Your FREE CPA Flashcards 2026 – 300+ Cards

CPA Flashcards

Audit risk model

Audit Risk = Inherent Risk × Control Risk × Detection Risk. Detection risk is the only component the auditor controls; as risk of material misstatement rises, the auditor lowers acceptable detection risk by gathering more evidence.

Risk of material misstatement (RMM)

RMM = Inherent Risk × Control Risk. It is the risk that the financial statements are materially misstated before the audit; the auditor assesses it but cannot change it.

Detection risk

The risk that audit procedures fail to detect an existing material misstatement. Detection Risk = Audit Risk / (Inherent Risk × Control Risk). Higher RMM means lower acceptable detection risk and more substantive testing.

Inherent risk

The susceptibility of an assertion to material misstatement before considering related controls. Driven by account complexity, estimates, and susceptibility to fraud.

Control risk

The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. Tests of controls support a lower assessed control risk.

Professional skepticism

An attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor neither assumes management is dishonest nor assumes unquestioned honesty.

Reasonable assurance (audit)

A high but not absolute level of assurance provided by an audit. It is not a guarantee because of inherent limitations such as sampling, judgment, and the possibility of collusion.

Assurance levels by engagement

Audit = reasonable assurance; Review = limited (negative) assurance; Compilation = no assurance; Examination = reasonable; Agreed-upon procedures = no assurance (findings only).

GAAS (Generally Accepted Auditing Standards)

AICPA auditing standards (Statements on Auditing Standards) for nonissuers, organized around general, fieldwork, and reporting principles. The PCAOB sets standards for issuers.

PCAOB

Public Company Accounting Oversight Board, created by Sarbanes-Oxley, sets auditing standards and inspects firms that audit public companies (issuers). It is overseen by the SEC.

AICPA Code conceptual framework (threats and safeguards)

When no specific rule applies, identify threats to compliance, evaluate their significance, and apply safeguards to reduce them to an acceptable level. If threats cannot be reduced, decline or end the engagement.

Self-review threat

The threat that a member will not appropriately evaluate the results of a previous judgment or service the member performed, such as auditing financial statements the firm helped prepare.

Advocacy threat

The threat that a member will promote a client's position to the point that objectivity is compromised, such as serving as the client's promoter in a securities offering.

Familiarity threat

The threat that, due to a long or close relationship with a client, a member becomes too sympathetic to the client's interests or too accepting of its work.

Management participation threat

The threat that a member takes on the role of client management or otherwise assumes management responsibilities, impairing independence.

Self-interest threat

The threat that a financial or other interest will inappropriately influence a member's judgment or behavior, such as a direct financial interest in the client.

Independence: direct financial interest

A direct financial interest in an attest client impairs independence regardless of materiality. An indirect financial interest impairs independence only if material.

Covered member

Individuals who can affect the attest engagement (engagement team, those who can influence the engagement, partners in the office, the firm). Independence rules apply most strictly to covered members.

Management's assertions (existence/occurrence)

Existence means assets, liabilities, and equity exist; occurrence means recorded transactions actually took place and pertain to the entity. Both target overstatement.

Assertion: completeness

All transactions and accounts that should be recorded are recorded. Completeness targets understatement (the risk of omitted items).

Assertion: rights and obligations

The entity holds or controls the rights to recorded assets, and liabilities are the obligations of the entity.

Assertion: valuation and allocation

Assets, liabilities, and equity are included at appropriate amounts, and any resulting valuation or allocation adjustments are properly recorded.

Assertion: presentation and disclosure

Accounts are properly classified, described, and disclosed in the financial statements in accordance with the applicable framework.

Sufficiency vs appropriateness of evidence

Sufficiency is the measure of quantity of evidence; appropriateness is the measure of quality (relevance and reliability). Both must be met; more evidence alone is not the answer.

Reliability of audit evidence hierarchy

Evidence is more reliable when obtained from independent external sources, generated under effective internal control, obtained directly by the auditor, in documentary form, and from original documents.

Most reliable evidence type

Auditor's direct personal knowledge (e.g., physical examination and recalculation) is generally the most reliable. External confirmations and externally produced documents rank above internally produced ones.

Vouching

Tracing from a recorded amount in the records back to the supporting source document. Vouching tests the existence/occurrence assertion (detects overstatement).

Tracing

Following a source document forward into the accounting records. Tracing tests the completeness assertion (detects understatement or omitted items).

Positive confirmation

A request asking the recipient to respond whether or not they agree with the stated balance. Used when individual balances are large or risk is higher; nonresponses require follow-up.

Negative confirmation

A request asking the recipient to respond only if they disagree. Appropriate only when control risk is low, many small balances exist, and a low exception rate is expected.

Analytical procedures

Evaluations of financial information through analysis of plausible relationships among data. Required during planning (risk assessment) and the final review; optional as substantive evidence.

Recalculation vs reperformance

Recalculation checks the mathematical accuracy of documents or records. Reperformance is the auditor's independent execution of a control or procedure originally performed by the entity.

Materiality

The magnitude of an omission or misstatement that could influence the decisions of users. Set during planning based on a benchmark (e.g., a percentage of pretax income, revenue, or total assets).

Performance materiality

An amount set below overall materiality to reduce the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. It drives the extent of testing.

Tolerable misstatement

The application of performance materiality to a particular sampling procedure; the maximum misstatement in a population the auditor will accept. Higher tolerable misstatement means a smaller sample.

COSO Internal Control Framework components

Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring Activities (mnemonic CRIME). The framework also has 17 underlying principles.

Control environment

The set of standards, processes, and structures that provide the foundation for internal control, including integrity, ethical values, board oversight, and accountability (the tone at the top).

Segregation of duties (ARC)

Authorization, Record-keeping, and Custody of assets should be performed by different people. Combining these functions creates opportunity for fraud and error.

Tests of controls vs substantive procedures

Tests of controls evaluate operating effectiveness of controls to support a lower control risk. Substantive procedures (tests of details and substantive analytics) detect material misstatements directly.

Fraud triangle

The three conditions present when fraud occurs: Pressure/incentive, Opportunity, and Rationalization. Auditors assess fraud risk factors related to each.

Fraudulent financial reporting vs misappropriation of assets

Fraudulent financial reporting is intentional misstatement to deceive users (e.g., earnings management). Misappropriation is theft of an entity's assets (e.g., embezzlement).

Responsibility for fraud prevention

Management and those charged with governance have primary responsibility to prevent and detect fraud. The auditor obtains reasonable assurance the statements are free of material misstatement from fraud or error.

Audit sampling: attribute vs variables

Attribute sampling tests the rate of deviation in a control (tests of controls). Variables (or monetary-unit) sampling estimates a dollar amount of misstatement (substantive testing).

Sample size relationships

Sample size rises as tolerable misstatement falls, expected misstatement rises, and acceptable sampling risk falls. Tolerable misstatement is inversely related to sample size.

