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CPA EXAM R EVI EW

J i j ~
BECKER
PROFESSIONAL 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.
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Becker Professional Education J CPA lXilnl Review
REGULATION
program attendance record
Regulation
Student _ Location:, _
REGULATION 1 REGULATION 2
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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.
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Regulation
vi
NOTES
Becker Professional Education I CPA Exam Review
© 2010 DeWy/Becker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review
REGULATION
table 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
4. Class questions R3-77
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
11. Class questions R4-135
© 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
4. Class questions R5-57
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
7. Class questions R6-69
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
7. Class questions R7-71
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
Becker Professional Education I CPA Exam Review
{)2010 DeVry/Becker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review
REGULATION CONTENT SPECIFICATION OUTLINE
REGULATION
3 hours
Regulation
<--------- 60 Points ---------->
Testlet #1 Testlet #2 Testlet #3 Testlet #4
24 24
I-
24 6
MC MC MC Task-based
Questions 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
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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
Regulation Becker Professional Education I CPA Exam Review
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
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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
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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
Becker Professional Education I CPA Exam Review
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Becker Professional Education I CPA Exam Review Regulation
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.
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Regulation
Textbook Icons
Becker Professional Education I CPA Exam Review
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 been
prepared to assist in your understanding of major concepts. Pass Keys will be
identified with this icon in the margins.
For important items within the materials that should be memorized, it will be
identified with this icon in the margins.
When working with the new task-based simulations, it will be necessary for
candidates to search professional literature to find the solution to a given
question. A keyword search ofthe given literature is a candidate's most time-
effective tool. Potential keywords to search with will be identified with this
icon in the margins.
FASB Accounting II'lIl1\'I I
Standards Codification
Notes, Exceptions, etc. III
These numbers represent the location of this topic in the FASB Accounting
Standards Codification. These will be identified with this icon in the margins.
When important notes, exceptions, etc. are included within the materials, it
will 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 be
identified with this icon in the margins.
When international comparison information is included within the materials, it
will 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 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 authoritallve
nongovernmental 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 of
fieldwork?
a piece of PIE'
Question 4 01 41
l),.v",. B kcO EdJ at o"al [)" Co p
Hom, AUDIT 1 0 I)
Auditing & Attestation 1
-.JI AUDIT 1-4
No'n,.".,.d
The auditor must adequately PLAN
the work and must properly supervise
any assistants.
The auditor must obtain a sufficient
understanding of the entity and its
environment, including its INTERNAL
CONTROL, to assess the risk of
material misstatement of the financial
statements whether due to error or
fraud, and to design the nature,
timing, and extent of further audit
procedures.
Answer 4 of 41
:00, , B" ,et ,,' 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
Regulation Becker Professional Education I CPA Exam Review
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:
'th
mber
A-I
N""Vo\e t-he'3 ItGe\\eY'""llr st-",,\\A""Y'As
A-I
+--Codewl
class nu
Ge\\€Y'",,1 '5+",,\\A""Y'As (liP)
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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
your retention will be.
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Becker Professional Education I CPA Exam Review Regulation
COURSE UPDATES AND ACADEMIC SUPPORT
The Becker Knowledgebase (http://beckerkb.custhelp.com) is your source for course updates, supplemental
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Regulation Becker Professional Education I CPA Exam Review
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Submit a question to our support team.
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Becker Professional Education I CPA Exam Review
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,f
The 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", m
Multiple 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 30
depending on the section) or one task-based simulation. For example, the Financial examination will contain 4
testlets. The first three testlets will be multiple-choice questions and the last one will contain seven short task-
based simulations. In completing the exam, each testlet must be finished and submitted before continuing on
to the next. Candidates cannot go back and view a previously completed tesllet or go forward to view a
subsequent testlet before closing and submitting the earlier testlet. Our final exam contains these types of
restrictions, 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
Becker Professional Education I CPA Exam Review
The computer-based CPA exam is offered during two of every three months of the calendar year. Once
determined 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 you
have 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 on
a 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 all
candidates pass all four parts of the examination on their first attempt. However, in spite of the low initial pass
rate, 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 no
preparation for the exam; while other candidates prepare minimally, improperly, or inefficiently. By preparing
properly, you can succeed the first time you take the exam.
Intro-14 (Q2010 DeVry/Becker Educational Development Corp. All rights reseNed.
Becker Professional Education I CPA Exam Review
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 initially
earn 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
Becker Professional Education I CPA Exam Review
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.
Becker Professional Education I CPA Exam Review
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 stress
by 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.
Becker Professional Education I CPA Exam Review
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 careers@becker.com 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
Regulation Becker Professional Education I CPA Exam Review
INSTRUCTOR EVALUATION FORM
Becker Professional Education is committed to providing quality education to our students. If you are taking this course in a live
classroom, you will be receiving a short instructor evaluation at the end of this section by email. Please take the 5 to 10 minutes
needed to complete this evaluation. Your input is very important to us. If you do not receive this evaluation by email, please
complete 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 sbsupport@iotasolutions.com 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 your
instructors, you will continue to receive periodic reminders from sbsupport@iotasolutions.com until you complete the evaluation
forms, 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 I
Please answer the questions below
by checking the box to the right of
the question:
This instructor communicated in away
that helped me learn in the class.
This instructor demonstrated
knowledge of the subject matter by
giving examples, working questions
during the lecture and answering
questions while at the class.
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This instructor motivated me to
complete the homework and to do
what I could to ensure that I was
prepared for the exam.
This instructor showed agenuine
interest in preparing me for the exam.
I would recommend this instructor to
others.
ITIIIJ ITIIIJ ITIIIJ
ITIIIJ ITIIIJ ITIIIJ
I would give this instructor the
following grade:
Describe at least one characteristic or
aspect of your instructor's teaching
that could be improved in order to
provide students with a better learning
experience.
(Use the back ofihis page for
additional space, if needed.)
Describe at least one of your
instructor's teaching strengths that
you found helpful or valuable.
(Use the back of this page for
additional space, if needed.)
A B c D F A B c D F
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Becker Professional Education I CPA Exam Review
INSTRUCTOR EVALUATION FORM-ADDITIONAL NOTES
©2010 DeVrv/Becker Education.1 Development Corp. All rishts reserved.
Regulation
Intro-21
Regulation
Intro-22
NOTES
Becker Professional Education I CPA Exam Review
"2010 DeVry/Becker Educational Development Corp. All rights re,erved.
REGULATION 1
11II ",,"'( 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 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 notification of updates by clicking on the
"Notify me by email ..." button on the Course Updates page.
Regulation 1
Rl-2
NOTES
Becker Professional Education I CPA Exam Review
© 2010 DeVry/t1ecker Educational Development Corp. All
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)
\ G
ITEMIZED 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 Income
Capital 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.
Becker Professional Education I CPA Exam Review Regulation 1
... Check here If you, or your spouse If fIling JOintly, want $3 to go to thiS fund (see page 14)" 0 You 0 Spouse Election Campaign

Department ot the Treasury..--Jntemal Revenue Service

U.S. Individual Income Tax Return
(99) lAS Use Only-Oo not write or 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
i
instructions 6
on page 14.)
E
If ajoint return, spouse's first name and initial Last name Spouse's social security number
Use the IRS
L
j
label.
H Home address (numbel" and slreet).lf you have a P.O. box, see page 14.
I
Apt. 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
Presldentlal
change your tax or refund.
Filing Status
Check only one
bo,
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)
D lines above.
Total number of exemptlons c1mmed d
6a o Yourself. If someone can claim you as a dependent, do not check box 6a
f
Boxes checked
Exemptions on 58 and 6b
b 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
• did not live with
--
: 0
you due to divorce
or separation
If more than four
: 0
lsee page 18)
--
dependents, see
0
Dependents on 6c
page 17 and
not entered ebove
--
check here .. 0
: 0
Add numbers on
7
sa
Income
Attach Form(s)
W-2 here. Also
attach Forms
W-2G and
1099-R if tax
was withheld.
If you did not
get a W-2,
see page 22.
Enclose, but do
not attach, any
payment. Also,
please use
Form 1040-V.
Adjusted
Gross
Income
7
sa
b
96
b
10
11
12
13
1.
lsa
16a
17
18
19
20a
21
22
23
2.
25
26
27
28
29
30
31a
32
33
34
35
36
37
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"=MI
Ordinary dividends. Attach Schedule B if required 9a
Qualified dividends (see page 22) .
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)
Certain business expenses of reservists, perlorming artists, and
fee-basis govemment officials. Attach Form 2106 or 21D6-EZ
Health savings account deduction. Attach Form 8889
Moving expenses. Attach Form 3903 r26"'-t_-------t--
One-half of self-employment tax. Attach Scheclule SE +_
Self-employed SEP, SIMPLE, and qualified plans +_
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 .. +_
IRA deduction (see page 31)
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
Regulation 1 Becker Professional Education I CPA Exam Review
Form 1040 (2009) Page 2
+---11 "
52
\
r
46
=-t----t--i1
49 "
50
55
54
43
45
41
46
44
42
53
Amount from line 37 (adjusted gross income)
Check ( D You were born before January 2, 1945, D Blind.) Total boxes L·)';}.•.
if: D Spouse was born before January 2, 1945, D Blind. checked 39a·';'"'-,
If your spouse itemizes on aseparate retum or you were adual-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 Land 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-
43
44
45
46
47
46
49
50
51
52
53
54
55
41
42
38
39a
b

