywhere on Form 1040 or Form 1040NR from all rental real estate activitiesin which you materiallv oarticioated under the oassive activitv loss rules . 431 I

Schedule E(Form 1040) 2009

Rl-42 1;)2010 OeVryjBecker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA Exam RQviflw Regulation 1

1. General

The basic formula for the determination of net rental income or loss is as follows:

Gross Rental Income

Prepaid Rental IncomeRent Cancellation Payment

Improvement In-Lieu-of Rent

< Rental Expenses>Net Rental Income

oNet Rental loss

2. Rental of Vacation Home

a. Rented Less than 15 Days

If the residence is rented for less than 15 days per year, it is treated as apersonal residence. The rental income is excluded from income, and mortgageinterest (first or second home) and real estate taxes are allowed as itemizeddeductions. Depreciation, utilities, and repairs are not deductible.

b. Rented 15 or More Days

If the residence is rented for 15 or more days, and is used for personal purposesfor the greater of (i) more than 14 days or (ii) more than 10% of the rental days, itis treated as a personal/rental residence. Expenses must be pro-rated betweenpersonal and rental use (see example below). However, a different pro-rationmethod is used for mortgage interest and property taxes (see' in the examplebelow), than for other property-related expenses (e.g., utilities, insurance,depreciation, etc.). Rental use expenses are deductible only to the extent ofrental income.

EXAMPLE

Julie rents her vacation home for two months and lives there for one month (during the other 11 months, Julie lives in the

city). Thus, of the three-month period the vacation home is used, one-third is personal and two-thirds is rental. Assume

that Julie's gross rental income is $6,000, her real estate taxes are $2,400, interest is $3,600, utilities are $4,800, and related

depreciation is $7,200.

These amounts are deductible in the following order:

Rental

Gross rental income $6,000

Deduct: Taxes $2,400

Interest 3.600

$6,000 x 2/12' (1.000)

Balance $5,000

Deduct: Utilities $4,800 x 2/3" (3,2001

$1,800

Deduct: Depreciation $7,200 x 2/3"

$4,800 but limited to*** (1,8001

Net income $ a

Personal

$5,000 - Schedule A

$1,600 - Not Deductible

$2,400 - Not Deductible

Allocated based on rental period/total annual period.

** Allocated based on rental period/total annual usage.

*** The additional $3,000 ($4,800 -1,800) is not deductible, but is carried over to next year and applied against future income from this property.

{)201O OeVry/8ecker Educational Development Corp. All rights reserved. Rl-43

Regulation 1

• 3.

Becker Professional Education I CPA [x<lJn Review--_.~-----''-------

Passive Activity Losses (PALs)

A passive activity is any activity in which the taxpayer does not materially participate.Such activities include rental activities, interests in limited partnerships, S corporations,and most tax sheiters.

a. Deductibility

A net passive activity loss may not be deducted against wages, salaries, andother active income or against portfolio (interest and dividends) or capital gainsincome. Expenses related to passive activities can be deducted only to theextent of income from all passive activities.

b. Nondeductible PALs

Carry forward without any time limit unused passive activity losses held insuspension.

(1) Suspended losses are used to offset passive income in future years.

(2) If still unused, suspended losses become fully tax deductible in the yearthe property is disposed of (sold).

(3) If the taxpayer becomes a material participant in the passive activity(therefore changing from "passive" to "active"), unused passive lossesfrom the activity can be used to offset the taxpayer's active income in thesame activity.

c. Taxpayers Subject to PAL Rules

Individuals, estates, trusts, personal service corporations, and closely held Ccorporations are subject to the passive activity rules.

d. PAL (Disallowed Net Loss) Exceptions

An individual may deduct rental activity losses (although deduction may belimited) if either of the following two conditions are met:

(1) Mom and Pop Exception

(a) $25,000 and "Active"

Taxpayers may deduct up to $25,000 (per year) of net passivelosses attributable to rental real estate annually if the individuals areactively participating/managing (although not participating to theextent needed to avoid passive activity classification as describedbelow) and own more than 10% of the rental activity.

(b) Carryforward

Any excess would be carried forward indefinitely as an unusedpassive activity loss. An estate can qualify for the two yearsfollowing the decedent's death if the decedent actively participated inthe operation.

(c) Phase-out

The $25,000 allowance is reduced by 50% of the excess of thetaxpayer's AGI (without consideration of this loss deduction) over$100,000. The allowance is eliminated completely when AGIexceeds $150,000.

Rl-44 ~ 2010 DeVry!Becker educational Development Corp. All rights reserved.

Becker Professional Education I CPA Exam Review Regulation 1-~---------

(2) Real Estate Professional (not passive activity)

If the following two conditions are met and the taxpayer is deemed to havematerial participation in the activity, the rental activities are not consideredpassive and the taxpayer (sometimes referred to on the CPA Exam as a"real estate person") can fully deduct losses from the rental activitiesagainst other income:

(a) More than 50% of the taxpayer's personal services during the yearare performed in real property businesses, and

(b) The taxpayer performs more than 750 hours of services in realproperty businesses during the year.

L. Unemployment Compensation

A taxpayer must include in gross income the full amount received for unemploymentcompensation.

•M. Social Security Income

Social Security benefits received might be included in income. Taxpayers areclassified into five categories depending on the level of provisional income, which isdefined as AGI plus tax-exempt interest plus 50% of Social Security benefits. Taxpayersmust include in income the lesser of 50% (or 85%, depending on income) of social securityreceived or 50% (or 85%, depending on income) of the excess provisional income over thethreshold.

1. Low Income = No Social Security benefits are taxable (income below: single$25,000/MFJ $32,000)

2. Lower Middle Income =Less than 50% of Social Security benefits are taxable

3. Middle Income =50% of SS benefits are taxable (income over: single $25,000/MFJ$32,000)

4. Upper Middle Income =Between 50% and 85% of Social Security benefits are taxable.

5. Upper Income = 85% of Social Security benefits are taxable (income over; single$34,000/MFJ $44,000)

Modified Adjusted Gross Income (MAGI), also known as provisional income, includes the following

items:

• Any income you excluded because of the foreign earned income exclusion.

• Any exclusion or deduction you claimed for foreign housing.

• Any interest income from series EE bonds that you were able to exclude because you paid hqualified higher education expenses. ~

Any deduction you claim for student loan interest or qualified tuition and related expenses.

Any employer-paid adoption expense you excluded.

• Any deduction you claimed for an annual (non-roliover) contribution to a regular IRA.

In other words, the above items are not taken into account in determining AGI vs. MAGI.

~ 2010 DeVry/Becker Educational Development Corp. All right~ reserved. Rl-45


N. Taxable Miscellaneous Income

1. Prizes and Awards

The fair market value of prizes and awards is taxable income. An exclusion fromincome for certain prizes and awards applies where the winner is selected for theaward without entering into a contest (i.e., without any action on the winner's part) andassigns the award directly to a governmental unit or charitable organization.

2. Gambling Winnings and Losses

a. Winnings

Gambling winnings are included in gross income.

b. Losses

Unless the taxpayer is in the trade or business of gambling (which follows otherspecific reporting rules), gambling losses may only be deducted to the extent ofgambling winnings. The allowable amount of these gambling losses aredeductible on Schedule A as an itemized deduction, but the amount is notsubject to the 2% of AGI limitation on miscellaneous itemized deductions.

3. Business Recoveries

To decide whether a business recovery is excludible, one must determine what thedamages were paid "in lieu of." Thus, if a damage award is compensation for lostprofit, the award is income.

4. Punitive Damages

Punitive damages are fully taxable as ordinary income if received in a business contextor for loss of personal reputation. Punitive damages received by an individual in apersonal injury case are also taxable except in wrongful death cases where state lawhas limited wrongful death awards to punitive damages only.

O. Partially Taxable Miscellaneous Items: Scholarships and fellowships

I"@,,wl 1. Degree-seeking Student

Scholarships and fellowship grants are excludible only up to amounts actually spent ontuition, fees, books, and supplies (not room and board) provided:

a. The grant is made to a degree-seeking student;

b. No services are to be performed as a condition to receiving the grant; and

c. The grant is not made in consideration for past, present, or future services of thegrantee.

2. Nondegree-seeking Student

Scholarships and fellowships awarded to nondegree-seeking students are fully taxableat FMV.

3. Tuition Reductions

Graduate teaching assistants and research assistants who receive tuition reductionsare taxed on the reduction if it is their only compensation, but not if the reduction is inaddition to other taxable compensation .

• ,AG l;) 2010 DeVry!Becker Educational Oevelopment Corp_ All riehu re~erved,

Becker Professional Education I CPA Exam f{evicw

P. Nontaxable Miscellaneous Items

1. Life Insurance Proceeds (non-taxable)

Regulation 1

•The proceeds of a life insurance policy paid because of the death of the insured areexcluded from the gross income of the beneficiary.

a. The interest income element on deferred payout arrangements is fUlly taxable.

b. If the proceeds are used to pay for long-term care, accelerated death benefitsreceived by an insured who is terminally ill (provided there is certification that theinsured is expected to die within 24 months), is chronically ill, or requiresassisted living) are not taxable.

2. Gifts and Inheritances (non-taxable)

Gross income does not include property received from a gift or inheritance; however,any income received from such property (e.g., interest income, rental income, etc.)after the property is the in the hands of the recipient is taxable.

3. Medicare Benefits (non-taxable)

Exclude from gross income basic Medicare benefits received under the Social SecurityAct.

4. Workers' Compensation (non-taxable)

Exclude from gross income compensation received under a workers' compensation actfor personal injury or sickness.

5. Personal (Physical) Injury or Illness Award (non-taxable)

Exclude from gross income damages received as compensation for personal (physical)injury or illness.

6. Accident Insurance - Premiums Paid by Taxpayer (non-taxable)

Exclude from gross income all payments received (even with multiple recoveries) if theindividual paid all premiums for the insurance.