Sampling risk vs nonsampling risk

Sampling risk is that the sample is not representative of the population. Nonsampling risk is error from auditor mistakes such as using an inappropriate procedure or misinterpreting results.

Monetary-unit sampling (MUS)

A substantive sampling method that gives larger items a higher chance of selection (probability proportional to size). Effective for detecting overstatement; not ideal for understatement or zero balances.

Unmodified (unqualified) opinion

The financial statements are presented fairly, in all material respects, in accordance with the applicable framework. Called unmodified for nonissuers and unqualified for issuers.

Qualified opinion

Issued when a misstatement (GAAP departure) or scope limitation is material but NOT pervasive. The report states the statements are fair except for the matter described.

Adverse opinion

Issued when a GAAP departure is both material AND pervasive. The statements do not present fairly in accordance with the applicable framework.

Disclaimer of opinion

Issued when a scope limitation is material AND pervasive, so the auditor cannot obtain sufficient appropriate evidence. The auditor expresses no opinion.

Opinion decision: GAAP departure vs scope limitation

GAAP departure (problem with the statements): material = qualified, pervasive = adverse. Scope limitation (problem getting evidence): material = qualified, pervasive = disclaimer.

Emphasis-of-matter paragraph

Refers to a matter appropriately presented or disclosed in the statements that is fundamental to users' understanding (e.g., a significant subsequent event). Does not modify the opinion.

Other-matter paragraph

Refers to a matter NOT presented or disclosed in the statements that is relevant to users' understanding of the audit or report (e.g., comparative statements audited by a predecessor).

Unmodified report section order (nonissuer, SAS 134+)

Opinion, then Basis for Opinion, then (if applicable) Going Concern and Key/Critical Audit Matters, then Responsibilities of Management, then Auditor's Responsibilities.

Going concern

If substantial doubt about the entity's ability to continue for a reasonable period (one year from issuance) is unresolved, the auditor adds a separate going concern section; the opinion may still be unmodified if disclosure is adequate.

Critical audit matters (CAMs)

Matters communicated to the audit committee that involve especially challenging, subjective, or complex auditor judgment. Required in issuer (PCAOB) audit reports.

Type I vs Type II subsequent events

Type I (recognized) events provide evidence of conditions existing at the balance sheet date and adjust the statements. Type II (nonrecognized) arise after the date and require disclosure only.

Subsequent events procedures (PRIME)

Post-balance-sheet transactions review, Representation letter, Inquiry of management and counsel, Minutes of meetings, and Examination of latest interim financial data.

SOC 1 report

Reports on a service organization's controls relevant to a user entity's internal control over financial reporting (ICFR). Restricted to management, user entities, and their auditors.

SOC 2 report

Reports on controls relevant to the Trust Services Criteria (security, availability, processing integrity, confidentiality, privacy). Restricted-use, for knowledgeable parties.

SOC 3 report

A general-use summary report based on the same Trust Services Criteria as SOC 2 but with less detail and no description of tests. Can be distributed freely.

SOC report Type 1 vs Type 2

Type 1 reports on the suitability of the design of controls at a point in time. Type 2 reports on both design and operating effectiveness over a period of time.

Management representation letter

A written letter from management confirming oral representations and acknowledging responsibility for the statements. Required, dated the date of the audit report, and signed by the CEO and CFO.

Engagement letter

Establishes an understanding with the client: objective, scope, responsibilities of auditor and management, and limitations. Reduces the risk of misunderstanding; required before the engagement.

Review engagement (SSARS)

Provides limited assurance through inquiry and analytical procedures, expressed as negative assurance: the accountant is not aware of material modifications needed. Requires independence.

Compilation engagement (SSARS)

The accountant presents management's information in financial statement form with no assurance. Independence is not required, but lack of independence must be disclosed.

Sarbanes-Oxley Section 404

Requires management to assess and report on the effectiveness of ICFR, and (for large accelerated filers) the auditor to attest to it. Section 302 requires CEO/CFO certification of the statements.

Audit committee

A subcommittee of the board (independent directors) responsible for oversight of financial reporting and the external auditor. Under SOX it hires, compensates, and oversees the auditor.

Dual-purpose test

A single test that simultaneously serves as a test of controls and a substantive test of details on the same transaction, improving audit efficiency.

Audit data analytics

Techniques (regression, visualization, full-population analysis) used to discover and analyze patterns, identify anomalies, and extract useful information for risk assessment and substantive testing.

The accounting equation

Assets = Liabilities + Equity. It is the foundation of double-entry accounting and must remain in balance after every transaction.

The five financial statements

Balance sheet (financial position), income statement, statement of comprehensive income, statement of changes in equity, and statement of cash flows, plus the accompanying notes.

Accrual vs cash basis

Accrual accounting recognizes revenue when earned and expenses when incurred, regardless of cash timing. Cash basis recognizes them when cash changes hands; GAAP requires accrual.

ASC 606 revenue recognition (5 steps)

1) Identify the contract, 2) Identify performance obligations, 3) Determine the transaction price, 4) Allocate the price to the obligations, 5) Recognize revenue as each obligation is satisfied.

ASC 606: over time vs point in time

Recognize over time if the customer simultaneously receives and consumes the benefit, the asset is created/enhanced as the entity performs, or the asset has no alternative use and there is a right to payment. Otherwise recognize at a point in time.

Variable consideration

Amounts subject to discounts, rebates, refunds, or bonuses. Estimated using expected value or most-likely-amount and included only to the extent a significant reversal is not probable (the constraint).

ASC 842 lessee accounting

Lessees record a right-of-use (ROU) asset and a lease liability for nearly all leases. The liability is the present value of remaining lease payments; the ROU asset starts equal to the liability plus initial direct costs.

Finance vs operating lease (lessee)

A finance lease produces front-loaded expense (separate interest + amortization). An operating lease produces a single straight-line lease expense. Classification uses the OWNES criteria.

Lease classification criteria (OWNES)

Ownership transfers; Written purchase option reasonably certain to exercise; NPV of payments is substantially all of fair value; Economic life is a major part used by the lessee; Specialized asset with no alternative use. Any one met = finance lease.

Bonds: effective-interest interest expense

Interest expense = beginning carrying value × market (effective) rate. Cash paid = face × stated rate. The difference amortizes the premium or discount.

Bond discount vs premium behavior

A discount (stated rate < market rate) means carrying value rises toward face as it amortizes, increasing interest expense over time. A premium (stated > market) means carrying value falls, decreasing interest expense.

Goodwill (acquisition method)

Goodwill = purchase price (consideration transferred) − fair value of net identifiable assets acquired. Goodwill is not amortized under GAAP but tested for impairment.

Intercompany eliminations (consolidation)

On consolidation, eliminate intercompany receivables/payables, sales/purchases, and unrealized profit in ending inventory or fixed assets so only transactions with outside parties remain.

