REG Exam Tax Strategies: Don't Freak Out About the REG Exam: Mastering Tax Concepts
Introduction
I wanted to provide you with 4 key study tips to take your REG exam studies to the next level! After having helped hundreds of students pass REG, I want to give you tips on the four most important topics on the exam: Partnership Taxation, S Corporation Taxation, C Corporation Taxation, and Individual Taxation.
Bonus Tip: Familiarize Yourself with IRS Forms
Before we jump into the 4 tips, I wanted to recommend that you familiarize yourself with actual IRS forms. The IRS forms are all freely available online and provide invaluable insights into tax filing processes. For example, the 1040 form for individual returns can be easily accessed by searching '1040 form IRS' on Google. Or, you can simply click on the links below.
Download the following forms: 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule 1, 1120S, 1120, 1065.
1. Partnerships and Partner Basis Adjustments
Partnership basis calculations are heavily tested on the REG exam. Basis determines when an individual must record a capital gain on a distribution. When a partnership takes on a liability, the parent’s basis increases by their ownership percentage of that liability, since they could be liable to pay back that liability.
For instance, consider the scenario with QRS Partnership:
Partnership Taxation Example & Question: Quinn, holding a 30% stake in QRS Partnership, sees the partnership incur a $300,000 operational loss in 2024. Additionally, Quinn extends a $100,000 personal loan to the partnership. At the start of the year, Quinn's initial basis was $200,000. How do these financial movements affect Quinn's basis in the partnership for 2024?
Quinn has beginning basis of $200,000. In 2024, the partnership incurs a loss of $300,000. Quinn's share of the loss is 30% of $300,000, which equals $90,000. Additionally, Quinn extends a personal loan of $100,000 to the partnership, which will entirely be added to his basis
Initially, Quinn's basis is $200,000. The $90,000 loss decreases it to $110,000, but the addition of the $100,000 loan brings it up to $210,000. Therefore, Quinn’s year-end adjusted basis in the QRS Partnership is $210,000.
2. S Corporations: Calculating Ordinary Business Income
Ordinary business income is important to calculate for S Corporation. Anything that’s not separately stated is recorded as ordinary business income. Separately stated items are for individual limitations and rules (e.g., charitable contributions). For example, individuals can only donate 60% of AGI in cash donations. If an S Corporation donates to charities, those donations are recorded as separately stated items and pass through the K-1 to the individual’s 1040 form.
Consider this example of TechGenius Solutions, Inc.:
S Corporation Taxation Example & Question: Mike owns an IT consulting firm, TechGenius Solutions, Inc., an S corporation. This year, the firm generated $600,000 in revenue, with significant expenses including $250,000 in labor costs, $100,000 in office lease payments, $30,000 for utilities, and a $20,000 donation to charity. What is the ordinary business income for TechGenius Solutions, Inc., this year?
We start revenue of $600,000. From this, we subtract the various operating expenses: $250,000 for labor costs, $100,000 for office lease payments, $30,000 for utility bills, and a $20,000 charitable donation ($400,000 total expenses). Therefore, the ordinary business income is $600,000 - $400,000 = $200,000.
3. Individual Taxation: The Power of Itemized Deductions
Individual taxation covers many rules and limitations that you need to memorize. Individual taxation is the most important area for you to regularly review to remember all the rules. Use a REG study outline to continually review the individual taxation rules.
A common topic within individual taxation is itemized deductions and their associated rules. Consider the following example question:
Individual Taxation Example & Question: A taxpayer makes a charitable contribution of $15,000, pays $5,000 in state income taxes, and $6,000 in mortgage interest this year. With an AGI of $100,000 and choosing to itemize deductions, calculate the total itemized deductions.
To find the total amount of itemized deductions, simply add the following:
$15,000 (charitable contributions) + $5,000 (state income taxes) + $6,000 (mortgage interest) = $26,000
Thus, the taxpayer's total itemized deductions amount to $26,000.
4. C Corporations: Managing Deduction Limitations and Reporting
C Corporation Example & Question: JKL Corporation made charitable contributions totaling $100,000 in 2023 but was only permitted to deduct $70,000 based on its taxable income limit. The corporation's book income before contributions was $800,000. How should JKL Corporation report the unallowed $30,000 on its Schedule M-1?
JKL Corporation attempted to deduct $100,000 in charitable contributions but was restricted by its taxable income limit, allowing only a $70,000 deduction (a C Corporation can only deduct 10% of its adjusted taxable income.). The remaining $30,000 exceeds this year's deductible limit and must be addressed in the company's financial reports. Therefore, we must add back the unallowed $30,000 to the taxable income on Schedule M-1.
Conclusion
We've explored fundamental tax strategies for Partnerships, S Corporations, Individual Taxation, and C Corporations to help prepare you for the REG exam. Best of luck with your studies, and let me know of any way that I can assist!