CPA Tax Compliance and Planning Cheat Sheet (2026): Key Formulas, Rules, and Mnemonics

The official AICPA blueprints for the Tax Compliance and Planning (TCP) exam are not a study guide; they are a map of potential traps. Candidates often focus on memorizing formulas from their REG studies, only to be blindsided by a simulation that tests the exceptions and ordering rules for those formulas. The difference between a 74 and a 75 is rarely about knowing a rule, but about knowing which rule to apply first when three of them seem relevant.

This guide is built to close that gap. We will focus on the specific, layered scenarios the exam uses to separate passing scores from failing ones.

Key facts

• Exam Section: Tax Compliance and Planning (TCP), a CPA Exam Discipline section.
• Primary Focus: Advanced individual and entity tax compliance, planning, and property transactions.
• Key Topics: Individual AGI/Taxable Income, C-Corp/S-Corp/Partnership taxation, Basis calculations, Loss Limitations.
• Exam Format: A mix of multiple-choice questions (MCQs) and heavily weighted task-based simulations (TBSs).
• Core Skill: Applying complex, layered tax rules to specific scenarios, not just rote memorization.
• Official Body: The American Institute of Certified Public Accountants (AICPA) develops and scores the exam.

The AICPA reports that pass rates for Discipline sections often hover around 55%, emphasizing the need for specialized preparation to secure a passing score.

What Does the TCP Exam Actually Test?

The TCP exam tests your judgment on advanced individual and entity tax compliance, focusing on complex calculations and planning scenarios rather than simple rule memorization. It is one of three discipline sections you can choose (along with BAR and ISC) after passing the core exams. The AICPA blueprints emphasize two primary areas: Individual Tax Compliance and Planning and Entity Tax Compliance and Planning.

This isn't about simply filling out tax forms. The exam expects you to demonstrate judgment on topics like:

• Individual Tax: Gross income inclusions/exclusions, calculating Adjusted Gross Income (AGI), complex itemized deductions, tax credits, and the Alternative Minimum Tax (AMT).
• Entity Tax: The complete lifecycle of C-corps, S-corps, and partnerships—from formation and contributions to operations, distributions, and liquidations.
• Property Transactions: Calculating basis is the starting point. You must also master MACRS depreciation, Section 179/Bonus depreciation, and the character of gains and losses under IRC §1231, §1245, and §1250.

The key is to build decision trees. When you see a property distribution, your first thought shouldn't be "What's the rule?" but "What entity type is this, and what is the recipient's basis before the distribution?" That's how you think like an examiner. For a full breakdown of the exam structure, check out the VoraPrep CPA exam information page.

Ready to see how you stack up? Test your understanding of these basis rules with VoraPrep's adaptive practice questions.

What Are the Foundational Tax Formulas and Rules?

The foundational tax rules for TCP revolve around correctly calculating AGI, taxable income, and the adjusted basis of property under various scenarios. Don't just read them—use them for active recall. Cover the explanations and try to rebuild the formulas and logic yourself.

How to Calculate AGI

Adjusted Gross Income is the gatekeeper for dozens of other limitations, phase-outs, and credits. Get this wrong, and a cascade of errors will follow.

1. Start with Gross Income.
2. Subtract "above-the-line" deductions (e.g., deductible IRA contributions, student loan interest, self-employment tax).
3. The result is Adjusted Gross Income (AGI).

How to Calculate Taxable Income

The exam often tests the precise ordering of deductions, especially the QBI deduction.

1. Start with Adjusted Gross Income (AGI).
2. Subtract the greater of the Standard Deduction OR Itemized Deductions.
3. This equals Taxable Income before the QBI Deduction.
4. From this amount, subtract the Qualified Business Income (QBI) Deduction under IRC §199A, if applicable.
5. The final result is Taxable Income.

How to Calculate Basis for Property

Basis is everywhere on the TCP exam. Master these variations and their governing Internal Revenue Code sections.

• Purchased Property (IRC §1012): Cost + Shipping/Installation + Improvements - Accumulated Depreciation = Adjusted Basis.
• Gifted Property (IRC §1015): Generally, the donor's adjusted basis ("carryover basis").
• The Trap: If the FMV on the date of the gift is lower than the donor's basis, a dual-basis rule applies. The basis for calculating a gain is the donor's basis. The basis for calculating a loss is the lower FMV. If the sale price is between the two, no gain or loss is recognized. This is a classic MCQ distractor.
• Inherited Property (IRC §1014): Fair Market Value (FMV) at the date of the decedent's death (or alternate valuation date). This is the "step-up" (or "step-down") in basis.