Noncontrolling interest (NCI)

The portion of a subsidiary's equity not owned by the parent. Reported within consolidated equity at fair value (full goodwill method) and allocated its share of subsidiary net income.

ASC 740 deferred taxes: temporary differences

Differences between book and tax basis that reverse over time, creating deferred tax assets or liabilities (e.g., depreciation, warranty accruals). They affect timing, not the total tax.

Permanent differences

Items that affect book income or taxable income but never both (e.g., municipal bond interest, fines, 50% meals). They never create deferred taxes; they only change the effective tax rate.

Deferred tax asset vs liability

A DTA arises when book income is currently less than taxable income (future deductible amounts). A DTL arises when book income currently exceeds taxable income (future taxable amounts).

Valuation allowance (DTA)

A contra-account reducing a deferred tax asset to the amount more likely than not (greater than 50%) to be realized based on available evidence.

Pension cost components (SIR AGE)

Net periodic pension cost = Service cost + Interest cost − Return on plan assets ± Amortization of prior service cost ± Gains/losses ± Existing (transition) amounts.

Pension corridor amortization

Unrecognized net gains/losses are amortized only to the extent they exceed 10% of the greater of beginning PBO or plan assets, divided by average remaining service life.

Funded status of a pension

Funded status = fair value of plan assets − projected benefit obligation (PBO). An overfunded plan is an asset; an underfunded plan is a liability on the balance sheet.

Basic EPS

Basic EPS = (Net income − preferred dividends) / weighted-average common shares outstanding.

Diluted EPS

Adjusts basic EPS for dilutive potential common shares using the treasury-stock method for options and the if-converted method for convertibles. Antidilutive securities are excluded.

Treasury-stock method

Assumes options/warrants are exercised and proceeds buy back shares at the average market price. Incremental shares = options − (options × exercise price / average market price).

Inventory cost flow: FIFO

First-in, first-out assigns the oldest costs to COGS and the newest costs to ending inventory. In rising prices, FIFO produces lower COGS and higher net income than LIFO.

Inventory cost flow: LIFO

Last-in, first-out assigns the newest costs to COGS and oldest to ending inventory. Permitted under U.S. GAAP but prohibited under IFRS. In rising prices it lowers taxable income.

Lower of cost or net realizable value

Inventory measured with FIFO or weighted-average is reported at the lower of cost or NRV (selling price − costs to complete and sell). LIFO/retail use lower of cost or market.

Cost of goods sold formula

COGS = beginning inventory + purchases − ending inventory.

Treasury stock: cost method

Records reacquired shares at repurchase cost in a contra-equity account. On reissuance, any excess over cost goes to APIC-treasury; deficiencies reduce APIC-treasury then retained earnings.

Treasury stock: par-value method

Records treasury stock at par and removes the original APIC on repurchase. Differences adjust APIC and retained earnings at the time of reacquisition, not reissuance.

Statement of cash flows: indirect method

Begins with net income and adjusts for noncash items (depreciation), gains/losses, and changes in working capital to arrive at cash from operations.

Cash flow classification

Operating = core business activities; Investing = buying/selling long-term assets and investments; Financing = debt and equity transactions with owners and creditors (issuing stock, dividends, borrowing).

Modified accrual basis (governmental funds)

Revenue is recognized when measurable and available (collectible within the current period or soon enough to pay current liabilities, typically 60 days); focus is on current financial resources.

Government-wide statements

Use the full accrual basis and the economic resources measurement focus, reporting all assets and liabilities including capital assets and long-term debt.

Governmental fund types (GRaSPP)

General, Special revenue, Debt service, Capital projects, and Permanent funds. They use modified accrual and the current financial resources focus.

Major fund determination

A fund is major if it is at least 10% of its own category (governmental or enterprise) AND at least 5% of the combined governmental and enterprise totals. The General Fund is always major.

NFP net asset classes

Not-for-profit entities report net assets in two classes: with donor restrictions and without donor restrictions. Restrictions may be by purpose or time.

NFP contributions vs exchange transactions

A contribution is an unconditional nonreciprocal transfer recognized as revenue when received/promised. An exchange transaction provides commensurate value and follows ASC 606.

Comprehensive income and OCI

Comprehensive income = net income + other comprehensive income. OCI includes unrealized gains/losses on available-for-sale debt securities, foreign currency translation, certain pension adjustments, and effective cash-flow hedges (mnemonic PUFI).

Current ratio

Current ratio = current assets / current liabilities. Measures short-term liquidity; a ratio above 1 indicates current assets cover current liabilities.

Quick (acid-test) ratio

Quick ratio = (cash + marketable securities + net receivables) / current liabilities. Excludes inventory and prepaids for a stricter liquidity measure.

Return on equity (ROE)

ROE = net income / average total stockholders' equity. Measures the return generated on shareholders' investment.

Return on assets (ROA)

ROA = net income / average total assets. Measures how efficiently assets generate profit.

Debt-to-equity ratio

Debt-to-equity = total liabilities / total stockholders' equity. A solvency measure of financial leverage; higher ratios mean more reliance on debt.

Price-earnings (P/E) ratio

P/E = market price per share / earnings per share. Reflects how much investors will pay per dollar of earnings.

Gross margin ratio

Gross margin = (net sales − COGS) / net sales = gross profit / net sales. Shows the percentage of revenue retained after direct costs.

Inventory turnover

Inventory turnover = COGS / average inventory. Days in inventory = 365 / inventory turnover. Higher turnover indicates inventory is sold quickly.

Accounts receivable turnover

AR turnover = net credit sales / average net accounts receivable. Days sales outstanding = 365 / AR turnover.

Allowance for doubtful accounts

A contra-asset estimating uncollectible receivables (allowance method, required by GAAP). Bad debt expense is recorded by aging or percentage-of-sales; write-offs reduce both the allowance and AR.

Equity method

Used for investments giving significant influence (generally 20%-50% ownership). The investor records its share of investee income and reduces the investment for dividends received.

Trading vs available-for-sale debt securities

Trading debt securities report unrealized gains/losses in net income. Available-for-sale debt securities report unrealized gains/losses in OCI until realized.

Held-to-maturity securities

Debt securities the entity has the intent and ability to hold to maturity, reported at amortized cost. Equity securities cannot be held-to-maturity.

Capitalize vs expense

Costs providing future benefit beyond the current period are capitalized as assets and depreciated/amortized. Costs benefiting only the current period (repairs, R&D) are expensed.

Research and development costs

Under U.S. GAAP, R&D costs are generally expensed as incurred. (For tax, OBBBA allows domestic R&D to be fully expensed; book treatment remains immediate expense.)

Straight-line depreciation

Depreciation per year = (cost − salvage value) / useful life. Allocates an equal amount of depreciable cost to each period.

