Tax Law I cheat sheet

Primary authority is binding: IRC, Treasury Regulations, court decisions. Secondary authority (treatises, articles, IRS publications) is persuasive only and never cited as precedent.

Authority weight order: IRC > final/legislative regulations > proposed regulations (no force) > Supreme Court > Circuit Court of Appeals (binding in its circuit) > Tax Court (only if taxpayer litigates there) > district court > IRS pronouncements.

Revenue Rulings and Revenue Procedures are official IRS positions binding on IRS personnel; they are not binding on courts. Private Letter Rulings bind only the requesting taxpayer for that transaction.

Regulation types: proposed (no effect until final), temporary (effective immediately, issued under 7805), final; and legislative (issued under a specific grant, carry force of law) versus interpretive (explain statute).

Judicial doctrines: Golsen rule (Tax Court follows the circuit of appeal that would hear the case); stare decisis; acquiescence versus nonacquiescence signals IRS litigating position.

Tax research sequence: state the issue, gather facts, identify and validate authority, weigh conflicting authority, reach a conclusion, document the file.

AICPA SSTS and Circular 230 both require a higher authority level for written advice than for oral advice; tax shelter opinions require the more-likely-than-not standard for reliance.

Circular 230 §10.34 requires signing preparers to have a reasonable basis (and substantial authority where relevant), to disclose nonfrivolous positions, and to keep records; §10.51 covers incompetent or disreputable conduct.

§61 defines gross income as all income from whatever source derived, including compensation for services, business profits, gains from dealings in property, interest, rents, royalties, dividends, and annuities.

Formulas: GI = inclusions − exclusions; Adjusted Gross Income = Gross Income − above-the-line (partnership/S-corp losses, alimony pre-2019, moving expenses for military, HSA, half SE tax, SE health insurance, IRA, student loan interest).

Gross income requires an accession to wealth, clearly realized, over which the taxpayer has complete dominion (Glenshaw Glass). Barter and in-kind benefits are includible at fair market value.

Employer-provided health insurance premiums are excluded (§106); group term life insurance coverage up to $50,000 is excluded, excess measured by Table I rates.

Exclusions: gifts and inheritances (§102, but income earned on the property after transfer is taxable), life insurance proceeds at death (§101), municipal bond interest (§103), discharge of indebtedness in Title 11 or insolvency (§108), and qualified scholarships for tuition, fees, and books.

Employee awards: tangible personal property and length-of-service awards up to $400 (or $1,600 for qualified plan awards) are excludable; cash awards are always includible.

Annuity exclusion ratio = investment in contract ÷ expected return; after basis is recovered, all payments are taxable.

Claim of right doctrine: income received under a claim of right is taxed when received even if it may have to be repaid; a later repayment produces a deduction in the repayment year, with §1341 relief if the deduction exceeds $3,000.

§162 ordinary and necessary business expenses are deductible currently; §212 expenses for production of income are deductible but subject to the 2% floor (through 2025 for individuals under current law, verify current status).

Startup costs: up to $5,000 of §195 investigation and startup costs may be deducted in the year business begins, phased out dollar-for-dollar above $50,000 of costs; the remainder is amortized over 180 months.

§197 intangibles (goodwill, customer lists, covenants not to compete) acquired in a business acquisition are amortized over 15 years, straight-line, no salvage.

§199A qualified business income deduction: 20% of QBI, limited by the greater of 50% of W-2 wages or 25% of wages plus 2.5% of qualified property; the limitation phases in for 2025 at $197,300 single and $394,600 MFJ (indexed).

§165 losses require a closed and completed transaction, and the loss must be evidenced by a closed transaction; personal losses are deductible only in casualty/theft situations (§165(c)).

Hobby losses are limited to hobby gross income under §183; the activity must show profit in 3 of 5 years (2 of 7 for horse activities) to be presumed for-profit.

Bad debts: business bad debts are ordinary deductions; nonbusiness bad debts are treated as short-term capital losses and require a worthless debt that was valid and enforceable.

Charitable contributions: cash to public charities deductible up to 60% of AGI (individuals), appreciated long-term capital gain property up to 30%; excess carries forward 5 years.