7. Foreign-earned Income Exclusion

Taxpayers working abroad may exclude from gross income up to $91,500 (2010) oftheir foreign-earned income. In order to quaiify for the exclusion, the taxpayer mustsatisfy one of the following two tests:

a. Bona Fide Residence Test

The taxpayer must have been a bona fide resident of a foreign country for anentire taxable year.

b. Physical Presence Test

The physical presence test requires that the taxpayer must have been present inthe foreign country for 330 full days out of any 12-consecutive-month period(Which may begin on any day).

Note: The exclusion cannot exceed the taxpayer's foreign earned income reduced by the taxpayer's foreign

housing exclusion (maximum $27,450 in 2010, or 30% of the $91, 500 maximum foreign income exclusion). ~

Further, the amount of excluded income and housing is used to determine the income tax rate (and ~

alternative minimum tax rate) for the taxpayer for the year (i.e., although it is not taxed, the excluded income"

could cause other income to be taxed at higher rates, as if the excluded income were taxable).

g)2010 DeVry!6ecker Educational De~elopment Corp. All rights reserved. Rl-47


INDIVIDUAL TAXATIONCapital Gains and Losses

C.

•...'.. . .

I. Definitions

A. Real Property (land and building)

Real property is defined as land and all items permanently affixed to the land (e.g., buildings,paving, etc.).

B. Personal Property (machinery and equipment)

Personal property is all property not classified as real property.

Capital Assets

Capital assets include property (reai and personal) held by the taxpayer, such as:

1. Personal automobile of taxpayer.

2. Furniture and fixtures in the home of the taxpayer.

3. Stocks and securities of all types (except those held by dealers).

4. Personal property of a taxpayer not used in a trade or business.

5. Real property not used in a trade or business.

6. Interest in a partnership.

7. Goodwill of a corporation.

8. Copyrights, literary, musical, or artistic compositions that have been purchased.

9. Other assets held for investment.

D. Non-capital Assets

1. Property normally included in inventory or held for saie to customers in the ordinarycourse of business.

Rl-48

2.

3.

4.

5.

Depreciable personal property and real estate used in a trade or business (forexample, Section 1231, Section 1245, and Section 1250 property).

Accounts and notes receivable arising from sales or services in the taxpayer's business

Copyrights, literary, musical, or artistic compositions held by the original artist.(Exception: Sales of musical compositions held by the original artist receive capital gaintreatment. )

Treasury stock (not an ordinary asset and not subject to capital gains treatment).

lQ2010 D€Vry!Becker Educational Development Corp_ All right5 re5erved.


SCHEDULE D(Form 1040)

Department of lIw TreasuryInternal Revenue SetVice (99)

Capital Gains and Losses

~ Attach to Form 1040 or Form 1040NR. ~See Instructions for Schedule D (Form 1040).

~Use Schedule D-1 to list additional transactions for lines 1 and 8.

OMB No. 1545-0074

~©09AttachmentS uence No. 12

Name{s) shown on return

IIimiII Short-Term Capital Gains and Losses-Assets Held One Year or Less

Your social security number

(a) Description of property (b) Dale acquired (e) Dale sold (d) Sales price e) Cost or other basis(f) Gain or (loss)

{see page 0-7 of {see page 0-7 of(Example: 100 sh. XYZ Co.) (Mo., day. yr.) (Mo., day, yr.)

Ihe instructionsl the instructionsSubtract (e) from (d)

1 if

!

!i i

:2 Enter your short-term totals, if any, from Schedule 0-1,

i 1",·,/<: '.line2 . 2

3 Total short-term sales price amounts. Add lines 1 and 2 in :<,i

" "'<'1'column (d) 3 ..1 <'. "". 'y

4 Short-term gain from Form 6252 and short-tenn gain or (loss) from Forms 4684, 6781, and 8824 4i

5 Net short-tenn gain or (loss) from partnerships, S corporations, estates, and trusts fromSchedule(s) K-1 5

6 Short-term capital loss carryover. Enter the amount, if any, from line 10 of your Capital Loss :

Carryover Worksheet on page 0-7 of the instructions 6 ( ) )

7 Net short-term capital gain or (loss). Combine lines 1 through 6 in column (I) 7

IZIiIII Long-Term Capital Gains and Losses-Assets Held More Than One Year

(al Description of property (b) Date acquired (e) Date sold (d) Sales price (el Cost or other basis(f) Gain or (loss)

(see page 0-7 of (see page D-7 of(Example: 100 sh. XYZ Co.) (Mo., day, yr.) (Mo., day. yr.) the instructions) the instNCtions)

Subtract {e} from (d)

8! !

:ii

f

::

9 Enter your long-term totals, if any, from Schedule D-1, ,: •. {;.,..,...•....

'"fline 9 9 ! :10 Total long-term sales price amounts. Add lines 8 and 9 in

i ':,(;:; ',H· "·'\,:,i..J '."column (d) 1011 Gain from Form 4797, Part I; long-term gain from Forms 2439 and 6252; and long-term gain or

(toss) from Forms 4684, 6781, and 8824 1112 Net long-term gain or (loss) from partnerships, S corporations. estates, and trusts from

Schedule(s) K-1 12

13 Capital gain distributions. See page 0-2 of the instructions 13 i14 Long-tenn capital loss carryover. Enter the amount, if any, from line 15 of your Capital Loss

Carryover Worksheet on page 0-7 of the instructions 14 ( )

15 Net long-term capital gain or (loss). Combine lines 8 through 14 in column (t). Then go to Partilion the back . 15

For Paperwork Reductlon Act Notice, see Form 1040 or Form 1040NR Instructions.

(l2010 DeVrv/Becker Educational Development Corp. All riGhts reserved.

Cat. No. 11338H Schedule 0 (Form 1040) 2009

"-49

Regulation 1

Schedule 0 (Form 1040) 2009

ImIII Summary


Page 2

16 Combine lines 7 and 15 and enter the result 16

If line 16 is:

• A gain, enter the amount from line 16 on Form 1040, line 13, or Form 1040NR, line 14. Thengo to line 17 below.

• A loss, skip lines 17 through 20 below. Then go to line 21. Also be sure to complete line 22.

• Zero, skip lines 17 through 21 below and enter -0- on Form 1040, line 13, or Form 1040NR,line 14. Then go to line 22.

17 Are lines 15 and 16 both gains?o Yes. Go to line 18.o No. Skip lines 18 through 21, and go to line 22.

18 Enter the amount, if any, from line 7 of the 28% Rate Gain Worksheet on page D-8 of theinstructions. .~ 18

19 Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet onpage 0-9 of the instructions .~ 19

20 Are lines 18 and 19 both zero or blank?

D Yes. Complete Form 1040 through line 43, or Form 1040NR through line 40. Then completethe Qualified Dividends and Capital Gain Tax Worksheet on page 39 of the Instructionsfor Form 1040 (or in the Instructions for Form 1040NR). Do not complete lines 21 and 22below. .

D No. Complete Form 1040 through line 43, or Form 1040NR through line 40. Then completethe Schedule 0 Tax Worksheet on page D-10 of the instructions. Do not complete lines 21and 22 below.

21 If line 16 is a loss, enter here and on Form 1040, line 13, or Form 1040NR, line 14, the smallerof:

• The loss on line 16 or } 21 ( )

• ($3,000), or if married filing separately, ($1,500)

Note. When figuring which amount is smaller, treat both amounts as positive numbers.

22 Do you have qualified dividends on Form 1040, line 9b, or Form 1040NR, line lOb?

D Yes. Complete Form 1040 through line 43, or Form 1040NR through line 40. Then completethe Qualified Dividends and Capital Gain Tax Worksheet on page 39 of the Instructionsfor Form 1040 (or in the Instructions for Form 1040NR).

D No. Complete the rest of Form 1040 or Form 1040NR.

Schedule 0 (Form 1040J 2009

Rl-50 1,)2010 DeVrv/6ecker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA EX:Jm Review Regulation 1

II. CALCULATION RULES

The basic formula in determining the gain or loss is as follows:

Amount Realized

< Adiusted Basis of Asset Sold>

Gain

Loss

A. Amount Realized

The amount realized includes: Amount Realized

1.

2.

3.

Cash received (boot);

Cancellation of debt (boot);

Property received at fair market value; and

< Adjusted Basis of Asset Sold>

Gain

Loss

4. Services received at fair market value;

5. Reduce the amount realized by any selling expenses (e.g., broker's commissions).

EXAMPLE

Taxpayer conveys commercial property in which he has a basis of $70,000 and which is subject to amortgage of $45,000 to Xfor $60,000 in cash. The taxpayer is treated as if he had received $105,000in the transaction, whether or not Xexpressly assumes the mortgage, and the taxpayer realizes a gainof $35,000 ($105,000 proceeds minus $70,000 basis.

loss

Gain

Amount Realized


Adjusted Basis of Asset Sold

1. Purchased Property Basis = Cost

Generally, the basis of property is the costof such property to the taxpayer. There are a number ofinstances in which the taxpayer's basis in property is to beadjusted upward or downward.

a. Increase Basis for Capital Improvements I_IBasis is adjusted upward for expenditures chargeable to the asset account.

B.

EXAMPLE

Taxpayer owns a factory and adds on a new wing for $50,000. The basis of the factory isincreased by $50,000.

b. Reduce Basis for Accumulated Depreciation (= NBV)

The basis is adjusted downward in the amount of any depreciation (allowed orallowable) by the taxpayer with respect to that asset.

EXAMPLE

Ataxpayer has a milling machine worth $10,000. In its first year, he deducts $1,000 from grossincome for depreciation of the machine. The basis of the machine is accordingly reduced to$9,000 ($10,000 minus $1,000 depreciation deduction).

(l2010 DeVryJ8e(~erEducational Development Corp. All rights reserved Rl-51


c. "Spreading" Adjustments

Although most adjustments require an increase or decrease in the basis, somespread the basis.

EXAMPLE

Under the IRe, the receipt of a nontaxable stock dividend will require the shareholder tospread the basis of his original share over both the original shares and the new shares receivedresulting in the same total basis, but a lower basis per share of stock held.