b
Standard
Deduction
for-
• People who
check any
box on line
3ga, 3gb, or
40b or who
can be
claimed as a
dependent,
see page 35.
• All others:
Single or
Married filing
separately,
$5,700
Married filing
iointlyor
Qualifying
widow(erj,
$11,400
Head of
household,
$8,350
Tax and
Credits
Other
Taxes
56
57
58
59
60
Self-employment tax. Allaeh Schedule SE
Unreported 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 ...
56
57
58
59
60
Payments 61
62
63
If you have a
qualifying
child, attach
Schedule EIC.
540
b
65
66
67
68
69
70
71
Federal income tax withheld from Forms W-2 and 1099 p6
e
1-+ f-_1
2009 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
Add lines 61, 62, 63, 64a, and 65 through 70. These are your total payments 71
Refund
Direct deposit?
See page 73
and fill in 73b,
73c, and l3d,
or Form 8888.
72
73a
b
d
74
If line 71 is more than line 60, subtract line 60 from line 71. This is the amount you overpaid
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 0 SaVings I:-,,'c'
Account number j iii I '
Amount of line 72 vou want aoolied to vour 2010 estimated tax 74
Amount
You Owe
75
76
Amount you owe. Subtract line 71 from line 60. For details onhTOW to pay, see page 74 . 1
Estimated tax oenallv (see oaae 741 . . . . . 76 I 1,;) .'': ,:-c.;'·i':'-:X;';:.),;
Third Party
Designee
Sign
Here
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 your
records.
..".' : ",'"' :(",," "."
Preparer's
Date Preparer's SSN or PTiN
Paid
signature
ICheck if
0 self-employed
Preparer's
Finn's name (or I EIN
Use Only yours if self-employed),
Phone no.
address. and ZIP code
Fonn 1040 (2009)
Rl-6 {J2010 DeVryjBecker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
INDIVIDUAL TAXATION
Filing 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 than
the 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 month
following 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 those
taxpayers who are unable to file on the Aprii 15 due date. The automatic six-
month extension is not an extension for the payment of any taxes owed.
Although granted automatically, the six-month extension must be requested by
the 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 their
principal place of business outside the United States or are stationed outside the
United States have an automatic two-month extension to file, but not to pay. Such
persons need not file for the extension, but must include documentation if the extension
is taken. They can also request the other extensions under the same ruies as for other
taxpayers.
V2DlO DeVryfBe,ker Edu,ational Development Corp. All rights reserved. Rl-7
Regulation 1
II. FILING STATUS
I'W-Wiiir.'1
Becker Professional Education I CPA Exam Review
Filing Status
Check only one
box.
1 D Single
2 D Married tiljng jointly (even jf only one had income)
3 D Married filing separately. Enter spouse's SSN above
and 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-,CCC
6
--c
1
-
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 single
status 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 together
in a recognized common law marriage, or married and living apart (but not legally separated
or divorced).
1. If married during the year, a joint return may be filed, provided the parties are married
at 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 the
year. In a separate property state, a husband and wife who elect to file using the married
filing separately status must separately report their own income, exemptions, credits, and
deductions on their own individual income tax returns. In a community property state, most of
the 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 standard
deduction and rates (but not the exemption for the deceased spouse) for each of two
taxable years following the year of death of his or her spouse, unless he or she
remarries. In the event of a remarriage, the surviving spouse will file a tax return Uoint
or separate) with the new spouse.
Principal Residence for Dependent Child
The surviving spouse must maintain a household that, for the whole taxable year, was
the principal place of abode of a son, stepson, daughter, or stepdaughter (Whether by
blood or adoption). The surviving spouse must also be entitled to a dependency
exemption for such individual.
© 2010 OeVryjBecker Educational Oevelopment Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
E. Head of Household
Head of household status entitles certain taxpayers to pay lower taxes. The lower tax results
from a larger standard deduction and "wider" tax brackets. To qualify, the following
conditions must be met:
1. The individual is not married, is legally separated, or is married and has lived apart
from hislher spouse for the last six months of the year as of the close of the taxable
year.
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 the
taxable year, is the principal residence of:
a. A Dependent Son or Daughter (or descendent)
(1) Legally adopted children, stepchildren, and descendents qualify as sons
and daughters.
(2) Working Families Act: The definition of head-of-household conforms with
the 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's
qualifying relative.
(3) Divorced Parents: Assuming all other requirements are met, a noncustodial
parent is entitled to the head of household status if the custodial parent has
waived 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 the
taxpayer maintains a home that was the principal residence of the parent for the
entire 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 (as
well as stepparents, parents-in-law, etc.) qualify as relatives. A dependent
relative (other than a father or mother) must live with the taxpayer. Note that
cousins, 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 year
o Head of household Half ayear (more than)
V Z010 OeVry/Becker Educational Oevelopment Corp. All right5 re,eNed Rl-9
Regulation 1 Becker Professional Education I CPA Exam Review
INDIVIDUAL TAXATION
Exemptions
D lines 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 Spouse
on 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

_lived with you
--
(1) Firsl name Last name _ did not live with
:
0
you due to divorce
or separation
If more than four .
0
(see page 16)
--
dependents, see . ,
0
Dependents on 50
page 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. For
2010, 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 a
personal 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 or
separate return, as the case may be. The exemption for a spouse is always
considered to be a personal exemption (not a dependency exemption), even if the
spouse 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 own
personal and dependency exemption. However, a married taxpayer filing separately
may 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 a
dependency (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
Becker Professional Education I CPA Exam Review Regulation 1
II. DEPENDENCY EXEMPTIONS
A taxpayer is entitled to an exemption for each qualifying child and qualifying relative. Each
category 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 has
attained 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 they
1I5UPORT," 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 child
unless 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:
I CARES' 1.
I CARES I 2.
Close Relative
Under the close relationship test, to be a qualifying child of a taxpayer, the child must
be the taxpayer's son, daughter, stepson, stepdaughter, brother, sister, stepbrother,
stepsister, or a descendant of any of these. An individual legally adopted by the
taxpayer, or an individual who is lawfully placed with the taxpayer for legal adoption by
the taxpayer, is treated as a child of the taxpayer by blood. A foster child who is placed
with the taxpayer by an authorized placement agency or by jUdgment, decree, or other
order 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 younger
than the taxpayer, and under age 19 (or age 24 in the case of a full-lime student) to be
a qualifying child (although no age limit applies with respect to individuals who are
totally and permanently disabled at any time during the tax year). A "full time" student
is a student who attends an educational institution for at least part of each of five
months during the taxable year. An "educational institution" is one that maintains full-
time faculty and a daytime program. School attendance only at night does not qualify.
11J2010 DeVry/Becker Educational Corp. All reserved. Rl-11
Regulation 1 Becker Professional Education I CPA Exam Review
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 principal
place of abode as the taxpayer for more than one half of the tax year. Further, the child
cannot 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 for
the child.
Support Test Changes
The support test has been modified to determine if the child did not contribute more
than 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 dependency
exemption 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 support
of a person in order to claim him or her as a dependent. Support means the actual
expenses incurred by or on behalf of the dependent. Scholarships received by a
dependent student child or stepchiid are not included in determining the student's total
support. However, Social Security and state welfare payments are included in the
dependent's total support, but only to the extent that such amounts are actually
expended for support purposes.
a. Multiple Support Agreements
Where two or more taxpayers together contribute more than 50% to the support
of a person but none of them individually contributes more than 50%, the
contributing taxpayers, all of whom must be qualifying relatives of (or lived the
entire year with) the individual, may agree among themselves which contributor
may claim the dependency exemption.
(1) A contributor must have contributed more than 10% of the person's
support in addition to meeting the other dependency tests in order to be
able 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 is
less than the exemption amount ($3,650 during the taxable year 2010, and $3,750 for
2011 ).
a. Definition of Taxable Income
Only income that is taxable is included for the purpose of determining whether
the dependent has earned less than the exemption amount.
©2010 DeVry{6ecker I:ducctioncl Development Corp_ All rights reserved
Becker Professional Education I CPA Exam Review Regulation 1
ISUPORTI 3.
ISUPORT I 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 return
unless the joint return is filed solely for a refund of all taxes paid or withheld for the
taxable year (Le., the tax is zero).
Married children may be claimed as dependents provided they do not file joint returns
with their spouses (except to claim a refund of all taxes paid) and provided they satisfy
all other requirements for dependency.
Only Citizens of the United States or Residents of the United States, Mexico, or
Canada
The dependent must be either a citizen of the United States or a resident of the United
States, 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 as
dependents. Children include legally adopted children, foster children, and
stepchildren. 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 for
the entire year) may be claimed as a dependent.
C. Children of Divorced Parents
ISUPORT I
1. General Rule - Custodial Parents
Generally, the parent who has custody of the child for the greater part of the year takes
the exemption (determined by a "time" test, not the divorce decree). It does not matter
whether that parent actually provided more than one-half of the child's support. If the
parents have equal custody during the year, the parent with the higher adjusted gross
income will claim the exemption.
2010 OeVryfBecker Educational Corp. All rights reserved. Rl-13
Regulation 1
2.
Becker Professional Education I CPA Exam Review
Exception - Custodial Parent Waives Right
A noncustodial parent is not allowed a dependency exemption based solely upon
language written in a divorce agreement. A noncustodial divorced or separated parent
may claim the exemption for his or her child if the custodial parent waives the right to
the exemption. This is done by the custodial parent's signing of a written declaration
that is attached to the noncustodial parent's return. Form 8332 is used as the required
written declaration. The custodial parent may revoke the release of claim using the
Form 8332, provided (1) notice is given to the noncustodial parent at least one tax year
in advance (i.e., if notice is given in 2009, the revocation is effective no earlier than
2010) and (2) a copy of Form 8322 claiming the revocation is attached to the custodial
parent'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 the
following people:
Tim (an unrelated friend)
Rick (peter's brother)
Dennis (Peter's son)
Amount
of Support
$2,400
2,150
--.12Q
$5000
Percent
of Total
48
43
-2
100%
Rl-14
Under a multiple support agreement, Peter's dependency exemption can be claimed by:
a. NoOne
b. Tim
c. Rick
d. Dennis
Tim Rick Dennis
Support test Yes Yes No
Under $gross income Yes Yes
Preclude joint filing Yes Yes
Only U.S. citizens Yes Yes
Relative, 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 increased
standard deduction (NOT an additional exemption) for being:
• Old (age 65 or older)
• Blind
© 2010 DeVrvjBe<:ker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
INDIVIDUAL TAXATION
Gross 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 specifically
excluded. (For example, if the taxpayer finds $4,000 under a floorboard in his house, cannot
find the owner, and keeps the money, the $4,000 is income regardless of the fact that the
taxpayer did not "earn" it.)
B. Computation of Income - General Rule
Except in the cases of gain derived from dealings in property (discussed below), income is
determined by the amount of cash, property (FMV), or services obtained. In cases of
noncash income, the amount of the income is the fair market value of the property or services
received.
PASS KEY
Event
Taxable
Non-taxable
Income
FMV
N -0- N E
EXAMPLE
Basis
FMV
NBV
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 in
the 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., there
is 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 no
realized gain even though there has been an increase in the taxpayer's wealth. Gain is realized when
the shares are sold for $150 or exchanged for other property worth $150. If the gain is taxable, it
would also be recognized on the tax return.
102010 OeVrv{Becker Educational Development Corp. All r i g h t ~ 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 (with
some exceptions); that is, revenue is taxable when earned.
2. Cash Method
Under the cash method, recognition occurs in the period the revenue is actuaily or
constructively received in cash or (FMV) property.
Income
7 Wages. salaries, tips, etc. Attach Formes) W·2 . 7
Sa Taxable interest. Atlach Schedule B if required ..
ISbi
8a
b Tax-exempt interest. Do not include on line 8a.
Attach Form(s)
9a Ordinary dividends. Attach Schedule B if required ....
..1 9bl
9a
W·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) 10
if tax was withheld. 11 Alimony received. . 11
If you did not
12 Business income or 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..