Realized gain = amount realized − adjusted basis; amount realized = cash + fair market value of property received + liabilities assumed by buyer − selling expenses.

Adjusted basis = original basis + capital improvements + capitalizable costs − depreciation allowed or allowable.

Gift basis: carryover the donor's basis; if FMV at gift is below donor basis, dual basis applies - loss limited to FMV, and no gain or loss if sold between FMV and donor basis.

Inherited property basis is FMV at date of death (or alternate valuation date if elected); community property generally gets a full step-up.

§1031 like-kind exchange (real property only after TCJA) defers gain; boot received is recognized to the lesser of boot or realized gain; basis of replacement = FMV replacement − deferred gain.

§1033 involuntary conversion: deferral if replacement property is acquired within 2 years (3 years for business or investment property destroyed by a presidentially declared disaster).

§121 home sale exclusion: $250,000 single / $500,000 MFJ, requires ownership and use for 2 of the 5 years before sale; partial exclusion for health, change in employment, or unforeseen circumstances.

Assumption of a mortgage is treated as boot in a §351 transfer and in like-kind exchanges; recourse versus nonrecourse debt allocation matters in partnership basis.

Capital assets under §1221 exclude inventory, depreciable business property, and self-created copyrights; holding period is long-term if held more than one year.

Net capital loss rules: individuals may deduct up to $3,000 ($1,500 MFS) against ordinary income per year; excess carries forward indefinitely, retaining character.

Net long-term capital gain is taxed at preferential rates (0/15/20%) plus the 3.8% net investment income tax above the MAGI thresholds ($200,000 single, $250,000 MFJ).

§1231 gain: net gain from sales of business property held more than one year is treated as long-term capital gain; net §1231 loss is ordinary.

§1231 lookback: net §1231 gain is ordinary to the extent of nonrecaptured net §1231 losses from the prior 5 years.

§1245 recapture: on sale of personal property, gain is ordinary to the extent of depreciation taken; remaining gain is §1231.

§1250 recapture: for real property, only excess accelerated depreciation over straight-line is recaptured; unrecaptured §1250 gain (straight-line depreciation) is taxed at a maximum 25% rate.

§179 expensing for 2025 is $2,500,000 with a $4,000,000 investment ceiling (indexed), limited to business income, and cannot create or increase a loss.

Cash method: income when actually or constructively received, expenses when paid; constructive receipt occurs when funds are made available without restriction.

Accrual method: income when the all-events test is met (fixed right to income and amount determinable with reasonable accuracy); expenses when all events have occurred, the amount is determinable, and economic performance has occurred.

Economic performance (§461(h)): services or property are performed/provided; for liabilities to others, performance occurs as the liability is paid; recurring items have an exception.

Claim of right and advance payments: prepaid income is generally taxable when received unless the taxpayer qualifies under §451(c) (one-year deferral for advance payments, Rev. Proc. 2004-34).

§481(a) adjustment: a change in accounting method requires IRS consent (Form 3115) and results in a cumulative adjustment taken into income (or deducted) over 4 years, or 2 years for certain small taxpayers.

Uniform capitalization (§263A) requires direct and indirect costs allocable to inventory to be capitalized; small business taxpayers (average annual gross receipts ≤ $31 million for 2025, indexed) are exempt.

Inventory methods: specific identification, FIFO, LIFO (requires conformity and Form 970); lower of cost or market is permitted for FIFO, not LIFO; LIFO recapture applies on incorporation.

Installment method (§453): gain recognized as payments are received; not permitted for inventory sold on revolving credit or for dealer dispositions of real property.

Filing statuses: single, MFJ, MFS, head of household (unmarried, paid more than half the cost of keeping home, qualifying person lived there more than half the year), and qualifying surviving spouse (with dependent child, 2 years after death).

2025 standard deduction: $15,750 single, $31,500 MFJ, $23,625 head of household, $15,750 MFS (indexed; verify current-year figures).

Dependents: qualifying child must meet relationship, age (under 19 or under 24 if a full-time student), residency, support, and joint return tests; qualifying relative requires gross income under $5,200 (2025) and more than half support.