Impairment of long-lived assets (held for use)

Test when events indicate the carrying amount may not be recoverable. Step 1: if carrying value > undiscounted future cash flows, impaired. Step 2: write down to fair value. No reversals under GAAP.

Contingency recognition

Accrue a loss contingency if it is probable and reasonably estimable. If reasonably possible, disclose only. Gain contingencies are not accrued (recognized only when realized).

Prior period adjustment vs change in estimate

Correction of an error in prior statements is a prior period adjustment (restate retained earnings). A change in estimate (e.g., useful life) is accounted for prospectively, not restated.

Change in accounting principle

Generally applied retrospectively by adjusting prior periods and the opening balance of retained earnings, unless impracticable. Must be preferable and result in more reliable, relevant information.

Capitalized interest

Interest on funds borrowed to construct an asset for the entity's own use is capitalized during construction, limited to the lesser of avoidable interest or actual interest incurred.

Conceptual framework: qualitative characteristics

Fundamental: relevance (predictive value, confirmatory value, materiality) and faithful representation (complete, neutral, free from error). Enhancing: comparability, verifiability, timeliness, understandability.

Statement of cash flows: noncash transactions

Significant noncash investing and financing activities (e.g., acquiring an asset by issuing stock or capital lease additions) are disclosed separately, not in the body of the statement.

Dividends: declaration vs payment

A liability and reduction of retained earnings are recorded on the declaration date. The record date determines who receives it; cash is disbursed on the payment date. No entry on the record date.

Stock dividend vs stock split

A small stock dividend (<20-25%) is recorded at fair value, reducing retained earnings. A large stock dividend or split increases shares without changing total equity (split also lowers par).

Nonmonetary exchange: losses and gains

Losses are always recognized immediately. Gains are recognized in full if the exchange has commercial substance; if it lacks commercial substance, a gain is recognized only to the extent boot is received.

Foreign currency translation vs remeasurement

Translation (functional = local currency) uses the current-rate method; gains/losses go to OCI. Remeasurement (functional = U.S. dollar) uses the temporal method; gains/losses go to net income.

Statement of changes in equity

Reconciles beginning to ending balances of each equity component (common stock, APIC, retained earnings, treasury stock, AOCI), showing net income, dividends, issuances, and OCI.

Working capital

Working capital = current assets − current liabilities. Represents resources available to fund day-to-day operations.

Times interest earned

Times interest earned = earnings before interest and taxes (EBIT) / interest expense. Measures the entity's ability to cover interest obligations from operations.

Statement of activities (NFP)

Reports changes in net assets with and without donor restrictions, including revenues, expenses by function (program and supporting), gains, losses, and reclassifications upon release of restrictions.

Modified accrual: expenditures

Governmental funds record expenditures (not expenses) when the related liability is incurred and measurable; capital outlays and debt principal are expenditures, not capitalized assets.

Encumbrance accounting

Governmental budgetary technique reserving fund balance for purchase orders/commitments. Encumbrances are not expenditures; they prevent overspending the appropriation.

Fund balance classifications

Governmental fund balance is classified as nonspendable, restricted, committed, assigned, and unassigned, in decreasing order of constraint.

Bond issue costs

Under GAAP, debt issuance costs are reported as a direct deduction from the carrying amount of the debt (like a discount) and amortized to interest expense using the effective-interest method.

Installment sales / percentage-of-completion concept

Long-term contract revenue is recognized over time when progress can be measured (input or output methods); if progress is not reliably measurable, recognize revenue only to the extent of recoverable costs.

Goodwill impairment (current GAAP)

Compare a reporting unit's carrying value to its fair value; if carrying value exceeds fair value, recognize impairment for the difference, limited to the goodwill balance. A qualitative step 0 may be used.

Asset retirement obligation (ARO)

A liability for the present value of a legal obligation to retire a long-lived asset. Recorded at fair value with a corresponding increase to the asset, then accreted to expense over time.

Net realizable value of receivables

Net realizable value = gross accounts receivable − allowance for doubtful accounts. This is the amount expected to be collected and reported on the balance sheet.

Operating cycle

The average time to convert cash into inventory, sell it (creating receivables), and collect cash. Current assets are those expected to be realized within one year or the operating cycle, whichever is longer.

Circular 230

Treasury Department rules governing practice before the IRS by attorneys, CPAs, enrolled agents, and others. Covers due diligence, conflicts of interest, contingent fees, and sanctions.

Tax preparer due diligence

A preparer must make reasonable inquiries if information appears incorrect or incomplete and may rely in good faith on client-provided information without verification, but cannot ignore implications.

Substantial authority vs reasonable basis

Substantial authority (about 40% likelihood) avoids penalties for undisclosed positions. Reasonable basis (about 20%) is a lower standard that avoids penalties only if the position is disclosed.

Statute of limitations (assessment)

Generally 3 years from the later of the due date or filing date. Extended to 6 years if gross income is understated by more than 25%; unlimited for fraud or no return filed.

Elements of a valid contract

An offer, acceptance, consideration, legal capacity, and legal purpose. Mutual assent (a meeting of the minds) plus bargained-for consideration form a binding agreement.

Statute of frauds

Certain contracts must be in writing to be enforceable: those that cannot be performed within one year, for the sale of goods $500 or more, involving land/interests in real property, suretyship, and marriage consideration (mnemonic MYLEGS).

Agency: actual vs apparent authority

Actual authority is granted by the principal expressly or by implication. Apparent authority arises from the principal's conduct leading a third party to reasonably believe the agent has authority.

Holder in due course

A holder who takes a negotiable instrument for value, in good faith, and without notice of defects. An HDC takes free of personal defenses but remains subject to real defenses (fraud in execution, forgery, infancy, illegality).

Secured transaction: attachment

A security interest attaches (becomes enforceable against the debtor) when there is value given, the debtor has rights in the collateral, and there is a security agreement (or possession/control).

Secured transaction: perfection

Perfection gives priority against third parties, usually by filing a financing statement. A purchase-money security interest (PMSI) in consumer goods is perfected automatically upon attachment.

Bankruptcy Chapter 7

Liquidation: a trustee collects and sells nonexempt assets to pay creditors, then the debtor receives a discharge of remaining dischargeable debts. Available to individuals and businesses.

Bankruptcy Chapter 11

Reorganization: the business (debtor in possession) continues operating and proposes a plan to restructure and repay debts under court supervision.

Bankruptcy Chapter 13

Adjustment of debts of an individual with regular income; the debtor repays creditors over a 3-to-5-year court-approved plan while keeping assets.

Filing status

The five statuses are single, married filing jointly, married filing separately, head of household, and qualifying surviving spouse. Status affects rates, standard deduction, and credit eligibility.

Head of household requirements

Unmarried (or considered unmarried) at year-end, paid more than half the cost of maintaining a home, and a qualifying person lived there more than half the year.

Gross income (tax)

All income from whatever source derived unless specifically excluded, including wages, business income, interest, dividends, rents, and gains. Exclusions include gifts, inheritances, and municipal bond interest.