13
see instructions. 14 Other gains or (losses). Attach Form 4797 14
15a IRA distributions. Ib Taxable amount (see instrs) .. 15b
16a Pensions and annuities.. 16a b Taxable amount (see Instrs). 16b
17 Rental real estate, royalfles. partnerships, S corporations, trusts, etc. Attach Schedule E . 17
Enclose, but do 18 Farm income or (loss). Attach Schedule F .. 18
not attach, any
19 Unemployment compensation. ............................ 19
payment. AlSO,
20a Social security benefits. I 20al I b Taxable amount (see instrs) 20b
use
arm 1040-V. 21 Other income 21
22 Add the am"Ounts in the fur-riaht 21--:- ThiS is 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 taxability
or deductibility of various items, such as passive activity losses, capital gains and losses, and
the investment interest deduction.
1. Ordinary
Ordinary income includes salaries and wages, state and local tax refunds, alimony, IRA
and pension income, self-employment (SchedUle C) income, unemployment
compensation, social security, prizes, the taxable portion of scholarships and
fellowships, gambling income, and anything not falling into one of the other three
baskets.
2. Portfolio
Portfolio income includes income a taxpayer would earn on his portfolio of assets, such
as interest and dividends.
3. Passive
The definition of "passive" generally means an activity in which a taxpayer did not
actively participate (active includes working in a business, etc.). Only passive losses
may offset passive income, and a net passive loss is not deductible on the tax return (It
is suspended and carried forward until passive income exists to offset it), unless an
exception exists and the requirement for passive treatment is removed.
Rl-16 ©2010 DeVryjBecker Educatiollal Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
II.
a. Rental Income and Royalties
Rental income received on a property that a taxpayer owns and rents (as
opposed to capital gain or loss that may exist when the property is sold) is
generally deemed "passive," unless exceptions exist.
b. Beneficiaries of Trusts and Investments in Partnerships, LLCs, and
S Corporations
Individuals (and companies) with investments in S Corporations, partnerships,
limited liability companies, and beneficiary interests in trusts and estates will
receive a Form K-1 from the entity each year. This K-1 is the investor's share of
the earnings and deductions of each company. A Schedule K is fiied for each
company (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 K
numbers. K-1 s can report income from any basket. If an investment in a
company is deemed limited (as opposed to general) for the investor, the income
from the business activities will be deemed passive for tax purposes, and the
passive activity ioss rules will apply. In addition, even general partners may
receive passive income on their K-1s (e.g., a partnership may have a rental
activity). This will be separated from regular business activities and on a different
line 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 any
property (personal or business), but there are some exceptions. An explanation of the
definition of capital and non-capital assets is presented later in this lecture. It is
important to become familiar with the definitions, as it will assist in understanding the
treatment of sales of various types of property. The calculation of the capitai gain or
loss is rather straight-forward once the components of the formula are determined. The
difficult parts of the process are determining if the gain or loss is, in fact, capital, and
then 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 of
mortgage debt on principal residences, which have very detailed guidelines for
excluded 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, the
difference is income to the employee.
©2010 DeVry!Becker Educational Development Corp. All rights reserved.
Regulation 1
5.
6.
7.
8.
Becker Professional Education I CPA Exam Review
Guaranteed Payments to a Partner
Guaranteed payments are reasonable compensation paid to a partner for services
rendered (or use of capital) without regard to the partner's ratio of income. This earned
compensation 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 in
income. For example, an employee's personal use of a company car is included as
wages in an employee's income. Further, the amount included is subject to
employment 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 his
employees are not income to the employees up to the cost on the first $50,000 of
coverage 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-2
wages. (This amount is calculated from an IRS table, and it is not the entire amount of
the 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 insured
are generally excluded from the gross income of the beneficiary.
(1) The interest income element on deferred payout arrangements is fUlly
taxable.
(2) Accelerated death benefits received by a terminally ill insured (certified that
the insured is expected to die within 24 months) are not taxable, or a
chronically ill insured (or requiring assisted living), if the proceeds are used
to 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 up
to the total amount of premiums and other amounts paid by the
policyholder-any excess would be taxable. Of course, exceptions apply.
If proper notice and consent requirements are met and the incurred was a
qualified 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 the
policyholder), or the beneficiary is a trust for the benefit of the insured's
family (or the estate of the insured), the gross income inclusion
requirement for the COLI is not applicable,
b. Accident, Medical, and Health Insurance (employer paid)
Premium payments are excludable from the employee's income when the
employer paid the insurance premiums, but amounts paid to the employee under
the 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 or
function of the body,
Rl-18 02010 DeVry{Becker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
c. De Minimis Fringe Benefits
De minimis fringe benefits are so minimal that they are impractical to account for
and may be excluded from income. An example is an employee's personal use
of a company computer.
d. Meals and Lodging
The gross income of an employee does not include the value of meals or lodging
furnished to him or her in kind by the employer for the convenience of the
empioyer 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 by
employer on behalf of an employee's educationai expenses. The exclusion
applies to both undergraduate and graduate level education.
f. Qualified Tuition Reductions
Employees of educational institutions studying at the undergraduate level who
receive tuition reductions may exclude the tuition reduction from income.
Graduate students may exclude tuition reduction only if they are engaged in
teaching or research activities and only if the tuition reduction is in addition to the
pay for the teaching or research. To be excludable, tuition reductions must be
offered on a nondiscriminatory basis.
g. Qualified Employee Discounts
Employee discounts on employer-provided merchandise and service are
excludable as follows:
(1) Merchandise Discounts
The excludable discount Is limited to the employer's gross profit
percentage. Any excess must be reported as income.
(2) Service Discounts
The excludable discount on services Is limited to 20% of the fair market
value 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 month
may be excluded. The exclusion is available even if the parking benefit is
taken by the employee in place of taxable cash compensation.
(4) Transit Passes
The value of employer-provided transit passes up to $230 (for 2010) per
month 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, profit-
sharing, or stock bonus plan are not income to the employee at the time of
contribution.
©201O DeVrv/Becker {ducational Development Corp. All dghts reserved Rl·19
j.
Regulation 1 Becker Professional Education I CPA Exam Review
(2) Benefits Received (taxable)
The amount that is exempt from tax (plus any income earned on such
amount) is taxable to the employee in the year in which the amount is
distributed or made available to the employee.
i. Flexible Spending Arrangements Stems (FSAS)
A Flexible Spending Arrangement Stems from a Section 125 employee flexible
benefit plan and is a plan that allows employees to receive a pre-tax
reimbursement 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 up
to $5,000 per year) deposited pre-tax into a flexible spending account
designated for them. These deposits must be done via salary reduction
directly by the employer, and the employee is not taxed on that income.
The employee has the option to use the deposited funds to pay for
qualified healthcare and/or qualified dependent care costs and submits
claims 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 within
a period of time (usually 6 months) are forfeited. However, this grace
period 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.
Becker Professional Education I CPA Exam Review
B. Interest Income
Regulation 1
Interest and Ordinary Dividends
SCHEDULE B
(Fonn 1040A or 1040)
Department of the Treasury
lntemal Revenue Se!vice (99)
Name{s) shown on retlJrn
"Attach to Fonn 1040A or 1040. .. see instructions on back.
OMB No. 1545-0074

Attachment
SoolJence No. 08
Your social SeClJrity number
Part I
Interest
(See instructions
on back and the
instructions for
Form 1040A, or
Form 1040,
line8a.)
Note. If you
received a Form
1099-INT, Form
1099-010, or
substitlJte
statement from
a brokerage firm,
list the firm's
name as the
payer and enter
the total interest
shown on that
form.
Part II
Ordinary
Dividends
(See instrlJctions
on back and the
instructions for
Form 1040A, or
Form 1040,
Iine9a.)
Ust name of payer. If any interest is from a seller-financed mortgage and the
buyer used the property as a personal residence, see instructions on back and list
this 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 Form
1040 line 8a . ...
Note. If line 4 is over $1 500 au must complete Part III.
5 List name of payer'" _
Amount
2
3
4
Amount
5
Note. If you
received a Form
1099-0IVor
substitute
statement from
a brokerage firm,
list the firm's
name as the
payer and enter
the ordinary
dividends shown
on that form.
f---I---+--
6 Add the amounts on line 5. Enter the total here and on Form 1040A, or Form
1040 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 a
Part 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
and Trusts . .
(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, a
back.) 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 1040Aor 1040) 2009
(12010 OeVrvjBecker Educational Development Corp. All riChts reserved.
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) are
included 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 is
taxable.
g. For certain taxpayers and certain bonds, the amortization of a bond premium is
an 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 received
and 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 fund
dividends 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-free
scholarships, 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. (For
2010, phase-out begins at $70,100 for single and head of household and
at $105,100 for married filing joint. There is no exclusion for those using
the 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 over
age 18 to under age 24 who does not provide over half of his/her own support and is a
full-time student) is taxed at the parent's higher tax rate. Net unearned income is
calculated 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 the
child's rate). Although the income in excess of $1 ,900 is taxed at the parent's marginal
tax 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 applicable
child provided the income is between $950 and $9,500 and consists solely of interest
and dividends.
2010 Child's
Unearned
Income
0-$950
$951- $1,900
$1,901 and over
Tax
Rate
0%
Child's
Parent's
4. Forfeited Interest (Adjustment) - Penalty on Withdrawal from Savings
Forfeited interest is a penalty for early withdrawal of savings (generally on a time
deposit, such as a certificate of deposit, at a bank). The bank credits the interest to the
taxpayer's account and then, in a separate transaction, removes certain interest as a
penalty for withdrawing the funds before maturity. The interest received is taxable on
the taxpayer's income tax return, but the amount forfeited is also deductible as an
adjustment in the year the penalty is incurred. Thus, the taxpayer only pays tax on the
amount of interest actually received. Note, however, that the amount of forfeited
interest 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-day
period that begins 60 days before the ex-dividend date (the date on
which a purchased share no longer is entitled to any recently
declared dividends).
(b) Disqualified Dividends
(i) Regulated Investment Companies
(ii) REIT (real estate investment trust)
(!lOIO DeVry/Becker Educational Corp_ All rights reserved Rl-23
Regulation 1 Becker Professional Education I CPA Exam Review
(iii) Employer stock held by an ESOP
(iv) Amounts taken into account as investment income (for
purposes 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% income
tax bracket)
Note: For 2011, the current tax law provides that qualified dividends be taxed at
the 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 no
earnings 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 basis
over 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 the
shares 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 FMV
of 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 the
sharehoider has recovered his or her entire basis, are treated as taxabie gross
income.
()2010 Educational Development Corp. All rights re,erve<!.
Becker Professional Education I CPA Exarn Review Regulation 1
---------
D.
State and Local Tax Refunds IIlIIII
The receipt of a state or local income tax refund in a subsequent year is not taxable
if 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 his
Year 11 income because he did not itemize in Year 10 and, therefore, did not receive a tax benefit
from 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 when
received, regardless of whether or not the taxpayer itemized deductions in the year the refund was
received.
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 payments
and are deductible to arrive at adjusted gross income (adjustment) by the contributing
spouse. 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 for
the support of minor children (or is contingent on the child's status, such as
reaching a certain age), such portion is not deductible by the spouse making
payment 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 for
alimony and for support, but the payments subsequently made fall short of
fUlfilling 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 a
spouse, that spouse gets no deduction for payments made, and the payments are not
includible in the gross income of the spouse receiving the payment.
E.
() 2010 DeVry/Beder Educational Corp. All rights reserved. Rl-25
Regulation 1 Becker Professional Education I CPA Exam Review
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 sole
proprietorship is then transferred to Form 1040 as one amount.
Gross Business Income
< Business Expenses>
Profit
G
loss
SCHEDULEC
(Form 1040)
Department of the TreaSU1Y
Intemal Revenue Service (99)
Profit or Loss From Business OMS No_ 1545·0074
(Sole Proprietorship)
.. 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.09
Name 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 I
E BUSiness address sUite 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 participate" in the operation of this business during 2009? If "No," see page C-3 for -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 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 Income
1 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 employee" box
)
on that form was checked, or