Child Tax Credit: $2,000 per qualifying child under 17, with up to $1,700 refundable as the Additional Child Tax Credit; phase-out begins at $200,000 single / $400,000 MFJ.

Credits: American Opportunity Credit up to $2,500 (40% refundable, first 4 years); Lifetime Learning Credit up to $2,000 (20% of $10,000), phased out at $80,000-$90,000 single and $160,000-$180,000 MFJ.

Earned Income Tax Credit is refundable and based on earned income and AGI; the childless maximum is small and the age range is 25-64.

Estimated tax: individuals must pay the lesser of 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeded $150,000, or $75,000 MFS); safe harbor avoids underpayment penalties.

Underpayment penalty is computed on Form 2210 by quarter; withholding is deemed paid ratably throughout the year, while estimated payments are credited when made.

Circular 230 §10.21 requires prompt notification of the IRS of an error or omission in a return, document, affidavit, or other paper the practitioner submitted.

§10.22 requires the practitioner to submit records or information on request unless the practitioner believes in good faith and on reasonable grounds that the request is unlawful or privileged.

§10.27 prohibits a practitioner from endorsing or negotiating a client's refund check, and §10.31 bars charging an unconscionable fee or a contingent fee for an original return.

§6694 preparer penalties: $1,000 per return for understatements due to an unreasonable position ($5,000 if willful or reckless), reduced if the position had substantial authority and was disclosed.

§6701 promotes abusive tax shelters; §6700 applies to organizers of abusive tax shelters; §6702 frivolous return penalty is $5,000.

Statute of limitations: 3 years for assessment, 6 years if more than 25% of gross income is omitted, and unlimited for fraud or failure to file; refund claims are generally 3 years from filing or 2 years from payment.

Collection: the IRS must issue a notice of deficiency; the taxpayer has 90 days (150 if outside the U.S.) to petition the Tax Court before assessment; CDP hearing rights follow a notice of lien or levy.

Circular 230 §10.35 requires the practitioner to possess the requisite knowledge of the client's affairs and to use reasonable care in preparing returns; §10.37 requires written advice to be based on reasonable factual and legal assumptions.

Primary authority is binding: IRC, Treasury Regulations, court decisions. Secondary authority (treatises, articles, IRS publications) is persuasive only and never cited as precedent.

Authority weight order: IRC > final/legislative regulations > proposed regulations (no force) > Supreme Court > Circuit Court of Appeals (binding in its circuit) > Tax Court (only if taxpayer litigates there) > district court > IRS pronouncements.

Revenue Rulings and Revenue Procedures are official IRS positions binding on IRS personnel; they are not binding on courts. Private Letter Rulings bind only the requesting taxpayer for that transaction.

Regulation types: proposed (no effect until final), temporary (effective immediately, issued under 7805), final; and legislative (issued under a specific grant, carry force of law) versus interpretive (explain statute).

Judicial doctrines: Golsen rule (Tax Court follows the circuit of appeal that would hear the case); stare decisis; acquiescence versus nonacquiescence signals IRS litigating position.

Tax research sequence: state the issue, gather facts, identify and validate authority, weigh conflicting authority, reach a conclusion, document the file.

AICPA SSTS and Circular 230 both require a higher authority level for written advice than for oral advice; tax shelter opinions require the more-likely-than-not standard for reliance.

Circular 230 §10.34 requires signing preparers to have a reasonable basis (and substantial authority where relevant), to disclose nonfrivolous positions, and to keep records; §10.51 covers incompetent or disreputable conduct.

§61 defines gross income as all income from whatever source derived, including compensation for services, business profits, gains from dealings in property, interest, rents, royalties, dividends, and annuities.

Formulas: GI = inclusions − exclusions; Adjusted Gross Income = Gross Income − above-the-line (partnership/S-corp losses, alimony pre-2019, moving expenses for military, HSA, half SE tax, SE health insurance, IRA, student loan interest).

Gross income requires an accession to wealth, clearly realized, over which the taxpayer has complete dominion (Glenshaw Glass). Barter and in-kind benefits are includible at fair market value.

Employer-provided health insurance premiums are excluded (§106); group term life insurance coverage up to $50,000 is excluded, excess measured by Table I rates.

