Regulation: Taxation, Business Law, and Ethics
Tax fundamentals
REG blends individual and entity taxation with business law and ethics. For individuals, know the difference between above-the-line (adjustments) and below-the-line (itemized) deductions, standard vs. itemized deduction choice, and capital gain treatment. Long-term capital gains (assets held more than one year) receive preferential rates; short-term gains are ordinary. A frequent trap is netting capital gains and losses - losses offset gains, with limited offset against ordinary income.
Entity taxation
For C corporations, taxable income is computed after book-tax differences (e.g., depreciation, meals, municipal bond interest). S corporations and partnerships are pass-through entities; income flows to owners and is taxed once. Watch for questions that test basis: a partner's basis increases with contributions and income, decreases with distributions and losses.
Business law and ethics
Know contract formation (offer, acceptance, consideration), agency duties, and the CPA's ethical obligations under Circular 230 and the AICPA Code. Independence rules prohibit certain financial interests and relationships.
Worked example
A taxpayer has a $10,000 long-term gain and $4,000 short-term loss. Net = $6,000 long-term gain, taxed at preferential rates. If instead the loss were $15,000, the net $5,000 loss offsets ordinary income up to the annual limit, with the excess carried forward.