• 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 professional
Ii:'
i'
.C
Iii
services. 17
26 Total expenses before expenses for business use of home. Add lines 8 through 27 26
29 Tentative profit or 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, line
13 (If you checked the box on line 1, see page C-l). Estates and trusts, enter on Fonn 1041, line 3. 31
For 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.
Becker Professional Education I CPA Exam Review Regulation 1
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 " Y e s . ~ 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 find
out 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 p a ~ 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 self-
employed activity (such as director or consulting fees) are included as part of gross
income 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 portion
used for business) or a standard mileage rate (50¢ per mile in 2010)).
f. Business meal and entertainment expenses at 50% (when all proceeds go to
benefit a charity, 100% may be deductible as an itemized deduction for
charitable contributions).
g. Depreciation of business assets
h. Interest expense on business loans (interest expense paid in advance by a cash
basis taxpayer cannot be deducted until the tax year/period to which the interest
relates).
i. Employee benefits.
j. Legal and professional services.
k. Bad debts actually written off for an accrual basis taxpayer only (the direct write
off 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 dues
are nondeductible.
(3) Interest expense - This may be reported as an itemized deduction if
mortgage interest or investment interest is paid.
Rl-28 © 2010 D",Vry!Becker educational Development Corp. All right, reserved
Becker Professional Education I CPA Exam Review
(4) State and local tax expense - Report as an itemized deduction on
Schedule A.
Regulation 1
(5) Health insurance of a sole proprietor - While this is not reported on
Schedule 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 expenses
from 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% of
up to $106,800 of self-employment income in 2010 plus 1.45% of
self-employment income thereafter, if applicable) of SIE tax
(Medicare plus Social Security) paid.
(b) This allows the sole proprietor the ability to "deduct" the employer
portion of the SIE tax as an adjustment to gross taxable income (of
which the net Schedule C amount is a part).
(c) All self-employment income is subject to the 2.9% Medicare tax, but
only up to $106,800 in 2010 is subject to the 12.4% Social Security
tax (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 is
permitted as a carryover (at taxpayer's election, it may be used as a carryforward
only):
(1) 2-year carryback (possibly up to 5years for 2009-2011)
(2) 20-year carryforward
19 2010 OeVry/Becker Educational Development Corp_ All rights reserved. Rl·29
Regulation 1
R1·30
Becker Professional Education I CPA Exam Review
5. Husband and Wife Qualified Joint Venture Election
Certain married persons who operate a business together may elect to simplify their tax
reporting requirements by not filing a partnership income tax return (Form 1065) and
instead reporting on their jointly filed personal income tax return.
a. Requirements
When a husband and wife operate a business as materially participating
business partners and the only members of the joint venture business are the
husband and wife, the spouses may elect to report their respective portions of
income, expenses, gains, losses, and credits related to the business on their
personal income tax return, just as if they were operating their own trades or
businesses.
b. Election
The election is made on the jointly-filed Form 1040 by having each spouse report
hislher respective portions of the business activity (based on ownership interest)
separately as a sole proprietor on either a Schedule C or a Schedule F. Social
Security 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 criteria
for implementation (including sole proprietorships, partnerships, and corporations) and
provide guidelines with respect to capitalizing or expensing certain costs (i.e., taxes
paid in connection with the acqUisition of property are capitalized as part of the
property's cost). In the first year of implementation, they generally cause an increase in
the carrying cost of ending inventory and a decrease in operating expense. This
results 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 his
or her trade or business (e.g., machine tools for use in the production line
of a machine tool manufacturer).
(2) Produced for Sale
Real or tangible personal property produced by the taxpayer for sale to his
or 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 apply
to (inventory) property acquired for resaie if the taxpayer's average gross
receipts for the preceding three tax years do not exceed $10,000,000
annually.
© 2010 DeVry/8ecker Educational Development Corp. All
Becker Professional Education I CPA Exam Review Regulation 1
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 administrative
supplies.
c. Costs Not Required to be Capitalized
Costs not required to be capitalized include selling, advertising, and marketing
expenses, certain general and administrative expenses, research, and officer
compensation 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 ER 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 Is
incomplete at the end of a tax year in which it was started (i.e., it does not start and
finish within the same tax year) and relates to the manufacture, installation, building, or
construction of real or personal property.
a. Income Recognition - General
(1) Percentage-of-Completion Method Required for Tax for Non-Exempt
Long-term Contracts
Unless an exemption exists for a taxpayer or a contract, long-term
contracts must be accounted for using the percentage-of-completion
method to determine taxable income for a partiCUlar contract (note that a
taxpayer may use other methods for other contracts if an exemption exists;
thus, contracts are evaluated on a contract-by-contract basis).
._----_.._"._--
() 2010 OeVry/8ecker Educational Oevelopment Corp. All rights reserved. Rl-31
Regulation 1 Becker Professional Education I CPA Exam Review
(2) Exemptions
Certain contracts are exempt from the requirements long-term contract
income recognition for tax purposes and may use other methods (e.g.,
completed contract method) to calculate their taxable income under the
contract for regular income tax purposes. These include:
(a) Small contractors (projects that are expected to last no more than
two years and are performed by a taxpayer who has average annual
gross receipts not exceeding $10 million for the three years that
precede the tax year in question.)
(b) Home construction contractors (where at least 80% of the total
contract costs are related to the construction or rehabilitation of
certain dwelling units, which do not include hotels, etc., where the
majority of the use is on a transient basis). [Note that these
residential contactors generally use the special rule of the
percentage-of-completion capitalized cost method, which is
essentially when 70% of the items are accounted for under the
percentage-of-completion method and 30% under any allowabie
method.]
(c) A long-term construction contract that includes land and where less
than 10% of the total contract costs relates to the actual construction
of property on the land.
(d) Services performed by architects, engineers, designers, construction
management advisors, and software implementation personnel
related to the long-term project (i.e., those who are contracted by a
taxpayer involved in a long-term contract to perform services but are
not generally responsible for the final product under contract).
(e) Services performed under warranty and maintenance agreements
related to the long-term contract.
b. Cost Allocation Rules - General
(1) Cost Allocation Rules Required for Tax for Long-term Construction
Contracts
Unless an exemption exists for a taxpayer or a contract, those involved in
long-term contracts must use cost allocation rules to account for their long-
term 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, the
Uniform Capitalization Rules discussed above apply to long-term contracts.
Note that costs associated with marketing, advertising, selling, and
research and development are not subject to such cost allocation
(capitalization).
Rl-32 l;l2010 Educational Development Corp. All riSht5 reserved.
Becker Professional Education I CPA Exam Review Regulation 1
(2) Exemptions
Small contractor and home construction contractors are not required to
employ the costs allocation rules identified above. However, (i) they are
required to allocate production period interest related to the contract to the
costs of the project and (ii) home construction projects that are not also
small constructions projects must use the Uniform Capitalization Rules of
Code Section 263 (discussed in the above section). Also, interest for the
production 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 months
to complete.
c. Production Period Defined
(1) Start Date
For cash basis taxpayers, the starting date of production is generally the
date on which the contractor either incurs costs (other than the start-up
engineering, design, etc., costs that are excluded from cost allocation, as
discussed above) under the contract. For accrual basis taxpayers, the
starting date is the later of the date for cash basis taxpayers or the date the
taxpayer has incurred at least 5% of the total costs initially estimated under
the contract.
(2) End Date
The end date of the production period is generally the date on which the
work under the contract is complete (per contract provisions) or on the date
the taxpayer has incurred at least 95% of the total costs expected under
the contract.
d. Calculation for Percentage-of-Completion Method Income Recognition
In simple terms, the amount of gross income under the contract that is
recognized on the tax return is the portion of income that relates to the
percentage 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 a
ratio of the total cumulative costs incurred to date at the end of the tax year
divided by the total expected costs to be incurred under the contract. This
ratio provides a total "percent-complete" amount for the contract as of the
end of the tax year.
(2) Gross Income Recognition Calculation
To calculate the amount of income that will be recognized under the
contract for a given tax year, multiply the ratio determined using the cost-
to-cost method (above) by the total contract price and subtract the amount
of income that was recognized in prior years for the contract.
1:12010 OeVrv/6ecker Educallonal Development Corp. All rights reserved. "-33
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-term
contracts.
(1) The percentage-of-completion method is required to be used for
Alternative Minimum Taxation, regardless of the method used for regular
tax (except for home construction contracts).
(2) Even if the percentage-of-completion method is used for regular tax
purposes, there are still likely to be differences in the calculation of taxable
income because the calculation of alternative minimum taxable income
must take into account not only the method of income recognition, but also
other alternative minimum tax rules (e.g., depreciation methods).
f. Miscellaneous Impacts
(1) Corporate earnings and profits (discussed in the R3 lecture) must be
calculated using the percentage-of-completion method, even if the
corporation uses the completed-contract method for regular tax purposes.
Thus, positive adjustments are generally reflected in the calculation of the
corporation's current E&P throughout the construction period (assuming
the contract is expected to make a profit) and a negative adjustment is
reflected in the calculation of the corporation's current E&P at the end of
the contract.
(2) Change in accounting method - The method used by a taxpayer for the
income recognition on a contract is deemed a "method of accounting" by
the 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 or
aggregates several contracts into one larger contract, IRS approval is
generally required, and a statement explaining the changes must be
attached to the original tax return for the year.
(3) "Unique" rules for personal property contracts - In order for the
manufacture of personal property to qualify as a long-term contract, not
only must the contract not be completed within the year it was started, but
it also must be for the manufacture of a "unique" item (i.e., an item that is
made specifically for a customer and could not be sold to others, is not
generally part of a taxpayer's normal inventory, and requires significant
pre-production costs).
(4) Related parties - Unless the exception exists where over 50% of the
3-year average annual gross receipts of the same items stem from
unrelated parties, if a taxpayer performs services for a contractor that is
required to account for a long-term contract entered into with a related
party using the percentage-of-completion method, the taxpayer (even
those providing engineering or design services) must also use the
percentage-of-completion method because of the related party impact.
END OF ANCillARY MATERIAL
Rl-34 © 2010 DeVry/Becker Development Corp_ All rights
Becker Professional Education I CPA [Xilnl Review
SCHEDULE SE
(Form 1040)
Department of the Treasury
Inlemal Reveflue Sef\lice (99) Attach to Form 1040.
Self-Employment Tax
See Instructions for Schedule SE (Form 1040).
Regulation 1
OMS No. 1545-0074

Attachment
S uence No. 17
Name of pefSon with self-employment income (as shown on Form 1040)
Social securi1y number of person
with self-employment income
Who Must File Schedule SE
You 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 a
religious 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 use
either "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 Science
practitioner 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
I
No V..