How to Calculate Basis in S-Corps and Partnerships

• S-Corp Stock Basis (IRC §1367):
• Initial Basis (cash + adjusted basis of property contributed)
• Plus: Pro-rata share of income items (taxable and tax-exempt)
• Minus: Distributions (tax-free up to basis)
• Minus: Pro-rata share of loss/deduction items
• Equals: Ending Stock Basis
• Key Distinction: Third-party corporate debt does not increase a shareholder's stock basis. A direct loan from the shareholder to the S-corp creates "debt basis," which can be used to deduct losses only after stock basis is zero.
• Partnership Interest Basis (IRC §705):
• Initial Basis (cash + adjusted basis of property contributed)
• Plus: Pro-rata share of income items (taxable and tax-exempt)
• Plus: Pro-rata share of partnership liabilities (the #1 difference from S-Corps!)
• Minus: Distributions
• Minus: Pro-rata share of loss/deduction items
• Equals: Ending Outside Basis
• Exam Nuance: A partner's share of recourse debt increases their basis. Their share of nonrecourse debt also increases basis, but the at-risk rules may limit loss deductions against it, unless it is qualified nonrecourse financing for real estate.

What Are the Key Thresholds & Limits for the 2026 Exam?

You must know the key inflation-adjusted thresholds for your exam year, as they are frequently tested. The principles, however, are constant and highly testable. The VoraPrep question bank is updated annually to reflect these changes.

Item	2026 Threshold/Limit (Projected)	The "Why It Matters" for TCP
Standard Deduction (MFJ)	~$30,700 (Inflation Adjusted)	The baseline for deciding whether to itemize deductions.
Section 179 Deduction Limit	~$1,300,000 (Inflation Adjusted)	Allows immediate expensing of business property, but limited by taxable income.
Section 179 Phase-Out	Begins at ~$3,220,000 of property placed in service.	A classic two-part test: you must check both the deduction limit and this phase-out threshold.
Bonus Depreciation	20% for property placed in service in 2026.	Phasing down from 40% (2025) and 60% (2024). Unlike §179, not limited by taxable income.
PAL Active Rental Exception	Deduct up to $25,000 of losses.	Phases out for Modified AGI between $100,000 and $150,000. A favorite exam trap.
Annual Gift Tax Exclusion	~$19,000 (Inflation Adjusted)	Allows tax-free transfers of wealth without using the lifetime exemption.
QBI Deduction Phase-Out	Begins at ~$383,900 (MFJ) for SSTBs.	This complex deduction has multiple phase-outs and limitations that are perfect for TBSs. See our guide to the QBI deduction for a full breakdown.

The #1 TCP Trap: S-Corp Distributions with Zero Stock Basis (Worked Example)

This scenario is a simulation-style problem designed to exploit a common, but fatal, misunderstanding of S-Corp basis rules.

Scenario: Sarah is a 50% shareholder in Innovate, Inc., an S-Corporation with no C-Corp E&P history. At the beginning of 2026, her tax basis is as follows:

• Stock Basis: $0
• Debt Basis: $20,000 (from a direct loan she made to Innovate, Inc.)

Innovate, Inc. has a $50,000 balance in its Accumulated Adjustments Account (AAA). On July 1, 2026, the company makes a $15,000 cash distribution to Sarah. Innovate has zero net income or loss for the year. What is the tax consequence of the $15,000 distribution to Sarah?

The Tempting Wrong Answer: Many candidates see the $20,000 debt basis and think, "She has $20,000 of total basis, so a $15,000 distribution is a tax-free return of capital." This is wrong. Others see the large AAA balance and assume any distribution sourced from it must be tax-free. Also wrong. Both mistakes stem from misapplying the fundamental ordering rules. The Judgment-First Approach (The Correct Steps):

1. Isolate the Core Principle: Distributions vs. Losses. This is the critical distinction. Debt basis can only be used to absorb flow-through losses. It can never be used to make a distribution tax-free. Cash distributions only interact with stock basis.
2. Apply the Distribution Ordering Rule. For an S-Corp with no C-Corp E&P, distributions are sourced as follows:

• First, as a tax-free reduction of the shareholder's stock basis, down to zero.
• Second, as a taxable capital gain.

1. Analyze Sarah's Situation.

• Sarah's stock basis is $0.
• The distribution is $15,000.

1. Calculate the Tax Consequence.

• Tax-free return of basis: Since her stock basis is already $0, none of the distribution can be a tax-free return. The amount is $0.
• Taxable Capital Gain: The entire distribution of $15,000 is in excess of her stock basis. Therefore, Sarah must recognize a $15,000 capital gain.