2. Gifted Property Basis for Gain/Loss Purposes

a. General Rule - Donor's Rollover Cost Basis

Property acquired as a gift generally retains the rollover cost basis as it had inthe hands of the donor at the time of the gift. Basis is increased by any gift taxpaid that is attributable to the net appreciation in the value of the gift. Gains andlosses are calculated using this rollover cost basis (subject to the exceptionnoted below).

b. Exception - Lower FMV at Date of Gift

If the fair market value at date of gift is iower than the rollover cost basis from thedonor, the basis for the donee depends upon the donee's future selling price ofthe asset.

(1) Sale of Gifts at Price Greater than Donor's Rollover Basis (gain basis)

When a taxpayer sells a gift for greater than the rollover basis, the gainshall be the difference between the sale price and that rollover basis.

EXAMPLE

Donor gives nondepreciable property worth $3,000 and having an adjusted basis of$5,000 to taxpayer, who subsequently sells the property for $6,500. Taxpayer's gainwill be $1,500 1$6,500 proceeds minus $5,000 basis).

(2) Sale of Gift at Price Less than Lower Fair Market Value (lOSS basis)

When a taxpayer sells the gift for less than the lower FMV at the date ofgift, the basis of the gift for purposes of determining the loss is the fairmarket value of the gift at the time the gift was given.

EXAMPLE

Donor gives property worth $3,000 having an adjusted basis of $5,000 to taxpayer whosubsequently sells the property for $1,000. The taxpayer's loss will be $2,000 1$3,000FMV at date of gift minus $1,000). (Note that the loss mayor may not be deductible onthe taxpayer's income tax return, depending on the situation.)

(3) Sale Less than Rollover Cost Basis but Greater than Lower FairMarket Value (in the middle)

When taxpayer sells a gift for a price less than the donor's rollover costbasis, but more than the iower fair market value at the date of gift, neithergain nor loss is recognized. The basis to the donee is the "middle" sellingprice.

Rl-52 fllOlO DeVry{Becker Educational Development Corp. All rights re~rved.


c. Gifted Property Depreciation Calculation

Regardless of the basis for the gain/loss (which may not be known at the timedepreciation is to begin), the basis for depreciation purposes (if applicable) is thelesser of (i) the donor's adjusted basis at the date of gift or (ii) the fair marketvalue at the date of gift. The amount of accumulated depreciation wili thenreduce the taxpayer's basis calculated for gain/loss purposes (per above) beforethe actual gain or loss on the sale is determined.

EXAMPLE

A donor gives property worth $3,000 and having an adjusted basis of $5,000 to a taxpayer.

• For purposes of determining gain on the sale, the taxpayer's basis is $5,000.

For purposes of determining loss on the sale, the taxpayer's basis is $3,000.

• If the taxpayer subsequently sells the property for $3,500, there is no gain or loss on thesale, and the basis is $3,500

• For purposes of calculating depreciation on the asset (if applicable) prior to the sale, thedepreciable basis is $3,000.

PASS KEY

• Sell higher -----t Use "donor's basis" to determine gain.IDono,B,,;,1--• Sell between -----t No gain or loss

Ilowe, 'MV" lr----Date of Gift

• Sell lower -----t Use "lower FMV at date of gift" to determine loss.

d. Holding Period

The recipient of the gift normaily assumes the donor's holding period. However,under the exception above, if fair market value at the time of gift is used (lossbasis) as the basis of the gift, the holding period starts as of the date of the gift.

EXAMPLE

BASIS OF GIFTED STOCK AND GAIN OR LOSS ON RESALE

IGeneral Rule: I IExceptfoo: FMV Lower IFMVHlgher• • • •Donor's (rich uncle)

basis $20,000 $20,000 $20,000 $20,000

FMV at gift date 40,000 13,000 13,000 13,000

Nephew's selling price 30,000 25,000 10,000 15,000"Basis" to nephew for

gain/loss purposes 20,000 20,000 13,000 15,000

Taxable gain (if any) 10,000 5,000 -0-

Deductible loss (if any) 3,000 -0-

Cl2010 OeVryj6ecker Educational Development Corp. All rights reserved. Rl-53

Regulation 1

3.


Inherited Property Basis

Following are the rules for years after 2010.

a. General Rule - Date of Death FMV Becomes Basis

For years after 2010, property acquired by bequest or inheritance generally takesas its basis the step-up (or down) to the fair market value at the date of thedecedent's death.

b. Alternate Valuation Date

If validly elected by the executor, the fair market value on the alternate valuationdate (the earlier of 6 months later or the date of distributionisale) may be used tovalue all of the estate property. The alternate valuation date is only available ifits use lowers the entire gross estate and estate tax (although individual assetsmay go up or down during the period). [Note: Estate taxation is covered in detailin lecture R4.]

If the alternate valuation date is validly elected, the asset is valued using FMV atthe earlier of:

(1) Distribution date of asset; or

(2) Alternate valuation date (earlier of 6 months after death or date ofdistributionisale).

EXAMPLE

Testator died owning property worth $60,000 and in which he had a basis of $20,000. His soninherited the land and subsequently sold it for $55,000. The son will recognize a loss of $5,000($60,000 basis minus $55,000 proceeds). The gain inherent in the property at the time of thetestator's death goes unrecognized.

c. Holding Period

Property acquired from a decedent is automatically considered to be long-termproperty regardless of how long it actually has been held.

EXAMPLE· BASIS OF INHERITED PROPERTY (years after 2010)

1. Assume a taxpayer inherited property from a decedent. The FMV at date of death was$20,000. The property was worth $15,000 six months later, and was worth $22,000 when itwas distributed to the taxpayer eight months later. It had a cost basis to the deceased of$5,000.

What is the basis of inherited property to the taxpayer:

a. If the alternate valuation date was not elected?

b. If the alternate valuation date was elected?

2. Assuming the beneficiary sold that property for $25,000, compute the capital gain:

a. Assuming the alternate valuation date was not elected.

b. Assuming the alternate valuation date was elected.

See Appendix Afar answers to this exercise.

$5,000 - 25,000 - 20,000

$10,000 - 25,000 -15,000

RI-54 1©2010 D~Vrv/Becker Educational D~v~lopm~nt Corp_ All rights reserved.


a. Year 2010 General Rule

For the year 2010, absent Congressional action that was not in place at the timeof this publication, the estate tax (discussed In lecture R4) has been repealed asthe exemption/credit become unlimited. Thus, inherited property resulting from adeath in the year 2010 will have a basis equal to the lesser of the adjusted basisof the property in the hands of the decedent on the date of death or the fairmarket value of the property on the date of death.

b. Year 2010 Gain Exclusion

Executors are allowed to Increase the basis of estate property by up to $1.3million (in effect, exempting $1.3 million of gains on subsequent sale of theproperty) and $3 million to a surviving spouse.

PASS KEY

REALIZED", BUT NOT RECOGNIZED, GAINS DR LOSSES

Money Received (boot)

AMOUNT REALIZEDC.O.D. (boot)

< ADJUSTED BASIS OF ASSET SOLD >

GAIN

OR

LOSS

FMV Propertyless: Selling Expenses

Homeowners Exclusion

Involuntary Conversion

Divorce Property Settlement

Exchange of Like Kind {Bllsirless)

Installment Sale

Treasury Capital & Stock

Wash Sale losses

Related Party losses

And

Personal losses

* All realized gains and losses are recognized (Le., reported on the tax return) unless "HIDE IT" or "WRaP" applies.

"2010 DeVryjBecker Educational Development Corp. All fights reserved Rl-55

Amount Realized

Loss

Gain


Regulation 1

C.

•Becker Professional Education I CPA Exam Review

Gains (excluded or deferred)

A gain is not taxed if the taxpayer can "HIDE IT" all. Gain to the extent of boot (the part thetaxpayer did not "HIDE IT") is taxable:

• Cash - Kept and not reinvested

• C.O.D. - Excess debt assumed by buyer

There is a special group of transactions on which any realizedgain is excluded or not currently recognized. These specialstatutory provisions are based on the idea that the taxpayer'sinvestment has not substantially changed and, therefore, recognition of the gain or loss onthe transaction should be deferred. This is done through the device of substituting thetaxpayer's basis in the property given up for the basis of the property acquired.

I HIDE IT I 2.

IHIDE IT I1.'1.- .- -

•••••••. ,."

Rl-56

1. Homeowner's Exclusion

The sale of the taxpayer's personal (primary or principal) residence is subject to anexclusion from gross income for gain:

a. $500,000 is available to married coupies filing a joint return and certain survivingspouses.

b. $250,000 is available for single, married filing separately, and head of household.

c. To qualify for the full exclusion (up to the applicable dollar limit):

(1) Taxpayer must have owned and used (subject to item (2), beiow) theproperty as a principal residence for two years or more during the five-yearperiod ending on the date of the sale or exchange a taxpayer. For salesbeginning in 2009, any period of time after January 1, 2009, for which thehome is not a principal residence is considered "nonqualified use," and aportion of the gain wili be taxable.

(2) Either spouse for a joint return must meet the ownership requirement, butboth spouses must meet the use requirement with respect to the property.

d. Taxpayers may be eligible for a partial (on a prorated basis) exclusion if the saieis due to a change in place of employment, health, or unforeseen circumstances,and the exclusion has been claimed within the previous two years or thetaxpayer fails to meet the ownership and use requirements.

e. There is no age requirement to receive the exclusion.

f. No rollover to another house is required.

g. The exclusion is renewable. A taxpayer may use the homeowner exclusion asoften as available over his or her iifetime provided he or she meets the otherrequirements, but the exclusion may not be used more than once every two (2)years.

Involuntary Conversions

Nonrecognition treatment is given to gains realized on involuntary conversions ofproperty (e.g., destruction, theft, condemnation) on the rationale that the taxpayer'sreinvestment of the involuntarily received proceeds restores him to the position he heldprior to the conversion. To tax him under such circumstances would produce unduehardship. If the taxpayer does not reinvest all the proceeds, his gain on the transactionwill be recognized to the extent of the unreinvested amount.