Are you a minister, member of a religious order, or Christian
Was the total of your wages and tips subject to social security
Science 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-employment
self-employment more than $106,8001
tax on other eamings?


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

Uncollected Social
Did you receive church employee income reported on Form
Did you report any wages on Form 8919,
W-2 01 $10828 or more?
SecUrity and Medicare Tax on Wages?

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 (Form
1065), box 14, code A . 1.
b If you received social security retirement or disability benefits, enter the amount of Conservation Reserve
Program 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 this
line. See page SE-3 for other income to report 2
3 Combine lines 1a, lb, and 2. 3
4 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 4
5 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. 5
6 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 Educational Development Corp. All rights reserved
Cat. No. 11358Z Schedule SE (Form 1040) 2009
Rl-35
B_ecck"e"r-,-PC-'-rofessional Education I CPA Exam Review
Schedule SE (Form 1040) 2009 Attachment Sequence No. 17 Page 2
Name 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 - orm
box 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 Reserve
Program 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 this
line. See page SE-3 for other income to report. Note. Skip this tine if you use the nonfarm
optional method (see page SE-4) 2
3 Combine lines 1a, 1b, and 2 . 3
4a 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 4b
e 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 ... 4e
5a Enter your church employee income from FOIm W-2. See page I I
I SE-l for definition of church employee income. . . . .. 5a
b Multiply line 5a by 92.35% (.9235). If less than $100, enter -0- 5b
6 Net earnings from self-employment. Add lines 4c and 5b 6
7 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 on
Form(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) 8b
e Wages subject to social security tax (from Form 8919, line 10) 8e
,
d Add lines 8a, 8b, and 8c . 8d
9 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) 10
11 Multiply line 6 by 2.9% (.029) 11
12 Self-employment tax. Add lines 10 and 11. Enter here and on Form 1040, line 56. 12
13 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 income
1
was not more
than $6,540, or (b) your net farm profits
2
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 income
1
(not less than zero) or $4,360. Also
include this amount on line 4b above. 15
Nonfarm Optional Method. You may use this method only if (a) your net nonfarm profits
3
were less
than $4,721 and also less than 72.189% of your gross nonfarm income,4 and (b) you had net earnings
from self-employment of at least $400 in 2 of the prior 3 years. Caution. You may use this method-no
more than five times.
16 Subtract line 15 from line 14 .
16
17 Enter the smaller of: (213) of gross nonfarm income
4
(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 4c
and go to line 5a. Income from services you perfonned as a minister or a member of a religious order is not church employee
income. 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 you
had $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 A-
minus the amount you would have entered on nne 1b had you not
used 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.
Becker Professional Education I CPA Exam Review
AN CIII A RY MAT ERI 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 the
intent 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 same
way 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 other
business 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 from
the 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 computed
by subtracting the purchase price (cost) from the sales price.
b. Accrual Method
(1) The accrual method is required for certain corporate and partnership
farmers as well as for all farming tax shelters.
(2) Inventories must be used and maintained. and they must be taken at the
start and end of the tax year.
(3) Gross profit equals the value of inventories at year-end plus the proceeds
received from the sales during the year, less the value of inventories at the
beginning 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
Regulation 1 Becker Professional Education I CPA Exam Review
SCHEDULE F
(Form 1040)
Deparlment of the Treasury
Internal Revenue service (99)
Profit or Loss From Farming
Ii>- 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

Attachment
Sequence 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
I
i<;
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 I
7a

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 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
---------
._---
34a
24 labor hired 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.
Becker Professional Education I CPA Exam Review Regulation 1
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. Gains
and losses are given tax effect (recognized) only when the asset is sold or disposed by other
means. Whether on a cash or accrual method of accounting, taxpayers who sell stock or
securities on an established securities market must recognize gains and losses as of the
trade date, not the settlement date. The basic formula in determining the gain or loss is as
follows:
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 age
of 59Y. (except in certain situations, covered later) or the individual elects to receive
equal periodic distributions over his life expectancy. A taxpayer is required to start
withdrawals by the age of 70Y. (this is often referred to as the "required minimum
distribution" or ''RMD''). Benefits are not taxable until the taxpayer receives the
distribution.
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 when
received (regardless of what type of income, such as capital gain, was
earned 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 partially
taxable. Return of capital is not taxable; thus, the amount received
must be prorated between the contributed and non-contributory
portions 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 any
increase in regular income tax) if the individual has not met an exception.
1:12010 OeVry/8ecker fduCiltional Development Corp. All rights reserved. Rl·39
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)
o
o (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 the
start ofthe payout period, then:
$60,000 $ I 'b
230.77 exc udl Ie from each of the first 260 payments
260
In this example, the first $230.77 of the first 260 payments received is not taxable. Amounts of each payment
in 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 a
miscellaneous itemized deduction on the annuitant's final income tax return not subject to the 2% of AGI
floor.
Rl-40 © 2010 DeVry{Becker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
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,
Departmenl of tt>e Treasury 5 corporations, estates, trusts, REMICs, etc.) Atlachment
Internal Revenue Service (99) Attach to Form 1040, 1040NR, or Form 1041. Instructions for Schedule E (Form 1040). S uenea No 13
Narne(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 family
use it during the tax year for personal
purposes 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) 6
7 Cleaning and maintenance 7
6 Commissions. 6

Insurance.

,.
Legal and other professional fees
,.
11 Management fees 11
12 Mortgage interest paid to banks,
etc. (see page E-S) . 12 12
13 Other interest. 13
,.
Repairs.
,.
15 Supplies 15
16 Taxes

17 Utitities. 17
16 Other (list) _
18
,.
Add lines 5 through 18. 1. 1.
2.
Depreciation expense or depletion
(see page E-S) 20 20
21 Total expenses. Add lines 19 and 20 21
22
Income or from rental real

estate m royalty properties.
Subtract line 21 from line 3 (rents) or
tine 4 (royalties). If the result is a

see page E-S to find out if
you must file Form 6198. 22
23
Deductible rental real estate loss.
I
Caution. YOlJr rental real estate loss
on line 22 may be limited. See page
.
E-5 to find out if you must file Fonn
8582. Real estate protessionals must
complete 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, line
17 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, use
Schedule 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 2
Name(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 which
any 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 year
unallowed loss from a passive activity (if that loss was not reported on Form 8582), or unreimbursed 0 Yes 0 No
oartnershiD 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 if
partnership; S foreign identification any amount is
for Scorooration oartnershio number not at risk
A D D
B D D
c D D
0 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
A
B
C
0
29a
Totals I- ......
. ,
.. .'
b Totals I I I I
30 Add columns (g) and 0) of line 29a . 30
31 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 Employer
identification number
AI
BI
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 I
BI I I
34a Totals I.;;'
>.·c· ....
b Totals I I .' . 1
35 Add columns (d) and (f) of line 34a . 35
36 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 and
include 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 from
tal Name
number
S C ~ ~ ~ a ~ ' ~ ~ ~ ; 2c
fromScl1edules C, line Ib
Schedules Q, line 3b
I I I I
39 Combine columns (d) and (e) onlv. Enter the result here and include in the total on line 41 below 39 I I
· SummarY
40 Net farm rental income or (loss) from Form 4835. Also, complete line 42 below. 401 I
41 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 I
42
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 estate
professional (see page E-2), enter the net income or Ooss) you reported
anywhere on Form 1040 or Form 1040NRfrom all rental real estate activities
in 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 Income
Rent Cancellation Payment
Improvement In-Lieu-of Rent
< Rental Expenses>
Net Rental Income
o
Net 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 a
personal residence. The rental income is excluded from income, and mortgage
interest (first or second home) and real estate taxes are allowed as itemized
deductions. 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 purposes
for the greater of (i) more than 14 days or (ii) more than 10% of the rental days, it
is treated as a personal/rental residence. Expenses must be pro-rated between
personal and rental use (see example below). However, a different pro-ration
method is used for mortgage interest and property taxes (see' in the example
below), than for other property-related expenses (e.g., utilities, insurance,
depreciation, etc.). Rental use expenses are deductible only to the extent of
rental 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, and
other active income or against portfolio (interest and dividends) or capital gains
income. Expenses related to passive activities can be deducted only to the
extent of income from all passive activities.
b. Nondeductible PALs
Carry forward without any time limit unused passive activity losses held in
suspension.
(1) Suspended losses are used to offset passive income in future years.
(2) If still unused, suspended losses become fully tax deductible in the year
the 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 losses
from the activity can be used to offset the taxpayer's active income in the
same activity.
c. Taxpayers Subject to PAL Rules
Individuals, estates, trusts, personal service corporations, and closely held C
corporations are subject to the passive activity rules.
d. PAL (Disallowed Net Loss) Exceptions
An individual may deduct rental activity losses (although deduction may be
limited) 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 passive
losses attributable to rental real estate annually if the individuals are
actively participating/managing (although not participating to the
extent needed to avoid passive activity classification as described
below) and own more than 10% of the rental activity.
(b) Carryforward
Any excess would be carried forward indefinitely as an unused
passive activity loss. An estate can qualify for the two years
following the decedent's death if the decedent actively participated in
the operation.
(c) Phase-out
The $25,000 allowance is reduced by 50% of the excess of the
taxpayer's AGI (without consideration of this loss deduction) over
$100,000. The allowance is eliminated completely when AGI
exceeds $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 have
material participation in the activity, the rental activities are not considered
passive and the taxpayer (sometimes referred to on the CPA Exam as a
"real estate person") can fully deduct losses from the rental activities
against other income:
(a) More than 50% of the taxpayer's personal services during the year
are performed in real property businesses, and
(b) The taxpayer performs more than 750 hours of services in real
property businesses during the year.
L. Unemployment Compensation
A taxpayer must include in gross income the full amount received for unemployment
compensation.