1. Determine Post-Distribution Basis.

• Ending Stock Basis: Remains $0. It cannot go below zero.
• Ending Debt Basis: Remains $20,000. The distribution did not affect it at all.
• Corporate AAA: The corporation's AAA is reduced by the distribution, from $50,000 to $35,000. The AAA is a corporate-level account, separate from Sarah's personal basis.

This multi-step logic is exactly what the exam demands. The VoraPrep adaptive engine identifies if you're weak in this area and serves you more questions until you've mastered the concept.

What Are the Three Hurdles for Deducting Losses in 2026?

You cannot simply deduct a loss because it happened. For the 2026 exam, a loss from a pass-through entity must clear three hurdles in this specific order. A good mnemonic is B-A-P.

1. Basis Limitation (IRC §704/§1366): You cannot deduct losses in excess of your stock basis (S-Corp) or outside basis (Partnership). Any excess loss is suspended and carried forward until you have sufficient basis.
2. At-Risk Limitation (IRC §465): You cannot deduct losses in excess of the amount you are personally "at risk" of losing. This is often the same as basis but can differ with nonrecourse financing.
3. Passive Activity Loss (PAL) Limitation (IRC §469): If the loss is from a passive activity (like most rental activities), you can only deduct it against passive income (with the active rental exception noted above).

What about the Excess Business Loss (EBL) Limitation? The EBL limitation under IRC §461(l), which was the fourth hurdle, expired at the end of 2025. Unless Congress passes new legislation to extend it, it will not apply to the 2026 tax year. For the 2026 CPA exam, you only need to master the three hurdles above.

How Do C-Corps, S-Corps, and Partnerships Differ?

The exam will constantly test your ability to distinguish between entity types. A rule that applies to a partnership might be completely wrong for an S-Corp. This table is your quick reference for the biggest differences.

Feature	C-Corporation	S-Corporation	Partnership
Taxation Level	Entity Level: Taxed on corporate income (Form 1120). Shareholder Level: Taxed on dividends. (Potential double taxation).	Shareholder Level: Income/losses flow through to shareholders' personal returns (Form 1120-S, Schedule K-1).	Partner Level: Income/losses flow through to partners' personal returns (Form 1065, Schedule K-1).
Loss Deductibility	Losses (NOLs) stay at the corporate level; cannot be used by shareholders.	Losses flow through and are deductible by shareholders up to their stock and debt basis.	Losses flow through and are deductible by partners up to their outside basis, which includes their share of partnership debt.
Basis & Liabilities	Shareholder basis is simply the cost of the stock. Corporate operations do not affect it.	Stock Basis: Adjusted annually. Does NOT include third-party corporate debt.	Outside Basis: Adjusted annually. Crucially, includes the partner's share of partnership liabilities.
Distributions (Cash)	Taxable to shareholders as dividends to the extent of corporate Earnings & Profits (E&P).	If has C-Corp E&P: Sourced from 1) AAA (tax-free), 2) E&P (taxable dividend), 3) Return of basis, 4) Capital gain.	Generally tax-free up to the partner's outside basis. Cash distributions in excess of basis are capital gains.
Property Distributions	Corporation: Recognizes gain (FMV - Basis). Shareholder: Receives dividend equal to FMV.	Corporation: Recognizes gain (FMV - Basis), which flows through to shareholders. Shareholder: Receives property tax-free up to basis.	Partnership: No gain/loss recognized. Partner: Generally no gain/loss. Basis in property depends on liquidating vs. nonliquidating status.

Are There Any Good Mnemonics for TCP?

Mnemonics are great for lists, but they can't replace understanding the concepts. Use them for high-frequency items you tend to forget under pressure.

• "HIM DEAD" - Exceptions to the 10% penalty for early IRA withdrawals:
• Homebuyer (first time, $10,000 limit)
• Insurance (medical)
• Medical expenses (in excess of AGI floor)
• Disability (permanent)
• Education expenses
• And
• Death
• "CARES" - Qualifying Child Tests:
• Close Relative
• Age Limit (19 or 24 if student)
• Residency (more than half the year)
• Eliminate Gross Income Test
• Support Test (child cannot provide >50% of own support)
• "SUPORT" - Qualifying Relative Tests:
• Support Test (you provide >50% of their support)
• Under Gross Income Limitation
• Precludes Dependent Filing a Joint Return
• Only Citizens of US/Canada/Mexico
• Relative OR
• Taxpayer lives with the individual for the whole year
• "BAP" - The Three Loss Limitation Hurdles for 2026 (in order):
• Basis
• At-Risk
• Passive Activity Loss

How Should I Use This Cheat Sheet to Study Smarter?