Adjusted gross income (AGI)

AGI = gross income − above-the-line adjustments (e.g., HSA, educator expenses, SE tax deduction, IRA). AGI is the threshold base for many deductions and credits.

Standard vs itemized deductions

Taxpayers deduct the greater of the standard deduction or itemized deductions (e.g., medical above 7.5% of AGI, SALT, mortgage interest, charity). TCJA's higher standard deduction was made permanent by OBBBA.

QBI deduction (§199A)

A deduction of up to 20% of qualified business income from pass-through entities, subject to wage/property limits and SSTB phaseouts above income thresholds. Made permanent by OBBBA.

Capital gains: short vs long term

Short-term (held one year or less) is taxed at ordinary rates. Long-term (held more than one year) is taxed at preferential rates (0%, 15%, or 20%).

Net capital loss limit (individuals)

Individuals deduct net capital losses against ordinary income up to $3,000 per year ($1,500 if married filing separately). Excess carries forward indefinitely, retaining its character.

Section 1244 stock

Allows an ordinary (not capital) loss deduction on qualifying small-business stock up to $50,000 single / $100,000 married filing jointly per year. Loss beyond that limit is a capital loss.

Realized vs recognized gain

Realized gain = amount realized − adjusted basis. Recognized gain is the portion currently taxable; nonrecognition rules (like-kind, involuntary conversion) can defer recognition.

Like-kind exchange (§1031)

Post-TCJA, applies only to real property held for business or investment. Gain recognized = lesser of realized gain or boot received; basis carries over adjusted for boot and gain.

Section 1231 property

Depreciable property and real property used in a trade or business held more than one year. Net §1231 gains are capital; net §1231 losses are ordinary (best of both).

Section 1245 recapture

On the sale of depreciable personal property, gain is recaptured as ordinary income to the extent of accumulated depreciation; any excess is §1231 gain.

Section 1250 recapture

Applies to depreciable real property. Unrecaptured §1250 gain (straight-line depreciation) is taxed at a maximum 25% rate; only excess accelerated depreciation is ordinary.

Section 179 expensing

Allows immediate expensing of qualifying business property up to an annual limit ($2,560,000 in 2026, phasing out after $4,090,000 of additions). Limited to business taxable income.

Bonus depreciation

Allows an immediate deduction of 100% of the cost of qualifying property placed in service after January 19, 2025 (made permanent by OBBBA). Applied after §179.

MACRS

The Modified Accelerated Cost Recovery System is the required tax depreciation method. It uses prescribed recovery periods and conventions (half-year, mid-quarter, mid-month for realty).

C corporation taxation

A separate taxpayer at a flat 21% federal rate; earnings are taxed again as dividends to shareholders (double taxation). Net operating losses carry forward indefinitely, limited to 80% of taxable income.

Dividends-received deduction (DRD)

A C corporation deducts a percentage of dividends from domestic corporations: 50% if it owns under 20%, 65% if 20%-80%, and 100% if 80% or more.

S corporation eligibility

Must be a domestic corporation with no more than 100 shareholders, only eligible shareholders (individuals, estates, certain trusts; no corporations or partnerships), and one class of stock.

Partnership outside basis

Outside basis = contributions + share of income − distributions − share of losses, increased/decreased by the partner's share of partnership liabilities.

Partnership vs S-corp liabilities and basis

Partnership liabilities increase a partner's basis. S corporation entity-level liabilities do NOT increase shareholder basis; only direct shareholder loans create debt basis, and a personal guarantee alone does not.

Loss limitation ordering

Apply sequentially: 1) basis, 2) at-risk, 3) passive activity loss (PAL), 4) excess business loss. A loss must clear each layer before it can be deducted.

Gift basis (carryover and dual basis)

Gifted property keeps the donor's carryover basis for gains. If FMV at the gift date is below donor basis, the loss basis is that lower FMV; selling between the two amounts yields no gain or loss.

Stepped-up basis at death

Property inherited from a decedent takes a basis equal to its fair market value at the date of death (or the alternate valuation date). Holding period is automatically long-term.

Qualifying child vs qualifying relative

A qualifying child must meet relationship, age, residency (more than half the year), and support tests with NO gross income limit. A qualifying relative has a gross income limit and a support test.

Self-employment tax

Covers Social Security (12.4% up to the wage base) and Medicare (2.9%, no cap) on net SE earnings (92.35% of net profit). Half of the SE tax is an above-the-line deduction.

Estimated tax safe harbor

Individuals avoid an underpayment penalty by paying the lesser of 90% of the current year's tax or 100% of the prior year's tax (110% if prior-year AGI exceeded $150,000).

Wash sale rule

A loss on the sale of a security is disallowed if substantially identical securities are purchased within 30 days before or after the sale. The disallowed loss is added to the basis of the new shares.

Related party loss disallowance

Losses on sales between related parties are disallowed. The buyer may use the disallowed loss to offset a later gain when reselling to an unrelated party.

Partnership formation: §721

No gain or loss is recognized when a partner contributes property in exchange for a partnership interest. Exception: gain is recognized if liabilities relieved exceed the partner's basis.

Corporate formation: §351

No gain/loss is recognized when property is transferred to a corporation solely for stock and the transferors control (at least 80%) the corporation immediately after. Boot triggers gain recognition.

Accumulated earnings tax

A penalty tax on C corporations that retain earnings beyond reasonable business needs to avoid shareholder dividend taxation. A credit shelters a base amount of accumulated earnings.

Hobby loss rules

If an activity is not engaged in for profit, expenses are not deductible (post-TCJA), and income is still taxable. A profit in 3 of 5 years creates a presumption of a profit motive.

Passive activity loss (PAL) rules

Losses from passive activities (rentals and businesses without material participation) offset only passive income. Disallowed losses carry forward and are freed when the activity is disposed.

Kiddie tax

A child's unearned income above a threshold is taxed at the parents' marginal rate to prevent income shifting. Applies to children under 19 (or under 24 if a full-time student).

AMT (alternative minimum tax)

A parallel tax computed on AMTI (regular taxable income with preferences and adjustments added back) less an exemption. The taxpayer pays the higher of regular tax or AMT.

SALT deduction cap (OBBBA)

The state and local tax itemized deduction is capped at $40,000 for 2025-2029 (raised from $10,000), phasing down for taxpayers with MAGI above $500,000.

Charitable contribution AGI limits

Cash gifts to public charities are deductible up to 60% of AGI; gifts of long-term appreciated property up to 30% of AGI. Excess carries forward 5 years.

Preparer penalty: §6694

Penalizes a preparer for an understatement due to an unreasonable position (no substantial authority/reasonable basis), with a higher penalty for willful or reckless conduct.

Innocent spouse relief

Relieves a spouse from joint liability for an understatement attributable to the other spouse if the requesting spouse did not know and had no reason to know, and it would be inequitable to hold them liable.