M. Social Security Income
Social Security benefits received might be included in income. Taxpayers are
classified into five categories depending on the level of provisional income, which is
defined as AGI plus tax-exempt interest plus 50% of Social Security benefits. Taxpayers
must include in income the lesser of 50% (or 85%, depending on income) of social security
received or 50% (or 85%, depending on income) of the excess provisional income over the
threshold.
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 h
qualified 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 r i g h t ~ reserved. Rl-45
Regulation 1 Becker Professional Education I CPA Exam Review
N. Taxable Miscellaneous Income
1. Prizes and Awards
The fair market value of prizes and awards is taxable income. An exclusion from
income for certain prizes and awards applies where the winner is selected for the
award without entering into a contest (i.e., without any action on the winner's part) and
assigns 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 other
specific reporting rules), gambling losses may only be deducted to the extent of
gambling winnings. The allowable amount of these gambling losses are
deductible on Schedule A as an itemized deduction, but the amount is not
subject 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 the
damages were paid "in lieu of." Thus, if a damage award is compensation for lost
profit, the award is income.
4. Punitive Damages
Punitive damages are fully taxable as ordinary income if received in a business context
or for loss of personal reputation. Punitive damages received by an individual in a
personal injury case are also taxable except in wrongful death cases where state law
has 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 on
tuition, 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 the
grantee.
2. Nondegree-seeking Student
Scholarships and fellowships awarded to nondegree-seeking students are fully taxable
at FMV.
3. Tuition Reductions
Graduate teaching assistants and research assistants who receive tuition reductions
are taxed on the reduction if it is their only compensation, but not if the reduction is in
addition to other taxable compensation.
• ,AG
l;) 2010 DeVry!Becker Educational Oevelopment Corp_ All riehu r e ~ e r v e d ,
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 are
excluded 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 benefits
received by an insured who is terminally ill (provided there is certification that the
insured is expected to die within 24 months), is chronically ill, or requires
assisted 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 Security
Act.
4. Workers' Compensation (non-taxable)
Exclude from gross income compensation received under a workers' compensation act
for 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 the
individual paid all premiums for the insurance.
7. Foreign-earned Income Exclusion
Taxpayers working abroad may exclude from gross income up to $91,500 (2010) of
their foreign-earned income. In order to quaiify for the exclusion, the taxpayer must
satisfy 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 an
entire taxable year.
b. Physical Presence Test
The physical presence test requires that the taxpayer must have been present in
the 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 Corp. All rights reserved. Rl-47
Regulation 1 Becker Professional Education I CPA Exam Review
INDIVIDUAL TAXATION
Capital 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 ordinary
course of business.
Rl-48
2.
3.
4.
5.
Depreciable personal property and real estate used in a trade or business (for
example, 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 gain
treatment. )
Treasury stock (not an ordinary asset and not subject to capital gains treatment).
lQ2010 D€Vry!Becker Educational Development Corp_ All right5 re5erved.
Becker Professional Education I CPA Exam Review Regulation 1
SCHEDULE D
(Form 1040)
Department of lIw Treasury
Internal Revenue SetVice (99)
Capital Gains and Losses
~ Attach to Form 1040 or Form 1040NR. ~ S e e Instructions for Schedule D (Form 1040).
~ U s e Schedule D-1 to list additional transactions for lines 1 and 8.
OMB No. 1545-0074
~ © 0 9
Attachment
S 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 instructions
Subtract (e) from (d)
1 i
f
!
!
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 4
i
5 Net short-tenn gain or (loss) from partnerships, S corporations, estates, and trusts from
Schedule(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
! !
:
i
i
f
:
:
9 Enter your long-term totals, if any, from Schedule D-1,
,: •. {;.,..,...•....
'"f
line 9 9 ! :
10 Total long-term sales price amounts. Add lines 8 and 9 in
i ':,(;:; ',H·
"·'\,:,i..J '." column (d) 10
11 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 11
12 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 i
14 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 Part
ilion 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
Becker Professional Education I CPA Exam Review
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. Then
go 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 the
instructions. . ~ 18
19 Enter the amount, if any, from line 18 of the Unrecaptured Section 1250 Gain Worksheet on
page 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 complete
the Qualified Dividends and Capital Gain Tax Worksheet on page 39 of the Instructions
for Form 1040 (or in the Instructions for Form 1040NR). Do not complete lines 21 and 22
below.
.
D No. Complete Form 1040 through line 43, or Form 1040NR through line 40. Then complete
the Schedule 0 Tax Worksheet on page D-10 of the instructions. Do not complete lines 21
and 22 below.
21 If line 16 is a loss, enter here and on Form 1040, line 13, or Form 1040NR, line 14, the smaller
of:
• 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 complete
the Qualified Dividends and Capital Gain Tax Worksheet on page 39 of the Instructions
for 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 a
mortgage of $45,000 to Xfor $60,000 in cash. The taxpayer is treated as if he had received $105,000
in the transaction, whether or not Xexpressly assumes the mortgage, and the taxpayer realizes a gain
of $35,000 ($105,000 proceeds minus $70,000 basis.
loss
Gain
Amount Realized
<Adjusted Basis of Asset Sold>
Adjusted Basis of Asset Sold
1. Purchased Property Basis =Cost
Generally, the basis of property is the cost
of such property to the taxpayer. There are a number of
instances in which the taxpayer's basis in property is to be
adjusted upward or downward.
a. Increase Basis for Capital Improvements I_I
Basis 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 is
increased by $50,000.
b. Reduce Basis for Accumulated Depreciation (= NBV)
The basis is adjusted downward in the amount of any depreciation (allowed or
allowable) 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 gross
income for depreciation of the machine. The basis of the machine is accordingly reduced to
$9,000 ($10,000 minus $1,000 depreciation deduction).
(l2010 Educational Development Corp. All rights reserved Rl-51
Regulation 1 Becker Professional Education I CPA Exam Review
c. "Spreading" Adjustments
Although most adjustments require an increase or decrease in the basis, some
spread the basis.
EXAMPLE
Under the IRe, the receipt of a nontaxable stock dividend will require the shareholder to
spread the basis of his original share over both the original shares and the new shares received
resulting 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 in
the hands of the donor at the time of the gift. Basis is increased by any gift tax
paid that is attributable to the net appreciation in the value of the gift. Gains and
losses are calculated using this rollover cost basis (subject to the exception
noted below).
b. Exception - Lower FMVat Date of Gift
If the fair market value at date of gift is iower than the rollover cost basis from the
donor, the basis for the donee depends upon the donee's future selling price of
the 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 gain
shall 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 gain
will 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 of
gift, the basis of the gift for purposes of determining the loss is the fair
market 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 who
subsequently sells the property for $1,000. The taxpayer's loss will be $2,000 1$3,000
FMV at date of gift minus $1,000). (Note that the loss mayor may not be deductible on
the taxpayer's income tax return, depending on the situation.)
(3) Sale Less than Rollover Cost Basis but Greater than Lower Fair
Market Value (in the middle)
When taxpayer sells a gift for a price less than the donor's rollover cost
basis, but more than the iower fair market value at the date of gift, neither
gain nor loss is recognized. The basis to the donee is the "middle" selling
price.
Rl-52 fllOlO DeVry{Becker Educational Development Corp. All rights r e ~ r v e d .
Becker Professional Education I CPA Exam Review Regulation 1
c. Gifted Property Depreciation Calculation
Regardless of the basis for the gain/loss (which may not be known at the time
depreciation is to begin), the basis for depreciation purposes (if applicable) is the
lesser of (i) the donor's adjusted basis at the date of gift or (ii) the fair market
value at the date of gift. The amount of accumulated depreciation wili then
reduce the taxpayer's basis calculated for gain/loss purposes (per above) before
the actual gain or loss on the sale is determined.
EXAMPLE
Adonor 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 the
sale, and the basis is $3,500
• For purposes of calculating depreciation on the asset (if applicable) prior to the sale, the
depreciable 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
I
lowe, '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 (loss
basis) 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 I
Exceptfoo: FMVLower
I
FMVHlgher


• • 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.
Becker Professional Education I CPA Exam Review
Inherited Property Basis
Following are the rules for years after 2010.
a. General Rule - Date of Death FMVBecomes Basis
For years after 2010, property acquired by bequest or inheritance generally takes
as its basis the step-up (or down) to the fair market value at the date of the
decedent's death.
b. Alternate Valuation Date
If validly elected by the executor, the fair market value on the alternate valuation
date (the earlier of 6 months later or the date of distributionisale) may be used to
value all of the estate property. The alternate valuation date is only available if
its use lowers the entire gross estate and estate tax (although individual assets
may go up or down during the period). [Note: Estate taxation is covered in detail
in lecture R4.]
If the alternate valuation date is validly elected, the asset is valued using FMV at
the earlier of:
(1) Distribution date of asset; or
(2) Alternate valuation date (earlier of 6 months after death or date of
distributionisale).
EXAMPLE
Testator died owning property worth $60,000 and in which he had a basis of $20,000. His son
inherited 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 the
testator's death goes unrecognized.
c. Holding Period
Property acquired from a decedent is automatically considered to be long-term
property 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 it
was 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 Educational Corp_ All rights reserved.
Becker Professional Education I CPA Exam Review Regulation 1
a. Year 2010 General Rule
For the year 2010, absent Congressional action that was not in place at the time
of this publication, the estate tax (discussed In lecture R4) has been repealed as
the exemption/credit become unlimited. Thus, inherited property resulting from a
death in the year 2010 will have a basis equal to the lesser of the adjusted basis
of the property in the hands of the decedent on the date of death or the fair
market 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 $1.3
million (in effect, exempting $1.3 million of gains on subsequent sale of the
property) and $3 million to a surviving spouse.
PASS KEY
REALIZED", BUT NOT RECOGNIZED, GAINS DR LOSSES
Money Received (boot)
AMOUNT REALIZED
C.O.D. (boot)
<ADJUSTED BASIS OF ASSET SOLD >
GAIN
OR
LOSS
FMV Property
less: 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
< Adjusted Basis of Asset Sold>
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 the
taxpayer 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 realized
gain is excluded or not currently recognized. These special
statutory provisions are based on the idea that the taxpayer's
investment has not substantially changed and, therefore, recognition of the gain or loss on
the transaction should be deferred. This is done through the device of substituting the
taxpayer's basis in the property given up for the basis of the property acquired.
I HIDE IT I 2.
IHIDE IT I
1.'1
.- .- -

