You feel confident about calculating a partner's basis, then bam—an exam simulation hits you with ordinary income, a cash distribution, and a separately stated capital loss, all in the same year. The #1 reason candidates stumble here isn’t the math; it’s the ordering. Applying these adjustments in the wrong sequence is the silent killer on the REG section, turning a straightforward calculation into a guaranteed wrong answer.
This CPA REG cheat sheet provides a condensed summary of essential formulas, tax thresholds, basis calculation ordering rules, and business law concepts for the 2026 Regulation exam. It focuses on high-yield topics and common traps, like basis ordering and AGI limitations, to help you study efficiently and pass.
Key facts
- Exam Section: Regulation (REG)
- Core Topics: Federal Taxation (Individuals, Entities, Property), Business Law, Ethics
- Question Format: 50% Multiple-Choice Questions (MCQs), 50% Task-Based Simulations (SIMs)
- Time Allotted: 4 hours (240 minutes)
- Passing Score: 75 on a 0-99 scale
- Key Skill: Applying specific rules and thresholds to complex, multi-step scenarios.
What is the Core Framework for Individual Taxation?
Every individual tax question on the REG exam hinges on a single, logical sequence. Don't just memorize the steps; understand why each one is a critical breakpoint. This is the decision tree you must follow every time.
- Start with Gross Income: This is the universal starting point—all income from whatever source derived, unless the tax code specifically grants an exclusion (IRC §61). Common exclusions to watch for are municipal bond interest, gifts and inheritances, and life insurance proceeds.
- Subtract Adjustments to Income: These are the "above-the-line" deductions used to arrive at Adjusted Gross Income.
- Educator expenses
- One-half of self-employment tax
- Deductible contributions to a traditional IRA
- Student loan interest deduction
- Health Savings Account (HSA) deductions
- Calculate Adjusted Gross Income (AGI): This is the most important number in individual tax. It acts as a gatekeeper, setting the floor or ceiling for many other deductions and credits.
- Subtract the Greater of Standard or Itemized Deductions: This is the "below-the-line" decision.
- Standard Deduction: A fixed amount based on filing status, age, and blindness. The exam will provide this number if needed.
- Itemized Deductions: Key categories include:
- Medical expenses (in excess of 7.5% of AGI)
- State and Local Taxes (SALT), capped at $10,000 per household ($10,000 for single filers)
- Interest (home mortgage and investment interest)
- Charitable Contributions (subject to AGI limitations, e.g., 60% for cash)
- Casualty losses (federally declared disaster, in excess of $100 floor and 10% of AGI)
- Subtract the Qualified Business Income (QBI) Deduction: Under IRC §199A, this is a deduction of up to 20% of QBI for eligible pass-through entities. This calculation has its own complex limitations, which you can master in our CPA Regulation: Qualified business income (199A) — Complete Study Guide.
- Arrive at Taxable Income: This is the amount you apply the tax rates to.
- Calculate Tax Liability & Subtract Credits: Apply the tax bracket schedule to taxable income. Then, subtract any tax credits (e.g., Child Tax Credit, American Opportunity Tax Credit). Credits are more valuable than deductions because they reduce tax dollar-for-dollar.
Mastering this flow isn't just about memorization; it's about building a mental map that guides you through any individual tax simulation. You can practice applying this framework with thousands of realistic questions and get instant feedback from Vory, our AI tutor. Try VoraPrep's free CPA practice questions to start building that muscle memory.
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Which REG Thresholds and Phase-outs Must I Memorize for 2026?
The exam provides some complex formulas, but it expects you to know key thresholds by heart. The AICPA loves to test these numbers because they are black and white. As of Q4 2026, the exam tests the 2026 tax law. The figures below reflect the key inflation-adjusted amounts and phase-outs you are expected to know for the 2026 exam. The core concepts remain consistent year-to-year, but the numbers are critical.
| Rule / Threshold | 2026 Amount / Rate | The Common Trap |
|---|---|---|
| Section 179 Expensing | $1,310,000 max deduction. | Forgetting the phase-out, which begins dollar-for-dollar for property placed in service over $3,270,000. |
| Bonus Depreciation | The rate for 2026 is 20%. | Applying an outdated rate. The exam loves testing the current year's rate. The rate phases down to 0% in 2027 unless extended. |
| Gift Tax Annual Exclusion | $19,000 per donee, per year. | Confusing this with the lifetime gift/estate tax exemption (a much larger, unified credit amount). |
| "Mom & Pop" PAL Exception | Deduct up to $25,000 of passive rental losses. | Failing to check the MAGI phase-out, which starts at $100,000 and is fully gone by $150,000. Using AGI instead of MAGI is a classic error. |
| Traditional IRA Contribution | Max contribution $7,500 (under 50). | Assuming the full amount is deductible. It's phased out for active participants in an employer plan based on AGI. |
| Dividends Received Ded. (DRD) | 50% (<20% own), 65% (20-80%), 100% (>80%). | Misapplying the percentage based on ownership level. The exam will give you an ownership level right on the edge. |
| SALT Deduction Cap | $10,000 per household (MFJ) or per individual. | Applying a $20,000 cap for a married couple filing jointly. It's a hard $10,000 limit per return. |
How Do I Calculate Basis in Different REG Scenarios?
Basis is the language of the REG exam. If you can't calculate basis correctly, you can't determine gain, loss, or the deductibility of distributions. The rules differ slightly but critically between entity types.