Suretyship

A surety promises to answer for the debt of another and is primarily liable. A surety who pays gains the rights of subrogation (steps into the creditor's shoes), reimbursement, and contribution from co-sureties.

Federal securities: 1933 vs 1934 Act

The Securities Act of 1933 regulates initial issuances (registration and prospectus). The Securities Exchange Act of 1934 governs ongoing trading, reporting, and creates the SEC.

Employer payroll taxes

Employers match employee FICA (Social Security and Medicare), pay FUTA (federal unemployment), and withhold income and FICA taxes. The 0.9% additional Medicare tax is employee-only (no employer match).

Estate/gift basic exclusion (2026)

Under OBBBA, the basic exclusion amount is $15,000,000 per person ($30,000,000 for a married couple) for 2026, made permanent and indexed for inflation.

Net investment income tax (NIIT)

A 3.8% tax on the lesser of net investment income or MAGI over a threshold ($200,000 single / $250,000 MFJ). Applies to interest, dividends, capital gains, rents, and passive income.

Corporate charitable deduction limit

A C corporation's charitable contribution deduction is limited to 10% of taxable income (before certain deductions); excess carries forward 5 years.

Schedule M-1 / M-3 reconciliation

Reconciles book income to taxable income for permanent and temporary differences (e.g., federal tax expense, municipal interest, 50% meals, depreciation). M-3 is the detailed version for larger corporations.

Guaranteed payments (partnership)

Payments to a partner for services or capital, determined without regard to partnership income. They are ordinary income to the partner and deductible by the partnership.

Partnership distributions (nonliquidating)

Generally nontaxable; the partner reduces outside basis by cash and the partnership's basis in property distributed. Gain is recognized only if cash distributed exceeds outside basis.

Boot in a §351 / §1031 transaction

Boot is nonqualifying consideration (cash, debt relief, other property). Receiving boot triggers gain recognition up to the lesser of realized gain or boot received.

Accountant's common-law liability

An accountant may be liable to clients for breach of contract and negligence, and to third parties depending on the jurisdiction's standard (privity, near-privity, foreseen users, or foreseeable users).

UCC: merchant firm offer

A signed written offer by a merchant to keep an offer to buy/sell goods open is irrevocable for the stated time (or a reasonable time), not exceeding 3 months, even without consideration.

Net operating loss (post-TCJA)

NOLs arising in 2018 and later carry forward indefinitely (no carryback for most), and the deduction is limited to 80% of taxable income in the year used.

S corporation income flow-through

S corporation income, losses, and separately stated items pass through to shareholders pro rata by ownership and are reported on Schedule K-1, retaining their character.

Adoption of an accounting method (cash vs accrual for tax)

C corporations (other than small businesses) and entities with inventory generally must use accrual. Small businesses meeting the gross receipts test may use the cash method.

Tax refund claim statute (§6511)

A claim for refund must be filed within the later of 3 years from filing the return or 2 years from paying the tax.

Financial statement analysis

The use of horizontal (period-over-period), vertical (common-size), and ratio analysis to evaluate liquidity, solvency, profitability, and efficiency, often benchmarked against peers or industry.

Horizontal vs vertical analysis

Horizontal analysis compares line items across periods to show trends and growth. Vertical analysis expresses each item as a percentage of a base (sales or total assets) for common-size comparison.

Contribution margin

Contribution margin = sales − variable costs. Per unit: CM/unit = price − variable cost per unit. CM ratio = CM/unit / price. It is the amount available to cover fixed costs and profit.

Breakeven point

Breakeven units = fixed costs / CM per unit. Breakeven in dollars = fixed costs / CM ratio. At breakeven, total contribution margin equals fixed costs and profit is zero.

Target profit (CVP)

Units for a pretax target = (fixed costs + pretax target profit) / CM per unit. For an after-tax target, convert first: pretax target = after-tax profit / (1 − tax rate).

Margin of safety

Margin of safety = actual (or budgeted) sales − breakeven sales. As a percentage = (actual sales − breakeven sales) / actual sales. It measures the cushion before losses begin.

Degree of operating leverage

DOL = total contribution margin / operating income. It measures how sensitive operating income is to a change in sales; higher fixed-cost structures have higher leverage.

Direct materials variances

Price variance = (actual price − standard price) × actual quantity purchased. Quantity (efficiency) variance = (actual quantity used − standard quantity) × standard price.

Direct labor variances

Rate variance = (actual rate − standard rate) × actual hours. Efficiency variance = (actual hours − standard hours) × standard rate.

Variable overhead variances

Spending variance = actual VOH − (actual hours × standard VOH rate). Efficiency variance = (actual hours − standard hours) × standard VOH rate.

Fixed overhead variances

Spending (budget) variance = actual FOH − budgeted FOH. Production-volume variance = budgeted FOH − applied FOH (standard hours allowed × standard rate); it reflects capacity utilization.

Favorable vs unfavorable variance

A variance is favorable when actual cost is less than standard (or actual revenue exceeds budget) and unfavorable when actual cost exceeds standard. Sign alone does not indicate good performance.

Net present value (NPV)

NPV = present value of cash inflows − initial investment, discounted at the required rate. A positive NPV adds value and the project should be accepted.

Internal rate of return (IRR)

The discount rate at which NPV equals zero. Accept a project when IRR exceeds the required rate of return (hurdle rate). IRR can mislead with nonconventional cash flows.

Payback period

The time required to recover the initial investment from net cash inflows. Simple but ignores the time value of money and cash flows after payback; discounted payback addresses the time value.

Cash conversion cycle

Cash conversion cycle = days inventory outstanding + days sales outstanding − days payable outstanding. A shorter cycle means cash is recovered faster.

Cost of capital (WACC)

WACC = (weight of debt × after-tax cost of debt) + (weight of equity × cost of equity). It is the blended required return and the typical hurdle rate for capital budgeting.

Job-order vs process costing

Job-order costing accumulates costs by individual job (custom products). Process costing accumulates costs by department and averages them over equivalent units (mass production).

Equivalent units of production

Partially completed units expressed as fully completed units for costing. Weighted-average EUP = units completed + (ending WIP × % complete); FIFO excludes beginning WIP work done last period.

Activity-based costing (ABC)

Allocates overhead to products based on cost drivers of activities rather than a single volume base, improving accuracy for products that consume resources differently.

Absorption vs variable costing

Absorption costing (GAAP) includes fixed manufacturing overhead in product cost. Variable costing treats fixed overhead as a period cost. Income differs when inventory levels change.

Lessor lease classification

A lessor classifies a lease as sales-type, direct financing, or operating. Sales-type/direct financing transfer control (derecognize the asset, record a net investment); operating keeps the asset.

Derivative instrument

A financial instrument whose value derives from an underlying (rate, price, index), with a notional amount, little or no initial net investment, and net settlement. Examples: options, futures, swaps, forwards.