••••••
. ,."
Rl-56
1. Homeowner's Exclusion
The sale of the taxpayer's personal (primary or principal) residence is subject to an
exclusion from gross income for gain:
a. $500,000 is available to married coupies filing a joint return and certain surviving
spouses.
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) the
property as a principal residence for two years or more during the five-year
period ending on the date of the sale or exchange a taxpayer. For sales
beginning in 2009, any period of time after January 1, 2009, for which the
home is not a principal residence is considered "nonqualified use," and a
portion of the gain wili be taxable.
(2) Either spouse for a joint return must meet the ownership requirement, but
both 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 saie
is due to a change in place of employment, health, or unforeseen circumstances,
and the exclusion has been claimed within the previous two years or the
taxpayer 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 as
often as available over his or her iifetime provided he or she meets the other
requirements, 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 of
property (e.g., destruction, theft, condemnation) on the rationale that the taxpayer's
reinvestment of the involuntarily received proceeds restores him to the position he held
prior to the conversion. To tax him under such circumstances would produce undue
hardship. If the taxpayer does not reinvest all the proceeds, his gain on the transaction
will 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 into
other similar property, the basis of the new asset is the same as the basis of the
old 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 year
in which any part of the gain was realized and be in property "simiiar or related in
service or use" (Le., the replacement property must serve the same function in
the taxpayer's business as did the old property which is a narrower standard than
the "like-kind" test). For principal residences destroyed in a federally declared
disaster 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 taxable
year in which any part of the gain was realized and be in property "similar or
reiated in service or use" (Le., the replacement property must serve the same
function in the taxpayer's business as did the old property, which is a narrower
standard than the "like-kind" test).
The basis of property acquired as a result of an involuntary conversion will be the
cost of such property decreased by the amount of any gain not recognized upon
such conversion.
EXAMPLE
Land owned by Mcintyre had an adjusted basis of $30,000. It was condemned by the state and
Mcintyre received similar property from the state to replace his condemned land. The basis of
his new land is $30,000.
d. Gain Recognized (boot)
When gain is recognized because the amount received exceeds the cost of
replacement, the basis of the replacement property is its cost less the gain not
recognized.
EXAMPLE
Crudd owned a building with an adjusted basis of $400,000. The state condemned it and
awarded 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 and
certain close relatives don't quaiify as replacement property.
© 2010 DeVrv/Becker €ducational Development Corp. Ail rights reserved. Rl-57
Regulation 1
e.
Becker Professional Education I CPA Exam Review
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 replacement
cost.
EXAMPLE
Rigoli had a factory with a cost basis of $340,000 that was destroyed by a fire. His insurance
company 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, it
is a non-taxable event. The basis of the property to the recipient spouse will be the
carryover basis,
Exchange of Like-Kind Business/Investment Assets (tangible)
Nonrecognition treatment is accorded to a "like-kind" exchange of property used in the
trade or business or held for investment (except inventory, stock, securities, partnership
interests, and real property in different countries). "Like-kind" means the same type of
investment, (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 complete
nonrecognition, produces recognized gain. The recognized gain is the lower of
the realized gain or the boot.
EXAMPLE
Taxpayer owns investment realty worth $40,000 and having an adjusted basis of $25,000. If
taxpayer exchanges this property for other realty worth $35,000 and $5,000 in cash, the
taxpayer's gain of $15,000 ($40,000 proceeds minus $25,000 basis) will be recognized only to
the extent of the $5,000 cash received.
b. Basis Rules
While the basis of the property received in the exchange is ordinarily the same as
the basis of the property given up, this basis is decreased by any money (or
other 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 cash
received and increased by the amount of gain recognized ($5,000). Therefore, the taxpayer's
basis in the acquired realty will remain $25,000 and, upon a later sale for $35,000, the
remaining $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 Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review
AN CIII A RY MAT ERI A l (for Independent Review)
Regulation 1
o
lIKE·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
Regulation 1 Becker Professional Education I CPA Exam Review
LIKE-KIND EXCHANGE EXPANDED EXAMPLE #3: REALIZED GAIN/BOOT RECEIVED>GAIN REALIZED
Ataxpayer trades in an old automobile used solely for business for another automobile to be used for business. The
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)
3. Basis of New Property
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
Ataxpayer trades in an old automobile used solely for business for another automobile to be used for business. The
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)
3. Basis of New Property
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,m8824
Department of the Treasury
Internal Revenue service
Name(s) shown on tax return
Like-Kind Exchanges
(and section 1043 confllct-of-Interest sales)
... Attach to your tax return.
OMS No. 1545-1190
Attachment
S 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 Information
Name 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 of
the 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 as
through an intermediary), that became your replacement property? . . Dyes DNo
10 During this tax year (and before the date that is 2 years after the last transfer of property that was part of
the 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 not
the 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 the
deferred 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 of
its 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 2
Name{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 Received
Caution: If you transferred and received (a) more than one group of like-kind properties or (b) cash or other (not 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 I
13 Adjusted basis of other property given up I 13 I
I
14 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 14
Caution: If the property given up was used previously or partly as a home, see Property used as
home 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 16
17 Add lines 15 and 16 17
18 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) , 18
19 Realized gain or (loss). Subtract line 18 from line 17 19
20 Enter the smaller of line 15 or line 19, but not less than zero 20
21 Ordinary income under recapture rules, Enter here and on Form 4797, line 16 (see instructions) 21
22 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) 22
23 Recognized gain. Add lines 21 and 22 . 23
24 Deferred gain or (loss). Subtract line 23 from line 19. If a related party exchange, see instructions 24
25 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 or JudiCIal
officers of the Federal Government (including certain spouses, minor or dependent children, and trustees as described in
section 1043) for reporting nonrecognition of gain under section 1043 on the sale of properly to comply with the conflict-of-
interest requirements. This part can be used only if the cost of the replacement property is more than the basis of the divested
property.
26
27
Enter the number from the upper right corner of your certificate of divestiture. (Do not attach a
copy 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
32
33 Cost of replacement property purchased within 60 days after date I' 'I
. . .. . ..
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) 35
36 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
38
Form 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-I
The 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 on
an established market. (Immediate recognition can be elected.)
Installment Sale 5.
I HIDE IT I
a. Recognize When Cash is Received
Under the installment method, revenue is reported over the period in which the
cash payments are received. This method does not alter the type of gain to be
reported (capital gain, ordinary income). Taxable income is calculated by
multiplying 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 Profit
Percentage
EXAMPLE
INSTALLMENT SALES REPORTING
Assume that a taxpayer had $400,000 in installment sales in Year 1 and a December
31, Year 1, balance in installment accounts receivable of $150,000. If the taxpayer
had $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 profit
Sale 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 obligation
shall be reported as amounts received/collected.
d. Gross Profit Percentage
Compute the gross profit percentage from the original sale and apply that gross
profit percentage to cash received in the year to record realized profit for the
year.
i;l2010 DeVry/Becker Educational Development Corp. All rights reserved. Rl-63
Regulation 1 Becker Professional Education I CPA Exam Review

Department of the Treasury
Internal Revenue Service
Installment Sale Income
... Attach to your tax return.
... Use a separate form for each sale or other disposition of
property on the installment method.
OMS No. 1545-0228
;?2@09
Altachment
Sequence 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 5
6
Mortgages, debts, and other liabilities the buyer assumed or took the
property subject to (see instructions) .
6
7 Subtract line 6 from line 5. 7
8 Cost or other basis of property sold 8
9 Depreciation allowed or allowable . 9
10 Adjusted basis. Subtract line 9 from line 8 10
11 Commissions and other expenses of sale 11
12 Income recapture from Form 4797, Part III (see instructions) 12
13 Add lines 10, 11,and12 . 13
14 Subtract line 13 from line 5. If zero or less, do not complete the rest of this fonn (see instructions) 14
15
If the property described on line 1 above was your main home, enter the amount of your excluded
gain (see instructions). Otherwise, enter -0- .
15
16 Gross profit. Subtract line 15 from line 14 16
17 Subtract line 13 from line 6. If zero or less, enter -0- . 17
18 Contract orice. Add line 7 and line 17 18
.
Insta."ment Sale Income. Complete this part the year of 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 after
the year of sale, see instructions
19
20 If this is the year of sale, enter the amount from line 17. Otherwise, enter -0- . 20
21 Payments received during year (see instructions). Do not include interest, whether stated or unstated 21
22 Add lines 20 and 2f . . . . . . . . . . . . . . . . .1..1
1
22
23
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. 24
25 Enter the part of line 24 that is ordinary income under the recapture rules (see instructions) . 25
26 Subtract line 25 from line 24. Enter here and on Schedule 0 or Form 4797 {see 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
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) 30
31 Enter contract price from line 18 for year of first sale. 31
32 Enter the smaller of line 30 or line 31 . 32
33 Total payments received by the end of your 2009 tax year (see instructions) 33
34 Subtract line 33 from tine 32. If zero or less, enter -0- 34
35 Multiply line 34 by the gross profit percentage on line 19 for year of first safe. 35
36 Enter the part of line 35 that is ordinary income under the recapture rules (see instructions) . 36
37 Subtract line 36 from line 35. Enter here and on Schedule 0 or Form 4797 (see 37
For Paperwork Reduction Act Notice, see page 4. Cal. No. 13601R Form 6252 (2009)
Rl-64 © 2010 DeVry/Becker Development Corp. All ....'erved.
Becker Professional Education I CPA Exam Review Regulation 1
Gain
Loss
Amount Realized
< Adjusted Basis of Asset Sold>
Treasury and Capital Stock Transactions (by corporation)
The following corporate transactions are exempt from gain (and any losses are
disallowed-essentially corporations are precluded from
tax benefits or income taxes resulting from dealing in their
own 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 is
repurchased 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 new
security plus the disallowed loss on the wash sale (or, alternatively, the basis of
the old security, less the proceeds from the sale, plus the purchase price of the
new security).
c. Date of Acquisition
The date of acqUisition of the repurchased security is the date of acquisition of
the original security.
d. Gain
If a security is sold resulting in a gain and it is repurchased within 30 days, the
taxpayer cannot use "substituted basis." Instead, he must pay capital gains tax
and use the new purchase price as the basis.
EXAMPLE
Item
Bob DeFilippis entered into the following transactions in April 2009.
Date af Date of
Purchase Cost Sale
Selling
Price
Indicated
Loss
(A) 100 shares of IBM
(B) 100 shares of IBM
09/08/82 $22,000 04/20/09
04/25/09 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, the
loss 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.
© ZOlO DeVry!Becker Educational Oevelopment Corp. All right, ,e,erved. Rl-65
Regulation 1
I WRAP I 2.
Becker Professional Education I CPA Exam Review
Related Party Transactions