©2010 DeVry/Becker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA Exam Revi['w Regulation 1

a. No Gain Recognized

When no gain is recognized because of the direct conversion of the property intoother similar property, the basis of the new asset is the same as the basis of theold asset (increased by any additional amounts invested).

b. Personal Property (two years from year-end)

The reinvestment must occur within two years after the close of the taxable yearin which any part of the gain was realized and be in property "simiiar or related inservice or use" (Le., the replacement property must serve the same function inthe taxpayer's business as did the old property which is a narrower standard thanthe "like-kind" test). For principal residences destroyed in a federally declareddisaster area, the replacement period is four years instead of two years.

c. Business Property (three years from year-end)

The reinvestment must occur within three years after the close of the taxableyear in which any part of the gain was realized and be in property "similar orreiated in service or use" (Le., the replacement property must serve the samefunction in the taxpayer's business as did the old property, which is a narrowerstandard than the "like-kind" test).

The basis of property acquired as a result of an involuntary conversion will be thecost of such property decreased by the amount of any gain not recognized uponsuch conversion.

EXAMPLE

Land owned by Mcintyre had an adjusted basis of $30,000. It was condemned by the state andMcintyre received similar property from the state to replace his condemned land. The basis ofhis new land is $30,000.

d. Gain Recognized (boot)

When gain is recognized because the amount received exceeds the cost ofreplacement, the basis of the replacement property is its cost less the gain notrecognized.

EXAMPLE

Crudd owned a building with an adjusted basis of $400,000. The state condemned it andawarded him $450,000. Crudd bought a new building for $440,000. While he realized $50,000,only $10,000 is recognized as follows:

Amount realized

Adjusted basis

Realized gain

Recognized gain ($450,000 - $440,000)

Gain not recognized

Cost of new building

Less: Gain not recognized

Basis of new building

$450,000(400,000)

50,000(10,000)

$ 40000

$440,000(40,000)

$400000

When the gain exceeds $100,000, property acquired from related parties andcertain close relatives don't quaiify as replacement property.

© 2010 DeVrv/Becker €ducational Development Corp. Ail rights reserved. Rl-57

Regulation 1

e.


Loss Recognized

Involuntary conversion rules apply to gains only. Losses would be recognized.When the loss is recognized, the basis of the new property is its replacementcost.

EXAMPLE

Rigoli had a factory with a cost basis of $340,000 that was destroyed by a fire. His insurancecompany paid him $330,000. Rigoli used the money to buy a new plant for $500,000. The$10,000 loss is recognized, and the basis of his new factory is $500,000.

IHIDE IT I 3.

IHIDE IT I 4.

•

Divorced Property Settlement

When a divorce settlement provides for a lump-sum payment or property settlement, itis a non-taxable event. The basis of the property to the recipient spouse will be thecarryover basis,

Exchange of Like-Kind Business/Investment Assets (tangible)

Nonrecognition treatment is accorded to a "like-kind" exchange of property used in thetrade or business or held for investment (except inventory, stock, securities, partnershipinterests, and real property in different countries). "Like-kind" means the same type ofinvestment, (e.g., realty for realty or personalty for personalty).

a. Gain When Boot Received

If property other than property qualifying for such an exchange is received (e,g"cash known as "boot"), the transaction, while not qualified for completenonrecognition, produces recognized gain. The recognized gain is the lower ofthe realized gain or the boot.

EXAMPLE

Taxpayer owns investment realty worth $40,000 and having an adjusted basis of $25,000. Iftaxpayer exchanges this property for other realty worth $35,000 and $5,000 in cash, thetaxpayer's gain of $15,000 ($40,000 proceeds minus $25,000 basis) will be recognized only tothe extent of the $5,000 cash received.

b. Basis Rules

While the basis of the property received in the exchange is ordinarily the same asthe basis of the property given up, this basis is decreased by any money (orother boot) received and increased by any gain (boot) recognized.

EXAMPLE

In the prior example, taxpayer's basis would be decreased in the amount of the $5,000 cashreceived and increased by the amount of gain recognized ($5,000). Therefore, the taxpayer'sbasis in the acquired realty will remain $25,000 and, upon a later sale for $35,000, theremaining $10,000 of gain will be recognized.

Carryover basis - Cash (boot) received + Gain recognized New basis

$25,000 $5,000 + $5,000 $25,000

Rl-58 © 2010 DeVry/Becker Educatjon~1 Development Corp. All rights reserved.


AN CIII A R Y MAT E RI A l (for Independent Review)

Regulation 1

olIKE·KIND EXCHANGE EXPANDED EXAMPLE #1: REALIZED GAIN/NO BOOT

A taxpayer trades in an automobile used solely for business purposes for another automobile to be used in his business. His

automobile originally cost $35,000 and is currently worth $20,000. Assume that the automobile that the taxpayer wants in

exchange is worth $20,000 and that the taxpayer has taken $18,000 of depreciation on his old automobile.

1. What is the Gain or loss Realized by the Taxpayer on the Exchange?

Gain/Loss Realized = Amount Realized - Adjusted Basis of Property Given Up

= $20,000 FMV of new auto - ($35,000 cost - $18,000 A/D)

= $3,000 Gain

• Adjusted Basis = Original Cost - Depreciation

• Amount Realized = FMV of New Property Rec'd + FMV of Boot Rec'd - FMV of Boot Paid

2. What is the Gain or Loss Recognized by the Taxpayer on the Exchange?

Gain/Loss Recognized = lesser of Realized Gain or Boot Rec'd (Realized Loss Never Recognized)

= $0 [lesser of gain realized of $3,000 or boot received of $0]

• Boot Received = Cash Rec'd + FMV of Non-Like Kind Property Rec'd + Net Relief from Liability

• Boot Paid = Cash Paid + FMV of Non-Like Kind Property Paid + Net Liability Assumed

3. What is the Taxpayer's Basis in the New Property Received?

Basis of New Property = Adjusted Basis of Property Given Up + Gain Recognized + Boot Paid - Boot Rec'd

= $17,000 + $0

= $17,000 Basis

LIKE-KIND EXCHANGE EXPANDED EXAMPLE #2: REALIZED GAIN/BOOT PAID

A taxpayer trades in an old automobile used solely for business for another automobile to be used for business. The

automobile origina lly cost $35,000 and is currently worth $20,000. Assume that the automobile that the taxpayer wants in

exchange is worth $20,000, and that the taxpayer has taken $12,000 of depreciation on his old auto:

1. Gain/Loss Realized

Gain/Loss Realized = Amount Realized (FMV of Auto Rec'dj - Adjusted Basis of Auto Given Up

= $20,000 FMV of new auto - ($35,000 cost - $12,000 depreciation)

= $20,000 FMV of new auto - $23,000 adjusted basis of old auto

= ($3000) Loss

2. Gain/Loss Recognized

Gain/Loss Recognized = $0 [realized loss is never recognized in like·kind exchange]

3. Basis of New Property

Basis of New Property = Adjusted Basis of Property Given Up + Gain Recognized

= $23,000 + 0

= $23,000 Basis

© 2010 DeVry!Becker Educational Development Corp. All rights reserved. Rl-59


LIKE-KIND EXCHANGE EXPANDED EXAMPLE #3: REALIZED GAIN/BOOT RECEIVED>GAIN REALIZED


automobile originally cost $35,000 and the taxpayer has taken $18,000 in depreciation. The old automobile is currently

worth $20,000, Assume that the new automobile the taxpayer wants in exchange is only worth $16,500, so the other party

agrees to give the taxpayer a trailer worth $3,500 in addition to the new auto:

1. Gain/loss Realized

Gain/Loss Realized = Amount Realized - Adjusted Basis of Auto Given Up

= $20,000 am!. realized ($16,500 FMV new auto + $3,500 FMV trailer boot reed.)

- $17,000 adjusted basis old auto ($35,000 cost - $18,000 depr.)

= $3,000 Gain

2. Gain/loss Recognized

Gain/Loss Recognized = $3,000 (lesser of Realized Gain of $3,000 or Boot Received of $3,500)


Basis of New Property = Adjusted Basis of Property Given Up + Gain Recognized + Boot Pd. - Boot Reed,

= $17,000 + $3,000 + $0 - $3,500

= $16,500 Basis

LIKE-KIND EXCHANGE EXPANDED EXAMPLE #4: REALIZED GAIN/BOOT RECEIVED<GAIN REALIZED


automobile originally cost $35,000 and the taxpayer has taken $18,000 in depreciation. The old automobile is currently

worth $20,000. Assume that the new automobile the taxpayer wants in exchange is only worth $17,500, so the other party

agrees to give the taxpayer $2,500 in cash in addition to the new auto:

1. Gain/loss Realized

Gain/Loss Realized = Amount Realized - Adjusted Basis of Auto Given Up

= $20,000 Am!. Realized ($17,500 FMVof new auto + $2,500 cash boot reed.)

- $17,000 adjusted basis of old auto ($35,000 cost - $18,000 depr.)

= $3,000 Gain

2. Gain/loss Recognized

Gain/Loss Recognized = $2,500 (lesser of Realized Gain of $3,000 or Boot Received of $2,500)


Basis of New Property = Adjusted Basis of Property Given Up + Gain Recognized + Boot Pd. - Boot Reed,

= $17,000 + $2,500 + $0 - $2,500

= $17,000 Basis

o END OF ANCillARY MATERIAL

Rl-60 {)2010 DeVry/Becker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA EX;Jm Review----

Regulation 1

Fo,m8824Department of the TreasuryInternal Revenue serviceName(s) shown on tax return

Like-Kind Exchanges(and section 1043 confllct-of-Interest sales)

... Attach to your tax return.

OMS No. 1545-1190

AttachmentS uence No. 109

Identifying number

Information on the Like-Kind Exchange

Note: ff the property described on line 1 or line 2 is real or personal property located outside the United States, indicate the country.