Fair value hedge

Hedges exposure to changes in the fair value of a recognized asset/liability or firm commitment. Both the derivative and the hedged item's gain/loss are recognized in current earnings.

Cash flow hedge

Hedges exposure to variability in expected future cash flows. The effective portion of the derivative's gain/loss is deferred in OCI and reclassified to earnings when the hedged transaction affects earnings.

Share-based compensation

Recognized at the grant-date fair value of the award over the requisite service (vesting) period. Equity-classified awards are not remeasured; forfeitures may be estimated or recognized as they occur.

Variable interest entity (VIE)

An entity consolidated by its primary beneficiary (the party with power over significant activities and exposure to losses/benefits), regardless of voting ownership percentage.

Segment reporting

Public entities disclose information about operating segments meeting quantitative thresholds (10% of revenue, profit/loss, or assets), reported on the basis used internally by the chief operating decision maker.

GASB government-wide vs fund statements

Government-wide statements use full accrual and the economic resources focus. Fund statements for governmental funds use modified accrual and the current financial resources focus; reconciliation bridges the two.

Budgetary accounting (governmental)

At year start, record estimated revenues and appropriations (the budget). Actual results are compared to the budget; the budgetary comparison schedule is required supplementary information.

Interfund activity

Transactions between funds: interfund loans (due to/due from), interfund transfers, and reimbursements. Loans are receivables/payables; transfers are other financing sources/uses.

Proprietary funds

Government funds that operate like a business: enterprise funds (serve external users, e.g., utilities) and internal service funds (serve other departments). They use full accrual accounting.

Forecasting: regression analysis

A statistical technique estimating the relationship between a dependent variable (cost) and independent variables (drivers). The R-squared measures how much variation the model explains.

High-low method

Estimates the variable cost per unit as (cost at highest activity − cost at lowest activity) / (highest units − lowest units). Fixed cost is the remainder at either point.

Working capital management

Managing current assets and liabilities to balance liquidity and profitability, including cash, receivables, inventory (e.g., economic order quantity), and short-term financing decisions.

Prospective financial statements

Forecasts (based on expected conditions) and projections (based on hypothetical assumptions). Projections are appropriate only for limited-use, knowledgeable parties.

ASC 606 in BAR: principal vs agent

A principal controls the good/service before transfer and recognizes gross revenue. An agent arranges for another party to provide it and recognizes only the net commission/fee.

Information system

A combination of hardware, software, data, people, and procedures that collects, processes, stores, and distributes information to support an organization's operations and decision-making.

IT general controls (ITGC)

Pervasive controls over the IT environment: access to programs and data, program change management, program development, and computer operations. They support the reliability of application controls.

Application controls

Controls embedded in a specific application to ensure transaction completeness, accuracy, validity, and authorization (e.g., input edit checks, validation, batch totals, reconciliations).

Input controls

Application controls ensuring data is entered accurately, completely, and validly: validity checks, field/format checks, limit/reasonableness checks, check digits, and batch totals.

CIA triad

The three core information-security objectives: Confidentiality (limiting access to authorized parties), Integrity (accuracy and completeness of data), and Availability (timely, reliable access).

Symmetric encryption

Uses a single shared secret key for both encryption and decryption. It is fast and efficient for large volumes of data but requires secure key distribution.

Asymmetric encryption

Uses a public/private key pair: data encrypted with the public key is decrypted only with the matching private key. It solves key distribution but is slower than symmetric encryption.

Hashing

A one-way function that converts data into a fixed-length digest to verify integrity. Hashes cannot be reversed; any change to the input produces a different hash value.

Digital signature

A hash of a message encrypted with the sender's private key. It provides authentication, integrity, and nonrepudiation; the recipient verifies it with the sender's public key.

Access control models

RBAC grants access based on job role; DAC lets the data owner set permissions; MAC enforces system-wide labels (clearance levels). Least privilege grants only the access needed for a task.

Authentication factors

Something you know (password), something you have (token/phone), and something you are (biometric). Multifactor authentication combines two or more different factor types.

Firewall

A network security device that monitors and filters incoming and outgoing traffic based on defined rules, separating trusted internal networks from untrusted external ones.

Change management

The controlled process for requesting, approving, testing, and migrating changes to systems and programs, with segregation between development, testing, and production environments.

Systems development life cycle (SDLC)

The structured phases of building a system: planning/analysis, design, development, testing, implementation, and maintenance. Controls and user involvement are needed at each phase.

SOC 1 vs SOC 2 vs SOC 3 (ISC view)

SOC 1 addresses controls relevant to user-entity ICFR; SOC 2 addresses Trust Services Criteria (restricted use); SOC 3 is a general-use, less detailed version of SOC 2.

Trust Services Criteria

The five categories for SOC 2/3 engagements: Security (the only mandatory/common criterion), Availability, Processing Integrity, Confidentiality, and Privacy.

SOC report Type I vs Type II (ISC view)

Type I evaluates the design of controls at a point in time. Type II evaluates the design and operating effectiveness of controls over a period (typically 6-12 months).

COBIT framework

A governance and management framework for enterprise IT (issued by ISACA) that aligns IT goals with business objectives and defines governance and management objectives.

COSO ERM framework

Enterprise Risk Management framework integrating strategy and performance: governance/culture, strategy/objective-setting, performance, review/revision, and information/communication/reporting.

Incident response phases

Preparation, detection and analysis, containment, eradication, recovery, and post-incident lessons learned. The goal is to limit damage and restore operations quickly.

HIPAA

The Health Insurance Portability and Accountability Act protects the privacy and security of protected health information (PHI). The Privacy and Security Rules govern its use, disclosure, and safeguards.

PCI DSS

The Payment Card Industry Data Security Standard sets requirements for protecting cardholder data, including network security, encryption, access control, and monitoring for entities that handle card payments.

PII (personally identifiable information)

Information that can identify a specific individual (name, SSN, biometric, account numbers). Privacy programs limit its collection, use, retention, and disclosure and require safeguards.

Data backup strategies

Full backups copy all data; incremental backups copy changes since the last backup of any type; differential backups copy changes since the last full backup. Offsite storage supports disaster recovery.

Disaster recovery: RTO vs RPO

Recovery Time Objective is the maximum acceptable downtime to restore systems. Recovery Point Objective is the maximum acceptable data loss measured back in time from an incident.

Database vs flat file

A database (DBMS) centrally stores related data, reducing redundancy and supporting integrity and shared access. Flat-file systems duplicate data, creating inconsistency risk.

Data lifecycle / governance

Stages of data: definition/capture, storage/maintenance, usage, archival, and disposal. Data governance establishes accountability for quality, security, and proper use.

Extract, transform, load (ETL)

The process of extracting data from sources, transforming it (cleansing, formatting, validating) into a consistent structure, and loading it into a target system such as a data warehouse.