C-Corporation Shareholder Stock Basis
A C-Corp shareholder's basis is relatively simple. It's the original investment (cash + adjusted basis of property contributed) and is only adjusted for additional capital contributions or non-taxable returns of capital. Corporate income and losses do not flow through to affect shareholder basis.S-Corporation Shareholder Stock Basis
This is where the ordering rules begin to matter. An S-Corp shareholder's basis is dynamic and must be adjusted annually. The sequence is critical for determining the taxability of distributions and the deductibility of losses.Partnership Outside Basis
A partner's basis is the most complex because it includes the partner's share of partnership liabilities. This is a major difference from S-Corp basis and a frequent source of confusion on the exam.The table below summarizes the key differences.
| Action | C-Corporation (Shareholder Stock Basis) | S-Corporation (Shareholder Stock Basis) | Partnership (Partner's Outside Basis) |
|---|---|---|---|
| Initial Basis | Cash + Adjusted Basis of Property Contributed | Cash + Adjusted Basis of Property Contributed | Cash + Adjusted Basis of Property Contributed + Share of Partnership Liabilities |
| Increased by... | N/A (income is taxed at corporate level) | Pro-rata share of all income (taxable & tax-exempt) + Additional Contributions | Pro-rata share of all income (taxable & tax-exempt) + Additional Contributions + Increase in share of liabilities |
| Decreased by... | Return of Capital Distributions (tax-free to extent of basis) | Distributions (tax-free to extent of basis) + Pro-rata share of all losses/deductions + Non-deductible expenses | Distributions + Pro-rata share of all losses/deductions + Non-deductible expenses + Decrease in share of liabilities |
| Ordering Rule | Simple: Distributions reduce basis. | Crucial: Increase for income, decrease for distributions, then decrease for losses. | Crucial: Increase for income, decrease for distributions, then decrease for losses. |
| Can basis be negative? | No. | No. | No. |
The most important takeaway is the ordering rule for S-corps and Partnerships. This is a classic trap tested in complex simulations. Even if a loss is allowed by basis rules, remember it must still clear the at-risk and passive activity loss (PAL) hurdles to be deductible.
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Worked Example: The Partnership Basis Ordering Trap
Let's walk through a scenario where sequence is everything.
Scenario: Alex is a 50% partner in the ACME Partnership. His basis at the beginning of 2026 was $20,000. During the year, ACME reported $30,000 of ordinary business income and a $4,000 separately stated long-term capital loss. Alex also received a $25,000 cash distribution on December 1st. Question: What is Alex's adjusted basis in his partnership interest at the end of 2026? The Tempting (and Wrong) Path: Many candidates see the distribution and immediately subtract it.- Beginning Basis: $20,000
- Minus Distribution: $25,000 -> This seems to create a $5,000 gain. STOP. This is incorrect.
- Start with Beginning Basis: Alex's starting point is $20,000.
- Condition: Is there income? Yes, $30,000 of ordinary income. Alex's 50% share is $15,000.
- Action: Increase basis.
- New Basis: $20,000 + $15,000 = $35,000.
- Condition: Are there distributions? Yes, a $25,000 cash distribution.
- Action: Decrease basis. Distributions are tax-free up to the amount of the partner's basis after accounting for income.
- New Basis: $35,000 - $25,000 = $10,000. The full distribution is tax-free.
- Condition: Are there losses? Yes, a $4,000 capital loss. Alex's 50% share is $2,000.
- Action: Decrease basis. Losses are deductible up to the remaining basis. Alex has $10,000 of basis left, so the $2,000 loss is fully deductible.
- Ending Basis: $10,000 - $2,000 = $8,000.
The correct answer is $8,000. The common wrong answer results from subtracting the distribution too early, which would have incorrectly calculated a taxable gain and an incorrect ending basis. The rule exists to allow partners to take tax-free distributions of the entity's current year earnings.
What are the Best Mnemonics for CPA REG?
Mnemonics are your best friend for recalling lists and rules under pressure. But only use them once you understand the concept they represent.
- Exceptions to Early IRA Withdrawal Penalty (HIM DEAD):
- Homebuyer (first time, $10,000 max)
- Insurance (medical) if unemployed
- Medical expenses in excess of AGI floor
- Disability (permanent)
- Education expenses
- and
- Death
- (Plus: Birth or adoption of child, $5,000)
- S-Corp Shareholder Basis Ordering (I Do LoVe B.A.S.E.): This helps you remember the full calculation.
- Beginning Basis
- Add: Income items & contributions
- Subtract: Distributions
- Ending Basis (this is your loss limitation threshold)
- Losses and Vexations (Deductions) are then subtracted to find the final ending basis.
- Non-Deductible Losses (WRaP): You can't deduct losses from these transactions.
- Wash sales
- Related party transactions
- and
- Personal use assets
How Should I Use This Cheat Sheet to Study Effectively?
A cheat sheet isn't a magic bullet; it's a tool. Here’s how to use it to maximize your score.
- Framework First, Details Later: Read this guide at the start of your REG studies to build a mental map of the key areas. Don't try to memorize every number. Just understand the flow.
- Pair with Active Recall: After reviewing a section here (like Basis), immediately do a 20-question quiz on that topic. VoraPrep's adaptive engine is perfect for this, as it will hammer your weak spots until they become strengths. When you get one wrong, don't just read the answer—come back to this sheet and see where your logic broke down in the framework.
- Create Your "Oh Crap" Sheet: As you study, keep a running list of the rules, thresholds, or concepts that consistently trip you up. This is far more valuable than any generic guide.
- Final Week Review: In the last 7-10 days before your exam, this cheat sheet becomes your primary review tool. Read it once a day to keep the most-tested concepts fresh in your mind. This is about quick recall, not deep learning, which should already be done.