Exclusions: gifts and inheritances (§102, but income earned on the property after transfer is taxable), life insurance proceeds at death (§101), municipal bond interest (§103), discharge of indebtedness in Title 11 or insolvency (§108), and qualified scholarships for tuition, fees, and books.

Employee awards: tangible personal property and length-of-service awards up to $400 (or $1,600 for qualified plan awards) are excludable; cash awards are always includible.

Annuity exclusion ratio = investment in contract ÷ expected return; after basis is recovered, all payments are taxable.

Claim of right doctrine: income received under a claim of right is taxed when received even if it may have to be repaid; a later repayment produces a deduction in the repayment year, with §1341 relief if the deduction exceeds $3,000.

§162 ordinary and necessary business expenses are deductible currently; §212 expenses for production of income are deductible but subject to the 2% floor (through 2025 for individuals under current law, verify current status).

Startup costs: up to $5,000 of §195 investigation and startup costs may be deducted in the year business begins, phased out dollar-for-dollar above $50,000 of costs; the remainder is amortized over 180 months.

§197 intangibles (goodwill, customer lists, covenants not to compete) acquired in a business acquisition are amortized over 15 years, straight-line, no salvage.

§199A qualified business income deduction: 20% of QBI, limited by the greater of 50% of W-2 wages or 25% of wages plus 2.5% of qualified property; the limitation phases in for 2025 at $197,300 single and $394,600 MFJ (indexed).

§165 losses require a closed and completed transaction, and the loss must be evidenced by a closed transaction; personal losses are deductible only in casualty/theft situations (§165(c)).

Hobby losses are limited to hobby gross income under §183; the activity must show profit in 3 of 5 years (2 of 7 for horse activities) to be presumed for-profit.

Bad debts: business bad debts are ordinary deductions; nonbusiness bad debts are treated as short-term capital losses and require a worthless debt that was valid and enforceable.

Charitable contributions: cash to public charities deductible up to 60% of AGI (individuals), appreciated long-term capital gain property up to 30%; excess carries forward 5 years.

Realized gain = amount realized − adjusted basis; amount realized = cash + fair market value of property received + liabilities assumed by buyer − selling expenses.

Adjusted basis = original basis + capital improvements + capitalizable costs − depreciation allowed or allowable.

Gift basis: carryover the donor's basis; if FMV at gift is below donor basis, dual basis applies - loss limited to FMV, and no gain or loss if sold between FMV and donor basis.

Inherited property basis is FMV at date of death (or alternate valuation date if elected); community property generally gets a full step-up.

§1031 like-kind exchange (real property only after TCJA) defers gain; boot received is recognized to the lesser of boot or realized gain; basis of replacement = FMV replacement − deferred gain.

§1033 involuntary conversion: deferral if replacement property is acquired within 2 years (3 years for business or investment property destroyed by a presidentially declared disaster).

§121 home sale exclusion: $250,000 single / $500,000 MFJ, requires ownership and use for 2 of the 5 years before sale; partial exclusion for health, change in employment, or unforeseen circumstances.

Assumption of a mortgage is treated as boot in a §351 transfer and in like-kind exchanges; recourse versus nonrecourse debt allocation matters in partnership basis.

Capital assets under §1221 exclude inventory, depreciable business property, and self-created copyrights; holding period is long-term if held more than one year.

Net capital loss rules: individuals may deduct up to $3,000 ($1,500 MFS) against ordinary income per year; excess carries forward indefinitely, retaining character.

Net long-term capital gain is taxed at preferential rates (0/15/20%) plus the 3.8% net investment income tax above the MAGI thresholds ($200,000 single, $250,000 MFJ).

§1231 gain: net gain from sales of business property held more than one year is treated as long-term capital gain; net §1231 loss is ordinary.

§1231 lookback: net §1231 gain is ordinary to the extent of nonrecaptured net §1231 losses from the prior 5 years.

§1245 recapture: on sale of personal property, gain is ordinary to the extent of depreciation taken; remaining gain is §1231.

§1250 recapture: for real property, only excess accelerated depreciation over straight-line is recaptured; unrecaptured §1250 gain (straight-line depreciation) is taxed at a maximum 25% rate.

