REG Exam Tax Strategies: Don't Freak Out About the REG Exam: Mastering Tax Concepts
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Four topics carry most of REG: partnership basis, S corp income, individual itemized deductions, and C corp deduction limits. Here's a worked question for each, plus a habit that makes all four easier to remember.
Before you study any of these: pull up the actual IRS forms. The 1040 and its schedules make the mechanics concrete in a way outlines don't. Download Form 1040, Schedule A, Schedule B, Schedule C, Schedule D, Schedule E, Schedule 1, Form 1120-S, Form 1120, and Form 1065.
Does a partner's loan to the partnership increase their basis?
Partnership basis is one of the most heavily tested REG topics. A partner's outside basis moves with their share of partnership income, losses, and liabilities — but a direct loan the partner makes to the partnership is a different animal entirely.
Example: Quinn holds a 30% stake in QRS Partnership. In 2024, the partnership incurs a $300,000 operating loss. Quinn also personally loans the partnership $100,000. Quinn's basis at the start of the year was $200,000. What is Quinn's basis at year-end?
Quinn's share of the loss is 30% of $300,000, or $90,000, which reduces the $200,000 starting basis to $110,000.
The $100,000 loan doesn't touch Quinn's outside basis. A partner lending money directly to their own partnership creates a separate note receivable — its own asset, with its own $100,000 basis — not additional basis in the partnership interest. That distinction (partner-as-lender vs. the partnership borrowing from a third party, which does allocate out to partners' outside basis) is exactly the kind of thing REG likes to test.
Quinn's loss deduction is also capped at outside basis, so even setting the loan aside, the $100,000 wouldn't have unlocked any additional loss deduction anyway.
How do you calculate S corp ordinary business income?
Ordinary business income captures everything except separately stated items — the items with their own individual-level limitations, like charitable contributions, that pass through the K-1 unchanged rather than getting folded into the entity's bottom line.
Example: TechGenius Solutions, Inc., an S corporation, generated $600,000 in revenue. Expenses included $250,000 in labor, $100,000 in office lease payments, $30,000 in utilities, and a $20,000 charitable donation. What is its ordinary business income?
The charitable donation is a separately stated item — it doesn't belong in this calculation at all. Only the operating expenses reduce ordinary business income:
The $20,000 donation passes through separately on the K-1 to the shareholder's own 1040, where it's subject to the shareholder's individual AGI-based limits (for example, cash donations are capped at 60% of AGI) — not the corporation's bottom line.
How much can a taxpayer itemize?
Individual taxation is the section of REG with the most rules to simply remember, and itemized deductions are one of the most common testing grounds.
Example: A taxpayer with $100,000 of AGI makes a $15,000 charitable contribution, pays $5,000 in state income taxes, and pays $6,000 in mortgage interest. What are total itemized deductions?
None of the usual caps come into play here: the charitable contribution is well under the 60%-of-AGI limit for cash gifts, and $5,000 of state income tax is under the $10,000 SALT cap. When a question does approach those limits, check the cap before you add.
What happens when a C corp's charitable deduction exceeds the limit?
A C corporation can only deduct charitable contributions up to 10% of its taxable income (computed before the deduction). Anything above that gets carried forward — and reconciled on Schedule M-1 in the year it's disallowed.
Example: JKL Corporation made $100,000 in charitable contributions in 2023 but was limited to a $70,000 deduction under the 10%-of-taxable-income rule. How does JKL report the disallowed $30,000 on Schedule M-1?
Since JKL's books already deducted the full $100,000 but the tax return only allows $70,000, the $30,000 difference is added back on Schedule M-1 to reconcile book income up to taxable income.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 91 on REG. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.