Data integrity controls

Edit checks, validation rules, referential integrity, reconciliations, and hash totals that ensure data is accurate, complete, and unaltered throughout processing.

Logical vs physical access controls

Logical controls restrict access to systems and data (passwords, encryption, user IDs). Physical controls restrict access to facilities and hardware (locks, badges, cameras, guards).

Preventive, detective, corrective controls

Preventive controls stop errors/fraud before they occur (segregation of duties); detective controls identify them after (reconciliations); corrective controls fix them (backups, incident response).

Vulnerability vs threat vs risk

A vulnerability is a weakness; a threat is a potential cause of harm exploiting it; risk is the likelihood and impact of a threat exploiting a vulnerability. Controls reduce risk.

Phishing and social engineering

Attacks that manipulate people into revealing credentials or taking harmful actions (e.g., deceptive emails). User training and email filtering are key mitigating controls.

Cloud computing service models

IaaS provides infrastructure (servers, storage); PaaS provides a development platform; SaaS provides ready-to-use applications. Responsibility for controls is shared between provider and user.

Bridge letter (gap letter)

A letter from a service organization covering the period between the end of a SOC report and the user's reporting date, stating whether controls have changed materially. It provides limited, not audit-level, assurance.

Complementary user entity controls (CUECs)

Controls a service organization assumes the user entity will implement for the system to function as designed. Identified in a SOC 1/SOC 2 report; the user must implement them.

TCP compliance vs planning mindset

Compliance answers what the tax is for a completed transaction. Planning answers what the taxpayer should do prospectively to minimize tax across years and entities; TCP emphasizes the planning shift.

Annual gift tax exclusion (2026)

$19,000 per donee per year ($38,000 if married and gift-splitting) can be given free of gift tax and without using the lifetime exclusion. Only gifts of a present interest qualify.

Unified credit / lifetime exclusion (2026)

A combined gift and estate tax exclusion of $15,000,000 per person (under OBBBA). Taxable gifts during life reduce the exclusion available at death; the unified credit offsets tax up to the exclusion.

Gift-splitting

Married couples may elect to treat gifts to a third party as made one-half by each spouse, effectively doubling the annual exclusion. Both spouses must consent on a gift tax return.

Generation-skipping transfer (GST) tax

A separate flat tax (at the highest estate rate) on transfers to skip persons (e.g., grandchildren) to prevent avoiding a generation of estate tax. A GST exemption equal to the estate exclusion applies.

Crummey trust

A trust giving beneficiaries a temporary right to withdraw contributions, converting a gift of a future interest into a present interest so it qualifies for the annual exclusion.

Marital deduction (estate/gift)

An unlimited deduction for transfers to a U.S. citizen spouse, deferring transfer tax until the surviving spouse's death or later disposition. Transfers to non-citizen spouses are limited.

Portability (DSUE)

Allows a surviving spouse to use the deceased spouse's unused estate/gift exclusion (DSUE), if properly elected on a timely estate tax return, effectively combining both spouses' exclusions.

Dual-basis rule on gifts (TCP application)

When gifted property's FMV at the gift date is below the donor's basis: use carryover basis to compute a gain, lower FMV to compute a loss, and recognize no gain or loss if sold between the two.

Section 754 election

Allows a partnership to adjust the inside basis of its assets when a partnership interest is transferred or a distribution occurs, aligning inside and outside basis. TCP tests whether to elect, not just the math.

Traditional vs Roth IRA

Traditional IRA contributions may be deductible and grow tax-deferred (taxed on withdrawal). Roth contributions are after-tax but grow and are withdrawn tax-free if qualified; no required minimum distributions for the owner.

Required minimum distributions (RMDs)

Traditional retirement accounts require withdrawals beginning at the applicable age; failure to take an RMD triggers an excise tax on the shortfall. Roth IRAs have no RMD during the owner's life.

529 plan

A tax-advantaged education savings plan. Contributions are after-tax; earnings grow tax-free and qualified education withdrawals are tax-free. Contributions can be front-loaded using 5 years of annual exclusions.

Installment sale method

Allows a seller to recognize gain on a deferred-payment sale proportionally as payments are received. Gross profit percentage × cash collected = recognized gain; recapture is taxed in the year of sale.

Estimated tax and underpayment planning

Plan quarterly payments to meet a safe harbor (90% of current or 100%/110% of prior-year tax) and time income/deductions to smooth liability and avoid the underpayment penalty.

Choice of entity planning

Compare a C corp (21% flat, double tax) with pass-throughs (single tax, QBI eligible). Factors include reinvestment plans, owner tax rates, loss use, fringe benefits, and exit strategy.

S corporation reasonable compensation

S corporation shareholder-employees must take reasonable wages (subject to payroll tax) before distributions. Overstating distributions to dodge payroll tax is an IRS audit target.

Trust and estate income taxation

Trusts and estates are separate taxpayers taxed on undistributed income at compressed brackets. Distributable net income (DNI) limits and characterizes the deduction for distributions to beneficiaries.

Grantor trust

A trust whose income is taxed to the grantor (not the trust) because the grantor retains control or benefit. Used in planning to shift assets out of the estate while keeping income tax responsibility.

Exempt organizations and UBIT

A 501(c)(3) is exempt from income tax on related activities but pays unrelated business income tax (UBIT) on income from a regularly carried-on trade or business unrelated to its exempt purpose.

Net investment income tax planning

The 3.8% NIIT applies to passive investment income above MAGI thresholds. Planning may convert passive to active income, use tax-exempt bonds, or harvest losses to reduce exposure.

Tax-loss harvesting

Selling investments at a loss to offset realized gains and up to $3,000 of ordinary income, while respecting the wash sale rule. A planning tool to reduce current-year tax.

Like-kind exchange planning (§1031)

Deferring gain on real property held for business/investment by reinvesting through a qualified intermediary within strict timelines: 45 days to identify and 180 days to close the replacement property.

Involuntary conversion (§1033)

Allows deferral of gain when property is destroyed, stolen, or condemned, if proceeds are reinvested in qualifying replacement property within the statutory period (generally 2-3 years).

Charitable remainder trust (CRT)

An irrevocable trust paying an income stream to the donor/beneficiary for a term, with the remainder to charity. Provides a current charitable deduction, defers capital gains, and removes assets from the estate.

Family limited partnership (FLP) / valuation discounts

A planning vehicle that transfers business interests to family members, often supporting valuation discounts for lack of control and marketability to reduce transfer-tax value (an IRS scrutiny area).

Estimated tax for entities and AMT planning

Corporations make estimated payments and, where applicable, plan around the corporate alternative minimum tax. Planning times income recognition, credits, and elections across multi-year horizons.

Backdoor and conversion strategies

High earners may fund a nondeductible traditional IRA then convert to Roth (backdoor Roth). Roth conversions accelerate tax now to gain tax-free growth, often timed in low-income years.