Description of Iike·kind property given up:

2 Description of like-kind property received:

3 Date like-kind property given up was originally acquired (month, day, year) 1-'3__l-'r,_/~__"\__!__!/__'__' __' __' __/V__,_,__/ __v_v__, _

4 Date you actually transferred your property to other party (month, day, year) 1-'4'-l-'i_V_1I_V_'I,_/I_l_'_J_/\_'_'_i_\_n_(_

5 Date like-kind property you received was identified by written notice to another party (month,day, year). See instructions for 45-day written identification requirement . 1-'5,-1-""_'_!\_/_>-'-'-'->_/'-(-'-(-'/_'-'-

6 Date you actually received the like-kind property from other party (month, day, year). See instructions '--'6__L-' ~ I__, __! __'l_'_'__)__/ __V_"__' __v_'__/_

7 Was the exchange of the property given up or received made with a related party, either directly or indirectly(such as throu han intermedia ? See instructions. If "Ves," com lete Part II. If "No," 0 to Part III DYes D No

Related Party Exchange InformationName of relate<! party Relationship to you Relate<! party's identifying numbel'

Address (no., street, and apt., room, or suite no., city Of town, state, and ZIP code}

9 During this tax year (and before the date that is 2 years after the last transfer of property that was part ofthe exchange), did the related party sell or dispose of any part of the like-kind property received from you(or an intermediary) in the exchange or transfer property into the exchange, directly or indirectly (such asthrough an intermediary), that became your replacement property? . . Dyes D No

10 During this tax year (and before the date that is 2 years after the last transfer of property that was part ofthe exchange), did you sell or dispose of any part of the like-kind property you received? . DYes D No

If both lines 9 and 10 are "No" and this is the year of the exchange, go to Part JIJ. If both lines 9 and 10 are "No" and this is notthe year of the exchange, stop here. If either line 9 or fine 10 is "Yes," compfete Part IfI and report on this year's tax return thedeferred gain or (loss) from line 24 unless one of the exceptions on line 11 applies.

11 If one of the exceptions below applies to the disposition, check the applicable box:

a D The disposition was after the death of either of the related parties.

b D The disposition was an involuntary conversion, and the threat of conversion occurred after the exchange.

c D You can establish to the satisfaction of the IRS that neither the exchange nor the disposition had tax avoidance as one ofits principal purposes. If this box is checked, attach an explanation (see instructions).

For Paperwork Reduction Act Notice, see page 4 of the instructions.

~ 2010 DeVry/Becker Educational Development Corp. All righls reserved.

Cat. No. 12311A Fonn 8824 (2009)

Rl-61

Regulation 1-~_._._---- ------. __ ._.

Becker Professional Education I CPA Fxam Review

Form 8824 {2009) Page 2Name{s) shown on tax retum. Do not enter name and social security number if shown on other side. Your social security number

Realized Gain or Loss, Reco nized Gain, and Basis of Like-Kind Pro e ReceivedCaution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not Iike~kind) properly,see Reporting of multi-asset exchanges in the instructions,Note: Comptete lines 12 through 14 only if you gave up property that was not like-kind. Otherwise, go to line 15.

12 Fair market value (FMV) of other property given up I 12 I I13 Adjusted basis of other property given up I 13 I I14 Gain or (loss) recognized on other property given up. Subtract line 13 from line 12. Report the

gain or (loss) in the same manner as if the exchange had been a sale 14Caution: If the property given up was used previously or partly as a home, see Property used ashome in the instructions.

15 Cash received, FMV of other property received, plus net liabilities assumed by other party,reduced (but not below zero) by any exchange expenses you incurred (see instructions) 15

16 FMV of like-kind property you received 1617 Add lines 15 and 16 1718 Adjusted basis of like-kind property you gave up, net amounts paid to other party, plus any

exchange expenses not used on line 15 (see instructions) , 1819 Realized gain or (loss). Subtract line 18 from line 17 1920 Enter the smaller of line 15 or line 19, but not less than zero 2021 Ordinary income under recapture rules, Enter here and on Form 4797, line 16 (see instructions) 2122 Subtract line 21 from line 20. If zero or less, enter -0-. If more than zero, enter here and on

Schedule D or Form 4797, unless the installment method applies (see instructions) 2223 Recognized gain. Add lines 21 and 22 . 2324 Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions 2425 Basis of like-kind property received. Subtract line 15 from the sum of lines 18 and 23 25. Deferral of Gain From Section 1043 Conflict-of-Interest Sales

Note: ThiS part IS to be used only by officers or employees of the executive branch of the Federal Government orJudiCIalofficers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described insection 1043) for reporting nonrecognition of gain under section 1043 on the sale ofproperly to comply with the conflict-ofinterest requirements. This part can be used only if the cost of the replacement property is more than the basis of the divestedproperty.

26

27

Enter the number from the upper right corner of your certificate of divestiture. (Do not attach acopy of your certificate. Keep the certificate with your records.) ....Description of divested property" _

28 Description of replacement property .... _

29 Date divested property was sold (month. day, year) 29

30 Sales price of divested property (see instructions) 30

31 Basis of divested property 31

32 Realized gain. Subtract line 31 from line 30 . ....

I

3233 Cost of replacement property purchased within 60 days after date I' 'I

cl~le . . .. . .. ~

34 Subtract line 33 from line 30. If zero or less, enter -0- 34

35 Ordinary income under recapture rules. Enter here and on Form 4797, line 10 (see instructions) 3536 Subtract line 35 from line 34. If zero or less, enter -0-. If more than zero, enter here and on

Schedule D or Form 4797 (see instructions) 36

37 Deferred gain. Subtract the sum of lines 35 and 36 from line 32 37

38 Basis of replacement property. Subtract line 37 from line 33 38Form 8824 (2009)

Rl-62 © 2010 DeVry/Becker Educational Development (orp. All rights reserved

c:Bc:ec"kc:er"P-cr"ofc:es:.:s:.:i0-c"",Ic:Ec:du"c:::'t"io"":cI"C"P"A,,'"X'-C"-C'-CRe"v"ie-Cw "Regulation 1

I-IThe installment method is the tax method of reporting gains (not losses)for sales made by a "nonmerchant" in personal property and "nondealer" in real estate.This installment sale method is not available for sales of stocks or securities traded onan established market. (Immediate recognition can be elected.)

Installment Sale5.IHIDE IT I

a. Recognize When Cash is Received

Under the installment method, revenue is reported over the period in which thecash payments are received. This method does not alter the type of gain to bereported (capital gain, ordinary income). Taxable income is calculated bymultiplying the annual cash collections by the gross profit percentage.

b. Reportable Installment Sale Gainllncome

(1) Gross Profit = Sale - Cost of Goods Sold

(2) Gross Profit Percentage =Gross Profit/Sales Price

(3) Earned Revenue (Taxable Income) = Cash Collections x Gross ProfitPercentage

EXAMPLE

INSTALLMENT SALES REPORTING

Assume that a taxpayer had $400,000 in installment sales in Year 1 and a December31, Year 1, balance in installment accounts receivable of $150,000. If the taxpayerhad $300,000 as its cost of goods sold, he would calculate realized profit in Year 1 as

follows:

STEP 1: GROSS PROFIT Year 1

Sale on installment

Cost of goods sold

Total gross profit

$ 400,000

1300.000)

$ IOO 000

STEP 2: GROSS PROFIT PERCENTAGE

Gross profitSale on installment

$100,000

400,000

STEP 3: EARNED GROSS PROFIT

Sale on installment

Ending installment accounts receivable

Collections

Gross profit percentage

Gross profit earned

$ 400,000

1150,000)

$ 250,000

25%

5 62500

c. Miscellaneous

(1) All depreciation recaptured shall be reported in income in the year of sale.

(2) Net proceeds from loans which are secured by the installment obligationshall be reported as amounts received/collected.

d. Gross Profit Percentage

Compute the gross profit percentage from the original sale and apply that grossprofit percentage to cash received in the year to record realized profit for theyear.

i;l2010 DeVry/Becker Educational Development Corp. All rights reserved. Rl-63


Fo~6252Department of the TreasuryInternal Revenue Service

Installment Sale Income... Attach to your tax return.

... Use a separate form for each sale or other disposition ofproperty on the installment method.

OMS No. 1545-0228

;?2@09AltachmentSequence No. 79

Name(s) shown on return Identifying number

Oy ON

D YesD No

certain debts you must treat as a payment on Installment obligations

1 Description of property ~ ~~~ ~~~~~~ ~ ~ ~ ~ ~~~ ~ ~ ~ ~ ~ ~ ~ ~~ ~~~ ~~~ ~~~~"" ~ ~~ ~~ ~ ~~ ~ ~~ ~~ ~ ~~ ~~ ~ ~~ ~~~~~~~ ~ ~~ ~~ ~ ~~ ~ ~ ~ ~~ ~~ ~~~ ~2a Date acquired (mm/ddlyyyy).... b Date sold (mm/ddlyyyy) ....3 Was the property sold to a related party (see instructions) after May 14, 1980? If "No," skip line 4. .4 Was the property you sold to a related party a marketable security? If "Yes," complete Part III. If "No,"

complete Part III for the year of sale and the 2 years after the year of sale es 0

IJmiII Gross Profit and Contract Price. Complete this part for the year of sale only.

5 selling price including mortgages and other debts. Do not include interest whether stated or unstated 56 Mortgages, debts, and other liabilities the buyer assumed or took the

property subject to (see instructions) . 67 Subtract line 6 from line 5. 78 Cost or other basis of property sold 89 Depreciation allowed or allowable . 9

10 Adjusted basis. Subtract line 9 from line 8 1011 Commissions and other expenses of sale 1112 Income recapture from Form 4797, Part III (see instructions) 1213 Add lines 10, 11,and12 . 1314 Subtract line 13 from line 5. If zero or less, do not complete the rest of this fonn (see instructions) 1415 If the property described on line 1 above was your main home, enter the amount of your excluded

gain (see instructions). Otherwise, enter -0- . 1516 Gross profit. Subtract line 15 from line 14 1617 Subtract line 13 from line 6. If zero or less, enter -0- . 1718 Contract orice. Add line 7 and line 17 18. Insta."ment Sale Income. Complete this part ~or the year of ~al~ and any year you receive a payment or have

19 Gross profit percentage (expressed as a decimal amount). Divide line 16 by line 18. For years afterthe year of sale, see instructions 19

20 If this is the year of sale, enter the amount from line 17. Otherwise, enter -0- . 2021 Payments received during year (see instructions). Do not include interest, whether stated or unstated 2122 Add lines 20 and 2f . . . . . . . . . . . . . . . . .1..1

1

2223 Payments received in prior years (see instructions). Do not include

interest, whether stated or unstated . . . . . . . . . .. 23

24 Installment sale income. Multiply line 22 by line 19. 2425 Enter the part of line 24 that is ordinary income under the recapture rules (see instructions) . 2526 Subtract line 25 from line 24. Enter here and on Schedule 0 or Form 4797 {see instruction~l. 26. Related Party Installment Sale Income. Do not complete jf you received the final payment this tax year.