§179 expensing for 2025 is $2,500,000 with a $4,000,000 investment ceiling (indexed), limited to business income, and cannot create or increase a loss.

Cash method: income when actually or constructively received, expenses when paid; constructive receipt occurs when funds are made available without restriction.

Accrual method: income when the all-events test is met (fixed right to income and amount determinable with reasonable accuracy); expenses when all events have occurred, the amount is determinable, and economic performance has occurred.

Economic performance (§461(h)): services or property are performed/provided; for liabilities to others, performance occurs as the liability is paid; recurring items have an exception.

Claim of right and advance payments: prepaid income is generally taxable when received unless the taxpayer qualifies under §451(c) (one-year deferral for advance payments, Rev. Proc. 2004-34).

§481(a) adjustment: a change in accounting method requires IRS consent (Form 3115) and results in a cumulative adjustment taken into income (or deducted) over 4 years, or 2 years for certain small taxpayers.

Uniform capitalization (§263A) requires direct and indirect costs allocable to inventory to be capitalized; small business taxpayers (average annual gross receipts ≤ $31 million for 2025, indexed) are exempt.

Inventory methods: specific identification, FIFO, LIFO (requires conformity and Form 970); lower of cost or market is permitted for FIFO, not LIFO; LIFO recapture applies on incorporation.

Installment method (§453): gain recognized as payments are received; not permitted for inventory sold on revolving credit or for dealer dispositions of real property.

Filing statuses: single, MFJ, MFS, head of household (unmarried, paid more than half the cost of keeping home, qualifying person lived there more than half the year), and qualifying surviving spouse (with dependent child, 2 years after death).

2025 standard deduction: $15,750 single, $31,500 MFJ, $23,625 head of household, $15,750 MFS (indexed; verify current-year figures).

Dependents: qualifying child must meet relationship, age (under 19 or under 24 if a full-time student), residency, support, and joint return tests; qualifying relative requires gross income under $5,200 (2025) and more than half support.

Child Tax Credit: $2,000 per qualifying child under 17, with up to $1,700 refundable as the Additional Child Tax Credit; phase-out begins at $200,000 single / $400,000 MFJ.

Credits: American Opportunity Credit up to $2,500 (40% refundable, first 4 years); Lifetime Learning Credit up to $2,000 (20% of $10,000), phased out at $80,000-$90,000 single and $160,000-$180,000 MFJ.

Earned Income Tax Credit is refundable and based on earned income and AGI; the childless maximum is small and the age range is 25-64.

Estimated tax: individuals must pay the lesser of 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeded $150,000, or $75,000 MFS); safe harbor avoids underpayment penalties.

Underpayment penalty is computed on Form 2210 by quarter; withholding is deemed paid ratably throughout the year, while estimated payments are credited when made.

Circular 230 §10.21 requires prompt notification of the IRS of an error or omission in a return, document, affidavit, or other paper the practitioner submitted.

§10.22 requires the practitioner to submit records or information on request unless the practitioner believes in good faith and on reasonable grounds that the request is unlawful or privileged.

§10.27 prohibits a practitioner from endorsing or negotiating a client's refund check, and §10.31 bars charging an unconscionable fee or a contingent fee for an original return.

§6694 preparer penalties: $1,000 per return for understatements due to an unreasonable position ($5,000 if willful or reckless), reduced if the position had substantial authority and was disclosed.

§6701 promotes abusive tax shelters; §6700 applies to organizers of abusive tax shelters; §6702 frivolous return penalty is $5,000.

Statute of limitations: 3 years for assessment, 6 years if more than 25% of gross income is omitted, and unlimited for fraud or failure to file; refund claims are generally 3 years from filing or 2 years from payment.

Collection: the IRS must issue a notice of deficiency; the taxpayer has 90 days (150 if outside the U.S.) to petition the Tax Court before assessment; CDP hearing rights follow a notice of lien or levy.

Circular 230 §10.35 requires the practitioner to possess the requisite knowledge of the client's affairs and to use reasonable care in preparing returns; §10.37 requires written advice to be based on reasonable factual and legal assumptions.