1. Framework First: Before starting a VoraPrep study module on partnerships, review the partnership sections here. It gives you a mental map of the key concepts (basis, distributions, liabilities) before you get lost in the details.
2. Post-Quiz Diagnosis: After you finish a set of 30 MCQs, pull this sheet out. For every question you got wrong, find the relevant rule here. Did you confuse an S-Corp and partnership basis rule? Did you apply a loss limitation out of order? This turns a wrong answer from a failure into a targeted learning moment.
3. Active Recall Drills: Don't just read it. Cover the right side of the entity comparison table and try to fill it in from memory. Recite the three loss limitation hurdles out loud. This active engagement is far more effective than passive reading.
4. Simulation Attack Plan: Use the "Three Hurdles" and entity comparison table as a pre-flight checklist before starting a complex simulation. This level of preparation is what separates passing scores from failing ones, and our affordable pricing makes it accessible.

Frequently asked questions

1. What is on the CPA TCP exam in 2026? The 2026 TCP exam covers advanced individual and entity tax compliance and planning. Key topics include complex AGI and taxable income calculations, the formation, operation, and liquidation of C-Corps, S-Corps, and Partnerships, property transaction basis rules, and loss limitations. 2. Is there a cheat sheet for the CPA TCP exam? This page serves as a comprehensive cheat sheet. It focuses on the most frequently tested rules, thresholds, and common traps, such as the S-Corp vs. Partnership basis differences, the three loss limitation hurdles (B-A-P), and the dual-basis rule for gifted property. 3. How do I pass the CPA TCP exam? To pass TCP, you must go beyond memorization and learn to apply layered rules. Focus on mastering basis calculations for all entity types, practice numerous task-based simulations to build judgment, and use an adaptive review course like VoraPrep to target your specific weak areas. 4. What is the hardest part of the TCP exam? Most candidates find the task-based simulations (TBSs) to be the hardest part. These complex scenarios often require you to synthesize multiple rules—like basis, at-risk, and passive activity loss limitations—and apply them correctly to a single fact pattern, which demands strong analytical judgment. 5. What is the difference between stock basis and debt basis in an S-Corp? A shareholder gets stock basis from capital contributions and income allocations. They get debt basis only by loaning money directly to the corporation. Losses first reduce stock basis to zero, then debt basis. Distributions only reduce stock basis and can never be made tax-free by using debt basis.

Related Resources

• CPA Regulation: Secured transactions (UCC Article 9) — Complete Study Guide, Master Secured Transactions (UCC Article 9) for the CPA REG exam. This complete guide breaks down attachment, perfection
• CPA Regulation: Capital gains and losses — Complete Study Guide, Avoid the #1 REG trap: capital loss netting errors. This guide fixes your process for wash sales, carryovers, and the $3
• CPA Regulation: Partnership Taxation — Complete Study Guide, Master CPA REG Partnership Taxation. Our guide breaks down outside basis, debt basis under IRC §752, §754 elections, and
• CPA Regulation: Fiduciary Income Taxation — Complete Study Guide, Ace Fiduciary Income Taxation on the CPA REG exam. This guide corrects common DNI calculation errors and provides a step
• CPA Auditing & Attestation: Group audits and component auditor reference (AU-C 600) — Complete Study Guide, Ace AU-C 600 on the CPA AUD exam. This guide deciphers group audits, component auditors, and the critical reporting deci
• CPA Auditing & Attestation: Audit Evidence — Complete Study Guide, Master Audit Evidence for the CPA AUD exam. Our expert guide covers key concepts, a worked example, and practice questio
• Adaptive Learning For Accounting Exams, Related guidance from the VoraPrep library.
• Cpa Vs Ea Which Is Easier, Related guidance from the VoraPrep library.
• Accounting Certification Salary Comparison, Related guidance from the VoraPrep library.
• Roger Vs Wiley Cpa, Related guidance from the VoraPrep library.
• Voraprep Vs Uworld Cpa, Related guidance from the VoraPrep library.
• Voraprep Vs Gleim Cpa, Related guidance from the VoraPrep library.

Official resources and references

• AICPA Uniform CPA Examination Blueprints
• NASBA CPA Exam Candidate Bulletin
• Internal Revenue Code (IRC)
• Treasury Department Circular 230

--- Ready to Pass Your CPA Exam? Don't let the layered rules and complex scenarios of TCP stand in your way. VoraPrep's adaptive learning platform, 9,500+ practice questions, and 24/7 AI tutor Vory are all designed to build the judgment you need to pass. We teach you how to think like the examiner.

Visit voraprep.com to get started.

Start Your Free 14-Day Trial at voraprep.com →