27 Name, address, and taxpayer Identlfymg number of related party

28 Did the-;eiated-partY';e~eii"c;~'di~p;~e-"C;i-the-p-;~p~rty'(';~e~;~d-d-i~POSitio~~;)-d~-;i~g-1hi~-t~ ye~;?--.-------------_·-----EfY~~--D·N~--

29 If the answer to question 28 is "Yes," complete lines 30 through 37 below unless one of the following conditions is met Check the box that applies.a D The second disposition was more than 2 years after the first disposition (other than dispositions of

marketable securities). If this box is checked. enter the date of disposition (mm/dd{yyyy) ....

b D The first disposition was a sale or exchange of stock to the issuing corporation.c D The second disposit"lon was an involuntary convers'lon and the threat of conversIon occurred after the first disposition.d D The second disposition occurred after the death of the original seller or buyer.eDit can be established to the satisfaction of the Internal Revenue Service that tax avoidance was not a principal purpose for

either of the dispositions. If this box is checked, attach an explanation (see instructions).

30 Selling price of property sold by related party (see instructions) 3031 Enter contract price from line 18 for year of first sale. 3132 Enter the smaller of line 30 or line 31 . 3233 Total payments received by the end of your 2009 tax year (see instructions) 3334 Subtract line 33 from tine 32. If zero or less, enter -0- 3435 Multiply line 34 by the gross profit percentage on line 19 for year of first safe. 3536 Enter the part of line 35 that is ordinary income under the recapture rules (see instructions) . 3637 Subtract line 36 from line 35. Enter here and on Schedule 0 or Form 4797 (see instruction~). 37

For Paperwork Reduction Act Notice, see page 4. Cal. No. 13601R Form 6252 (2009)

Rl-64 © 2010 DeVry/Becker Educ~tion~1 Development Corp. All right~ ....'erved.


Gain

Loss

Amount Realized


Treasury and Capital Stock Transactions (by corporation)

The following corporate transactions are exempt from gain (and any losses aredisallowed-essentially corporations are precluded fromtax benefits or income taxes resulting from dealing in theirown stock):

a. Sales of stock by corporation

b. Repurchase of stock by corporation

6.IHIDE IT I

c. Reissue of stock

II

D. Losses (nondeductible)

"WRaP" up these losses because they are nondeductible.

1. Wash Sale Loss

A wash sale exists when a security (stock or bond) is sold for a loss and isrepurchased within 30 days before or after the sale date.

a. Disallowed Loss

The loss on the wash sale is disallowed for tax purposes.

b. Basis of Repurchased Security

The basis of the repurchased security is equal to the purchase price of the newsecurity plus the disallowed loss on the wash sale (or, alternatively, the basis ofthe old security, less the proceeds from the sale, plus the purchase price of thenew security).

c. Date of Acquisition

The date of acqUisition of the repurchased security is the date of acquisition ofthe original security.

d. Gain

If a security is sold resulting in a gain and it is repurchased within 30 days, thetaxpayer cannot use "substituted basis." Instead, he must pay capital gains taxand use the new purchase price as the basis.

EXAMPLE

Item

Bob DeFilippis entered into the following transactions in April 2009.

Date af Date ofPurchase Cost Sale

SellingPrice

IndicatedLoss

(A) 100 shares of IBM(B) 100 shares of IBM

09/08/82 $22,000 04/20/0904/25/09 21,500

$21,000 ($1,000)

Although there appears to be a loss of $1,000 on the sale of the shares purchased 9/8/82, theloss will be disallowed because the same stock (IBM) was purchased within 30 days ofthe sale.The basis of the stock in the second purchase is now $22,500, as the indicated loss is added to

the basis.

PASS KEY

The CPA Examination has often tested the wash sale rules by haVing the taxpayer purchase

shares of the same stock 30 days before the sale of the stock that resulted in a loss. This is still ~a wash sale, and the loss is disallowed. For example, on 1/4/X8 you buy one share for $100.On 3/5/X9 you buy another share for $40. Then, on 3/15/X9, the first share is sold for $41.While you have "realized" a $59 loss, it will not be recognized due to the wash sale rules.

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Regulation 1

I WRAP I 2.


Related Party Transactions

•••••

...

a. Definition

Sales between related parties are not considered "arms-length," and the lossrecognition rules are different. Related parties are:

(1) Brothers and sisters

(2) Husband and wife

(3) Lineal descendants (father, son, grandfather)

(4) Entities that are more than 50% owned by individuals, corporations, trustsand/or partnerships

Note: In-laws are not related parties.

b. Capital Gains

(1) General Rule

Capital gains taxes are imposed on all sales of nondepreciable property(e.g., land) between all related parties except:

(2) Exception

Sales between the following related parties do not receive capital gaintreatment:

(a) Husband and wife (where basis is merely transferred), and

(b) An individual and a 50% + controlled corporation or partnership(where the gain is taxed as ordinary income).

c. Capital Losses

Losses are disallowed on (most) related party sales transactions, even if theywere made at an "arms-length" FMV price.

d. Basis Rules

The basis (and related gain or loss) of the (second) buying relative depends onwhether the second relative's resale price is higher, lower, or between the firstrelative's basis and the lower selling price to the second relative.

e. Gain Rules

Gain is recognized only to the extent the future sale price exceeds the previousrelative's cost basis.

EXAMPLE

Ned bought stock for $20,000 that he sold to his brother Ray for $16,000. The $4,000 loss isdisallowed. Ray then sells the stock to Bobby, a n unrelated party, for $21,000. Ray'srecognized gain from the sale is $1,000, calculated as follows:

Rl-66

Ray's selling price

less: Ray's cost

Disallowed loss

Ray's basis

Ray's gain

16,000

4,000

$21,000

© 2010 DeVry/Becker Educational Development Corp_ All rjght~ (e~erved.

Becker Professional Education I CPA Exam Review Regulation 1---- ~-----~-~---~~---

(1) Loss Rules

Loss is recognized oniy to the extent that the future sale price is lower thanthe acquiring relative's purchase price (FMV).

(2) No Gain or Loss Rules

No gain or loss is recognized when the future sale price is between the tworelated parties' purchase prices.

f. Holding Period

The holding period starts with the new owner's period of ownership.

PASS KEY

No gain or loss

------7 Use "Purchase Price" to determine loss,'----...... Sell lower

The purchasing relative's basis rules are the same as the gift tax rules:

• Sell higher ------7 Use "Relative's Basis" to determine gain,

IR"'"'''' B,,', 11---------,- -". Sell between ------7

3. Personal Loss

No deduction is allowed for the loss on a non-business disposal or loss. An itemizeddeduction may be available in the category of casualty and theft.

Tax rate - 15% is the maximum, use 0% if taxpayer is in the 10% or 15%income tax bracket.

E. Individual Capital Gain and Loss Rules

1. Net Capital Gains Rules

a. Long-term

(1) Holding period - More than one year.

(2)

II··,...Note: The above rules are in effect for years through 2010. For years 2011 and forward,

the current tax law enacted under the Jobs and Growth Reconciliation Act of 2003 is set

to expire (unless legislation is approved that extends or amends it), As of the date of

this publication, for tax years 2011 and forward:

• The maximum long-term capital gains rate that will be in effect is 20% (not 15%).

• The long-term capital gains tax rate for taxpayers in the 15% or 10% brackets will be

10%, not 0%.

• There will be a special "five-year" gain rule in effect-for property held more than

five years, the maximum capital gains rates will be 18% (instead of 20%) and 8%

(instead of 10%).

b. Short-term

(1) Holding period - One year or less.

(2) Tax rate - Treated as ordinary income.

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1 12.

~


c. Unrecaptured Section 1250 Gain (25% rate group)

Any unrecaptured section 1250 gain from depreciation that is not treated asordinary income is taxed at 25% for taxpayers not in the 10% or 15% income taxbracket (see detailed discussion of Section 1250 gains in the R-2 lecture).

d. Collectibles and Small Business Stock (28% rate group)

Long-term gains on collectibles, antiques, and small company (Section 1202)stock are taxed at 28% (for taxpayers not in the 10%, 15% or 25% income taxbrackets).

Net Capital Loss Deduction and Loss Carryover Rules

a. $3,000 Maximum Deduction

Individual taxpayers realizing a net long- or short-term capital loss may onlyrecognize (dedUct) a maximum of $3,000 of the amount realized from other typesof gross income (ordinary income, passive income, or portfolio income). Ajointreturn of husband and wife is treated as one person. If the husband and wife fileseparately, the loss deduction is limited to half ($1 ,500).

b. Limitation

Capital losses are also limited to taxable income before personal exemptions.

c. Excess Net Capital Loss

Carry forward an unlimited time until exhausted. It maintains its character aslong-term or short-term in future years.

d. A Personal (Non-Business) Bad Debt

A personal (non-business) bad debt loss is treated as a short-term capital loss inyear debt becomes totally worthless.

e. Worthless Stock and Securities

The cost (or other basis) of worthless stock or securities is treated as a capitalloss, as if they were sold on the last day of the taxable year in which theybecame totally worthless.

3. Netting Procedures

Specific netting procedures for capital gains and losses are outlined in the InternalRevenue Code. Essentially, gains and losses are netted within each tax rate group(e.g., the 15% rate group), creating net short-term and long-term gains or losses byrate group. Resulting short-term and long-term losses are then offset against shortterm and long-term gains (respectively) beginning with the highest tax rate group andcontinuing to the lower rates.

a. Short-term Capital Gains and Losses

(1) Ifthere are any short-term capital losses (this includes any short-termcapital loss carryovers), they are first offset against any short-term gainsthat would be taxable at the ordinary income rates.

(2) Any remaining short-term capital loss is used to offset any long-termcapital gains from the 28% rate group (e.g., collectibles).

Rl-68 © 2010 DeVry/Becker Educational Development Corp. All rights reserved.