••••
...
a. Definition
Sales between related parties are not considered "arms-length," and the loss
recognition 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, trusts
and/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 gain
treatment:
(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 they
were made at an "arms-length" FMV price.
d. Basis Rules
The basis (and related gain or loss) of the (second) buying relative depends on
whether the second relative's resale price is higher, lower, or between the first
relative'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 previous
relative's cost basis.
EXAMPLE
Ned bought stock for $20,000 that he sold to his brother Ray for $16,000. The $4,000 loss is
disallowed. Ray then sells the stock to Bobby, a n unrelated party, for $21,000. Ray's
recognized 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
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 than
the 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 two
related 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,
I R"'"'''' B,,', 11---------
,- -". Sell between ------7
3. Personal Loss
No deduction is allowed for the loss on a non-business disposal or loss. An itemized
deduction 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.
jJ 2010 DeWy/Becker Educational Corp. All rights reserved. Rl-67
1 1
2
.
~
Regulation 1 Becker Professional Education I CPA Exam Review
c. Unrecaptured Section 1250 Gain (25% rate group)
Any unrecaptured section 1250 gain from depreciation that is not treated as
ordinary income is taxed at 25% for taxpayers not in the 10% or 15% income tax
bracket (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 tax
brackets).
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 only
recognize (dedUct) a maximum of $3,000 of the amount realized from other types
of gross income (ordinary income, passive income, or portfolio income). Ajoint
return of husband and wife is treated as one person. If the husband and wife file
separately, 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 as
long-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 in
year debt becomes totally worthless.
e. Worthless Stock and Securities
The cost (or other basis) of worthless stock or securities is treated as a capital
loss, as if they were sold on the last day of the taxable year in which they
became totally worthless.
3. Netting Procedures
Specific netting procedures for capital gains and losses are outlined in the Internal
Revenue 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 by
rate group. Resulting short-term and long-term losses are then offset against short-
term and long-term gains (respectively) beginning with the highest tax rate group and
continuing to the lower rates.
a. Short-term Capital Gains and Losses
(1) Ifthere are any short-term capital losses (this includes any short-term
capital loss carryovers), they are first offset against any short-term gains
that would be taxable at the ordinary income rates.
(2) Any remaining short-term capital loss is used to offset any long-term
capital 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-term
gains from the 25% group (e.g., un-recaptured Section 1250 gains).
(4) Any remaining short-term capital loss is used to offset any long-term
capital 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 capital
loss carryovers) from the 28% rate group, they are first offset against any
net gains from the 25% rate group and then against net gains from the
15% rate group.
(2) If there are any long-term capital losses (this includes any long-term capital
loss carryovers) from the 15% rate group, they are offset first against any
net gains from the 28% rate group and then against net gains from the
25% rate group.
F. Corporation Capital Gain and Loss Rules (applies to Ccorporations 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 a
corporation 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 assets
are 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 short-
term capital loss.
b. Net capital losses are deducted from capital or Section 1231 gains. (Section
1231 gains are treated as "capital" assets used in the business while Section
1231 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.
V 2010 OeVryfBecker Development Corp. All rights reselVed.
Regulation 1
Rl-70
NOTES
Becker Professional Education I CPA Exam Review
Cl2010 DeVry{6ecker Educational Development Corp. All rights reserved.
Regulation 1 Becker 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 her
marriage 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 to
minimize 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 term
life 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 to
return the amount to the tenant. In addition, the Rileys received $20,000 in gross receipts from the rental
property. 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 in
Hawaii. 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 stock
transactions:
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 had
a fair market value of $50,000. The grandmother's basis was $60,000.
(continued)
©2010 Education.1 Development COlp. All rights reserved. Rl-71
Regulation 1
(continued)
Becker Professional Education I CPA Exam Review
Based on the data provided, enter the appropriate values in the shaded fields of the Form 1040 below.
U040
Depao1meol ol TreaslllY--!t'ternal ReYeNe SeIVtoe

U.S. 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 Yow social security JUnber
IS«
A !
,
i
instnJctions

,
,
on page 14.)
E
If aJoInt return SPOUM'S first name and Initial
!
8poIne's social security numbtf'
Use th& IRS
L
I I I I i
i i
label.
H
Home addfesf; (number and slreet). It you have aP.O. box, see page 14.
I
ApI. 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 aforeign addrass, sea page 14.
) Checking aOOK below wllllOl or 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) • 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 adependent, do not check box 6a .
.} ==::Ceb
ked
0
b n............................
. . No. ofchllcllNn
c
_Is,
{21 Depender1t's (31 Dependent's t411 i1qualilj4r1g
on 60 Who:
0
(11 Filsl name
w,_ sOCial set:urtty number
r!lationshlpltl yOll
• Ivecl with you
• dld not ... wtth
0
you IbI to dl\rorc.
w_
If more than four
0
l_pege11ll
--
dependents, see
0
..
0
page 17 and
-- check here • D 0
Add numben on
D d 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 I
b 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
i
b Qualified dMderKts (see page 22)
-
attach Fonns
· 9b
W-2Qand
,.
TaKable refunds, credits, or offsets of state and local income taxes (see page 23)
,.
l099-R if tax
11 Alimony received 11
I
was 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 I
If you did not
14 Other gains or (losses). Attach Form 4797 . 14
get a W-2,
lsa iRA distributions. ti:J tj ,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)
20b
Form 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) 23
Adjusted
••
certain busness expeoses of reservists, performing artists, iIld
Gross
fee-basis governnent officials. Attach Form2106 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) 33
34 Tuition and fees deduction. Attach Form 8917 34
.. Domestic production activities deduction. Attach Form8903 ..
36 Add lines 23 through 31a and 32 through 35 _ .. .. 36
37 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 elOlODeVry/Becker fducational Oevelopment Corp. All rights reserved.
Becker Professional Education I CPA Exam Review
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 the
appropriate 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 Individual Retirement Account (IRA)
6. Property received as a gift
7. $15,000 received as scholarship funds for a qualified degree-seeking student for the
following:
$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 individual
whose 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 appropriate
documents
OR
Perform a search for a particular topic by entering lext in the text box
above. Use the buttons to the right and the links above the text box to
perform 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 c
0 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 RA 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
Becker Professional Education I CPA Exam Review
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 to
enter 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 twenty-
one years old and is a junior in college (full course load for the whole year). When not In class, he piays
video 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 two
years ago, and he now lives in Portugai; although, he still maintains his U.S. citizenship. Peter's only
income 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 no
income, 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 an
eating disorder) and other medical expenses for Skipper in the current year.
Kyle and Mary have decided to file jointly for the year.
D
lines 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 Spouse
on 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 ~ e c ~ ~ ~ ~ ~ ~
• lived with you
--
• did not live with
,
· D
you due to divorce
or separation
If more than four
.
·
D
(see page 18)
--
dependents, see
,
· D
Dependents on 6c
page 17 and
not entered above
--
check here ... 0 :
,
D
Add numbers on
© 2010 OeVrv/Becker Educational Development Corp. All rights reserved. Rl-77
Regulation 1 Becker Professional Education I CPA Exam Review
3. CPA·01609
Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase
for Perle's office in full settlement of the bill. Wood sells comparable bookcases for $350. What amount
should Perle include in taxable income as a result of this transaction?
a. $0
b. $200
c. $550
d. $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. $500
b. $1,100
c. $1,900
d. $2,900
5. CPA·01636
Clark filed Form 1040EZ for the Year 8 taxable year. In July, Year 9, Clark received a state income tax
refund of $900 plus interest of $10, for overpayment of Year 8 state income tax. What amount of the
state tax refund and interest is taxable in Ciark's Year 9 federal income tax return?
a. $0
b. $10
c. $900
d. $910
6. CPA·01433
Which of the following conditions must be present in a post-1984 divorce agreement for a payment to
qualify 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.
Becker Professional Education I CPA Exam Review Regulation 1
7. CPA-01438
Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods
manufactured 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-week
vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker's
round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on
accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount
of educational expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss from Business"?
a. $700
b. $1,200
c. $1,800
d. $4,100
9. CPA-01614
Nare, an accrual-basis taxpayer, owns a bUilding which was rented to Molt under a ten-year lease
expiring August 31, Year 8. On January 2, Year 2, Molt paid $30,000 as consideration for cancelling the
lease. 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 last
month's rent. What amount of rental income should Nare report in its Year 2 income tax return?
a. $10,000
b. $15,000
c. $40,000
d. $45,000
10. CPA·01571
With regard to the inclusion of social security benefits in gross income, for the Year 8 tax year, which of
the following statements is correct?
a. The social security benefits in excess of modified adjusted gross income are included in gross
income.
b. The social security benefits in excess of one half the modified adjusted gross incomes are included in
gross income.
c. Eighty-five percent of the social security benefits are the maximum amount of benefits to be included
in gross income.
d. The social security benefits in excess of the modified adjusted gross income over a threshold amount
are included in gross income.
© 2010 DeVry/Beder Educational Development Corp. All rights reserved. Rl-79
Regulation 1
- ~ - - - - - - - -
Becker Professional Education I CPA Exam Review
11. CPA-01482
Klein, a master's degree candidate at Briar University, was awarded a $12,000 scholarship from Briar in
Year 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein
received $5,000 for teaching two courses at a nearby college. What amount is includible in Klein's Year 8
gross income?
a. $0
b. $5,000
c. $12,000
d. $17,000
12. CPA-01442
During Year 9, Ash had the following cash receipts:
Wages
Interest income from U.S. Treasury bonds
Workers' compensation following a job-reiated injury
$13,000
350
8,500
What is the totai amount that must be included in gross income on Ash's Year 9 income tax return?
a. $13,000
b. $13,350
c. $21,500
d. $21,850
13. CPA·01761
Platt owns land that is operated as a parking lot. A shed was erected on the lot for the related
transactions with customers. With regard to capital assets and Section 1231 assets, how should these
assets be classified?
a.
b.
c.
d.
Land
Capital
Section 1231
Capital
Section 1231
Shed
Capital
Capital
Section 1231
Section 1231
14. CPA-01736
Hall, a divorced person and custodian of her 12-year old child, filed her Year 9 federal income tax return
as head of a household. She submitted the following information to the CPA who prepared her Year 9
return:
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 sold
this stock in July, Year 9 for $3,500. The donor paid no gift tax. What was Hall's reportable gain or loss
in Year 9 on the sale of the 100 shares of stock gifted to her?
a. $0
b. $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 months
after the decedent's death (assume the tax law for years after 2010 apply)?
a. 12
b. 9
c. 6
d. 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 tax
return?
a. $455,000
b. $255,000
c. $5,000
d. $0
17. CPA·01747
In Year 9, Joan Reed exchanged commercial real estate that she owned for other commercial real estate
plus cash of $50,000. The following additional information pertains to this transaction:
Properlv given up bv Reed
Fair value
Adjusted basis
Properly received by Reed
Fair value
$500,000
300,000
450,000
What amount of gain should be recognized in Reed's Year 9 income tax return?
a. $200,000
b. $100,000
c. $50,000
d. $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.
02010 DeVrv/Be<:ker oevelopment Corp. All rights reserved. Rl-81
Regulation 1 Becker Professional Education I CPA Exam Review
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. $0
b. $1,000
c. $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. $0
b. $3,000
c. $4,000
d. $8,000
"-82
4:12010 OeVry/Becker Educational Development Corp. All rights reserved.