Becker Professional Education J CPA Exam Review Regulation 1---

(3) Any remaining short-term capital loss is then used to offset any long-termgains from the 25% group (e.g., un-recaptured Section 1250 gains).

(4) Any remaining short-term capital loss is used to offset any long-termcapital gains applicable at the lower (e.g., 15%) tax rate.

b. Long-term Capital Gains and Losses

(1) If there are any long-term capital losses (this includes any long-term capitalloss carryovers) from the 28% rate group, they are first offset against anynet gains from the 25% rate group and then against net gains from the15% rate group.

(2) If there are any long-term capital losses (this includes any long-term capitalloss carryovers) from the 15% rate group, they are offset first against anynet gains from the 28% rate group and then against net gains from the25% rate group.

F. Corporation Capital Gain and Loss Rules (applies to C corporations only)

1. Net Capital Gains (tong-term and short-term)

Net capital gains (net of short-term and long-term capital gains and losses) of acorporation are added to ordinary income and taxed at the regular tax rate.

a. Corporations do not get the benefit of lower capital gains rates.

b. Section 1231 gains are entitled to capital gain treatment. (Section 1231 assetsare capital assets used in the business and are covered in a later lecture.)

2. Net Capital Losses (tong-term and short-term)

Corporations may not deduct any capital loss from ordinary income.

a. Net capital losses are carried back three years and forward five years as a shortterm capital loss.

b. Net capital losses are deducted from capital or Section 1231 gains. (Section1231 gains are treated as "capital" assets used in the business while Section1231 losses are treated as ordinary losses.)

PASS KEY

EXCESS

• Operating losses:

• Individual Capital Losses:

• Corporate Capital Losses:

Offset Income

Yes

$3,000

No

Carryback

2 years*

No

3 years

Cartyforward

20 years

Forever

5 years

*Taxpayer can elect to forego the carryback.

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Regulation 1

Rl-70

NOTES


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Regulation 1Becker Professional Education I CPA EXilni Review._-------------------"=='--

TASK-BASED SIMULATIONS

TASK-BASED SIMULATION SAMPLE 1: Form 1040

Form 1040 IAuthoritative Literature I Help I

Trevor and Jordan Riley were married during the current year (Year 2). During the year, their daughter Sydney was

born. Jordan had previously been married and has sole custody of her daughter Kristi Turner, age 12. Prior to hermarriage to Trevor, Jordan received $5,000 in alimony and $12,600 in child support. Trevor's mother, Linda, who

was fully supported by Trevor during the year, lived in a retirement community for the entire year. The Rileys wish tominimize their tax liability.

Following is additional information pertaining to the Riley family for the current year:

1. The Rileys earned $10,000 in ordinary interest and $8,500 in municipal bond interest.

2. Trevor's wages were $85,000, and Jordan's were $60,000. In addition, Trevor's employer provided group termlife insurance on Trevor's life in excess of $50,000. The value of the excess coverage was $2,000.

3. The RHeys received a $2,000 security deposit on the rental property they actively manage. They are required toreturn the amount to the tenant. In addition, the Rileys received $20,000 in gross receipts from the rentalproperty. The expenses for the residential rental property were:

Bank mortgage interest

Real estate taxes

Insurance

MACRS depreciation

$12,000

3,600

1,700

4,200

4. In January, as part of a sweepstakes contest, Jordan won a week's stay valued at $3,000 at a luxurious hotel inHawaii. Trevor and Jordan spent their honeymoon at that hotel.

5. The Rileys had no capital loss carryovers from prior years. During the year, the Rileys had the following stocktransactions:

Buster Co.

Copper Inc.

Date Acquired

2/1IYear 1

2/18IYear 2

Date Sold

3/17IYear 2

4/1IYear 2

Sales Price

$15,000

8,000

Cost Basis

$35,000

4,000

6. Jordan received an acre of land as an inter-vivos gift from her grandmother. At the time of the gift, the land hada fair market value of $50,000. The grandmother's basis was $60,000.

(continued)

© 2010 DeVry/Bec~er Education.1 Development COlp. All rights reserved. Rl-71

Regulation 1

(continued)


Based on the data provided, enter the appropriate values in the shaded fields of the Form 1040 below.

U040 Depao1meol ol t~ TreaslllY--!t'ternal ReYeNe SeIVtoe [email protected]. Individual Income Tax Return (99) IRS Use 0nIy-00 001 "",ile or.lepIe In lhis.paGe.

Label Fortheyear Jan. 1-oec. 31. 2009. or olher tax year begimiog .2009. ning .20 , OMB No. 1545-0074

L yOU( first name and initial lart~ Yow social security JUnber

IS« A ! ,iinstnJctions • , ,

on page 14.) E If aJoInt return SPOUM'S first name and Initial l.utM~ ! 8poIne's social security numbtf'

Use th& IRSL I I I I i i i

label. H Home addfesf; (number and slreet). It you have a P.O. box, see page 14.

IApI. no. i You must enter

Otherwise, E .. your SSN(s) above. .."

:please print

E City. town or poet office, alate, and ZIP code. If you have a foreign addrass, sea page 14. ) Checking a OOK below wllllOlor type............, change your lax or refund.

Election campaign .. Check here if you, Of your spouse ttliling lolntly, want $3 to go to this fund (see page 14) • Ov~ 0_

filing Statu. 1 bJ Single • o Heed of household (with qualifying person). (See page 15.) If the

2 0 Married filing Jointly (even If only one had income) quaJifying per$OI'l is achild bvl: not your dependent. enter this

Check only one 3 o Married filing separately. Enter spouse's SSN above child's namEI hartl.•be,. and full name here.• l5 n OoaJifying wldow(er) with dependent child (see page 16)

Exemptions 68 0 Yoursetf. If someone can claim you as a dependent, do not check box 6a . .} ==::Cebked 0b n............................ . . No. ofchllcllNnc _Is, {21 Depender1t's (31 Dependent's t411 i1qualilj4r1g on 60 Who: 0

(11 Filsl name w,_ sOCial set:urtty number r!lationshlpltl yOll r:~~I~~~1• Ivecl with you• dld not ... wtth

0 you IbI to dl\rorc.w_If more than four 0 l_pege11ll --dependents, see 0 ~~ .. 0page 17 and --check here • D 0 Add numben on Dd Total number of eKemptions claimed

_......Income 7 Wages, salaries, tips, etc. Attach Form(s) W-2 1 7 I

sa Taxable interest. Attach SChedule B if required

• :..; I .

sal Ib Tax-exempt interest. Do not Include on line 8a -Attach Form(s) .. Ordinary dividends. Attach SChedule B if required 1 .. 1

W-2 here. AJso · II ib Qualified dMderKts (see page 22) -attach Fonns · 9bW-2Qand ,. TaKable refunds, credits, or offsets of state and local income taxes (see page 23) ,.l099-R if tax 11 Alimony received 11 Iwas withheld.

" Business Income or (loss). Attach Schedule C or C-EZ ",. capital gain or poss). Attach SChedule 0 If required. If not required, check here • 0 13 IIf you did not 14 Other gains or (losses). Attach Form 4797 . 14get a W-2, lsa iRA distributions. ti:J tj ~T~~~~t'{~~~4) ,51>see page 22.

lsa Pensions aod annuities 188 b Tax:abIe amoLl'rt (see page 25) ,..17 Rental real estate, royalties. partnerships. S corporations. lrusts, etc. Attach Schedule E 17

Enclose. but do ,. Farm Income or (loss). Attach Schedule F . ,.not attach, any ,. Unemployment compensation In excess of $2,400 per recipient (see page 27) . . . ,.payment. Also.please use ... Soc'"'::ecurity bMelits I ... 1 lib ''''''''''' ""0001(... pall" 27) 20bForm 1040-V, ., other income. Ust type and amount (see page 29) I I 21

22 Add the amounts In the far right column for lines 7 through 21. ThIs is your total Income • 22

23 Educator eKpenses (see page 29) 23Adjusted •• certain busness expeoses of reservists, performing artists, iIldGross fee-basis governnent officials. Attach Form 2106 or 2106·EZ ..Income 25 Health savings account deduction. Attach FOml 8889 25.. Moving expenses. Attach Form 3903 ..

27 One-half 01 self-employment tax. Attach Schedule SE 27.. self-employed SEP. SIMPLE. and QUalified plans 2B.. Self-employed health Insumnce deduction (see page 30) ..30 Penalty on earty withdrawal of savings. 30

3'. Alimony paid b Recipient'S SSN ~ i i 31.32 IRA deduction (see page 31) 32

33 Student loan interest deduction (see page 34) 3334 Tuition and fees deduction. Attach Form 8917 34.. Domestic production activities deduction. Attach Form 8903 ..36 Add lines 23 through 31a and 32 through 35 _ .. .. 3637 Subtract line 36 from line 22. This Is vour adlusted cross Income • '"For Disclosure, Privacy Act, end Paperwork Reduction Act Notice, see page 97, Cat. No. 113206 Form 1040 l2OO9)

.,·72 elOlO DeVry/Becker fducational Oevelopment Corp. All rights reserved.


TASK-BASED SIMULATION SAMPLE 2 - Taxability

Regulation 1

•, Taxability IAuthoritative Literature I Help I

For each of the items of income below, identify the taxability by double-clicking on a shaded cell and selecting theappropriate treatment from the list provided.

Income Item Taxability

1. Fair market value of property received as wages

2. Employer provided education reimbursement of $8,000

3. Interest received on state and local government bonds

4. Interest received from the federal government for late payment of tax refund

5. Distribution from a traditional non~deductible Individual Retirement Account (IRA)

6. Property received as a gift

7. $15,000 received as scholarship funds for a qualified degree-seeking student for thefollowing:

$10,000 tuition

$2,000 books

$3,000 room & board

8. Worker's compensation payments for sickness

9. $450,000 of proceeds from the sale of a personal residence by a qualified single individualwhose basis was $150,000

--

Partially taxable

Non-taxable

Fully taxable

~ I Cancel I

{l2010 DeVrylSeder Educational (}evetopment Corp. Ail rights reserved. Rl-73

Regulation 1 Becker Professional Education I CPA EX{lm Review

TASK-BASED SIMULATION SAMPLE 3 - Research Question

Research IAuthoritative literature I Help I

What code section and subsection addresses how a net capital loss in excess of $3,000 is treated in the current year?

Choose a title from the list.

I .:J

I I

Rl-74

,

NmReS'.It

Uniform CPA Examination Authoritative Literature

To access Authoritative Literature:

Click on Table of Conlents folders at left to locate and open appropriatedocuments

OR

Perform a search for a particular topic by entering lext in the text boxabove. Use the buttons to the right and the links above the text box toperform more detailed or advance searches.

© 2010 DeVrvjBecker Educational Development Corp. All rights reserved.

Becker Professional Education I CPA Exam Review------

Regulation 1------"

CLASS QUESTIONS

" " ~ c 0 c0 Z u: « u « eLA-SS QUESTIONS ANSWER WORKSHEET

l.

2. Task-based simulation

3.

4.

5.

6.

7.

8.

9.

10.

ll.

12.

13.

14.

15.

16.

17.

18.

19.

20.

G R A D E

Attempt •. MUltiple-choice Questions Task-based Simulations

1st Questions correct + 19 questions = % Questions correct .:,. 1 question = %

2nd Questions correct -;- 19 questions = % Questions correct -;- 1 question = %

3rd Questions correct + 19 questions - % Questions correct -;- 1 question - %

Final Total questions correct -;- 20 questions = %

()2010 DeWy/Becker Educational Development Corp. All rights reserved.

Regulation 1

Rl-76

NOTES


Cl20l0 DeVIY!Becker Educational Development Corp. All rights re\.elWd.

Becker Professional Education I CPA Exarn Review Regulation 1

1. CPA·01404

Which of the following is (are) among the requirements to enabie a taxpayer to be classified as a"qualifying widow(er)"?

I. A dependent has lived with the taxpayer for six months.II. The taxpayer has maintained the cost of the principal residence for six months.

a. I only.b. II only.c. Both I and II.d. Neither i nor II.

2. T85-00018

Assignment: Complete the "Exemptions" section of the Form 1040; Lines 6 a-d (ignore the requirement toenter social security numbers).

Kyle and Mary are married and live with their two children, Judith and David, and their pet dog, Skipper.Judith is sixteen years old, attends high school, and earned $6,000 from a summer job. David is twentyone years old and is a junior in college (full course load for the whole year). When not In class, he piaysvideo games. Kyle and Mary provide over half the support for their two children.

Kyle and Mary also provide more than half the support for Kyle's father, Peter. Peter's wife died twoyears ago, and he now lives in Portugai; although, he still maintains his U.S. citizenship. Peter's onlyincome is from his social security retirement benefits, which are all non-taxable to Peter.

Judith met a homeless man, Raymond, and brought him home to live with the family. Raymond has noincome, has a social security number, is a citizen of the U.S., and lived in the house for the entire year.

Skipper is a six-year-old dog, has no taxable income, and has lived with the family since he was a puppy.Kyle and Mary spent $7,500 in psychiatric care (Skipper has shown signs of depression and has aneating disorder) and other medical expenses for Skipper in the current year.

Kyle and Mary have decided to file jointly for the year.

Dlines above ...d Total number of exemptions claimed .

Exemptions 6. o Yourself. If someone can claim you as a dependent. do not check box 6a . } Boxes checked

o Spouseon 6a and 6b

b No. of children--

c Dependents: (2) Dependent's (3) Dependent's (4) I if qualifying on 6c who:

(1) first name Last name soflal security number relalIonsh'lp 10 you c~:~I~ t~ec~~~~~~• lived with you --• did not live with

, · D you due to divorceor separation

If more than four .

· D (see page 18)--

dependents, see , · D Dependents on 6cpage 17 and not entered above --check here ... 0 : , D Add numbers on

© 2010 OeVrv/Becker Educational Development Corp. All rights reserved. Rl-77


3. CPA·01609

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcasefor Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amountshould Perle include in taxable income as a result of this transaction?

a. $0b. $200c. $550d. $600

4. CPA·01610

Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows:

$500 interest on federal income tax refund.$600 interest on state income tax refund.$800 interest on federal government obligations.$1,000 interest on state government obligations.

What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax return?

a. $500b. $1,100c. $1,900d. $2,900

5. CPA·01636

Clark filed Form 1040EZ for the Year 8 taxable year. In July, Year 9, Clark received a state income taxrefund of $900 plus interest of $10, for overpayment of Year 8 state income tax. What amount of thestate tax refund and interest is taxable in Ciark's Year 9 federal income tax return?

a. $0b. $10c. $900d. $910

6. CPA·01433

Which of the following conditions must be present in a post-1984 divorce agreement for a payment toqualify as deductible alimony?

I. Payments must be in cash or its equivalent.II. The payments must end at the recipient's death.

a. I only.b. II only.c. Both I and II.d. Neither I nor II.

.,·78 ClI010 DeVry!Becker Educalional Development Corp. All right5 reserved.


7. CPA-01438

Which of the following costs is not included in inventory under the Uniform Capitalization rules for goodsmanufactured by the taxpayer?

a. Research.b. Warehousing costs.c. Quality control.d. Taxes excluding income taxes.

8. CPA-01472

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-weekvacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker'sround-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day onaccommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amountof educational expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss from Business"?

a. $700b. $1,200c. $1,800d. $4,100

9. CPA-01614

Nare, an accrual-basis taxpayer, owns a bUilding which was rented to Molt under a ten-year leaseexpiring August 31, Year 8. On January 2, Year 2, Molt paid $30,000 as consideration for cancelling thelease. On November 1, Year 2, Nare leased the building to Pine under a five-year lease. Pine paid Nare$10,000 rent for the two months of November and December, and an additional $5,000 for the lastmonth's rent. What amount of rental income should Nare report in its Year 2 income tax return?

a. $10,000b. $15,000c. $40,000d. $45,000

10. CPA·01571

With regard to the inclusion of social security benefits in gross income, for the Year 8 tax year, which ofthe following statements is correct?

a. The social security benefits in excess of modified adjusted gross income are included in grossincome.

b. The social security benefits in excess of one half the modified adjusted gross incomes are included ingross income.

c. Eighty-five percent of the social security benefits are the maximum amount of benefits to be includedin gross income.

d. The social security benefits in excess of the modified adjusted gross income over a threshold amountare included in gross income.

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Regulation 1-~--------


11. CPA-01482

Klein, a master's degree candidate at Briar University, was awarded a $12,000 scholarship from Briar inYear 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Kleinreceived $5,000 for teaching two courses at a nearby college. What amount is includible in Klein's Year 8

gross income?

a. $0b. $5,000c. $12,000d. $17,000

12. CPA-01442

During Year 9, Ash had the following cash receipts:

WagesInterest income from U.S. Treasury bondsWorkers' compensation following a job-reiated injury

$13,000350

8,500

What is the totai amount that must be included in gross income on Ash's Year 9 income tax return?

a. $13,000b. $13,350c. $21,500d. $21,850

13. CPA·01761

Platt owns land that is operated as a parking lot. A shed was erected on the lot for the relatedtransactions with customers. With regard to capital assets and Section 1231 assets, how should theseassets be classified?

a.b.c.d.

Land

CapitalSection 1231CapitalSection 1231

Shed

CapitalCapitalSection 1231Section 1231

14. CPA-01736

Hall, a divorced person and custodian of her 12-year old child, filed her Year 9 federal income tax returnas head of a household. She submitted the following information to the CPA who prepared her Year 9return:

In June, Year 9, Hall's mother gifted her 100 shares of a listed stock. The donor's basis for this stock,which she bought in Year 1, was $4,000, and market value on the date of the gift was $3,000. Hall soldthis stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall's reportable gain or lossin Year 9 on the sale of the 100 shares of stock gifted to her?

a. $0b. $500 gain.c. $500 loss.d. $1,000 loss.

"-80 © 2010 DeVry!Becker Educational Development Corp. All rights reseNed.

Becker Professional Education I CPA Exam Review Regulation 1-----~-

15. CPA·01669

If the executor of a decedent's estate elects the alternate valuation date and none of the property included

in the gross estate has been sold or distributed, the estate assets must be valued as of how many monthsafter the decedent's death (assume the tax law for years after 2010 apply)?

a. 12

b. 9c. 6d. 3

16. CPA·01671

In December, Year 10, Davis, a single taxpayer, purchased a new residence for $200,000. Davis lived in

the new residence continuously from Year 10 until selling the new residence in July, Year 17 for$455,000. What amount of gain is recognized from the sale of the residence on Davis' Year 17 taxreturn?

a. $455,000b. $255,000c. $5,000

d. $0

17. CPA·01747

In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estateplus cash of $50,000. The following additional information pertains to this transaction:

Properlv given up bv Reed

Fair valueAdjusted basis

Properly received by Reed

Fair value

$500,000300,000

450,000

What amount of gain should be recognized in Reed's Year 9 income tax return?

a. $200,000b. $100,000

c. $50,000d. $0

18. CPA·01742

In a "like-kind" exchange of an investment asset for a similar asset that will also be held as an investment,no taxable gain or loss will be recognized on the transaction if both assets consist of:

a. Convertible debentures.

b. Convertible preferred stock.c. Partnership interests.d. Rental real estate located in different states.

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19. CPA-01726

In Year 3, Fay sold 100 shares of Gym Co. stock to her son, Martin, for $11 ,000. Fay had paid $15,000

for the stock in Year 1. Subsequently in Year 3, Martin sold the stock to an unrelated third party for

$16,000.

What amount of gain from the sale of the stock to the third party should Martin report on his Year 3

income tax return?

a. $0b. $1,000c. $4,000

d. $5,000

20. CPA-01876

Lee qualified as head of a household for Year 9 tax purposes. Lee's Year 9 taxable income was$100,000, exclusive of capital gains and losses. Lee had a net long-term loss of $8,000 in Year 9. What

amount of this capital loss can Lee offset against Year 9 ordinary income?

a. $0b. $3,000c. $4,000d. $8,000

"-82 4:12010 OeVry/Becker Educational Development Corp. All rights reserved.