50 Things You MUST Know 2011 Edition

50 Things You MUST Know

about the CPA Exam

2011 Edition

Jeff Elliott, CPA

http://www.another71.com/

http://www.another71.com/

Dear Reader,

You have my permission to share this book with anyone and everyone you know who could benefit from it. I only ask that you respect the copyright and not alter it in any way. Print it…E-mail it…Link to it…feel free to pass it on and share it! http://www.another71.com/50-things/ Jeff Elliott, CPA www.another71.com [email protected]

Table of Contents 2011 CPA Exam Basics 1. What sections should I take first in 2011?

2. With the 2011 changes, is FAR still the “hardest” Exam? 3. Can I still get by using my 2010 CPA Review study materials?

4. How do the 2011 CPA Exam changes affect me if I have already

passed some sections?

5. The 2011 CPA Exam tutorial is not Mac-friendly. What is the step-by-step method of overcoming this as well as using any CPA Review course that isnʼt Mac-compatible? (Note: this one tip alone could be worth the price of the book if implemented correctly)

6. What did the AICPA do to improve the calculator function on the

Exam? 7. Is the AICPA really changing their definition of a “passing”

score? 8. Instead of two simulations, I now need to worry about seven? Advanced Study Tactics 9. How can I study 20 hours a week and still have a LIFE? 10. What is the CPA Review NINJA study framework?

Financial Accounting and Reporting 11. Can you breakdown all of the changes for FAR from 2010 to

2011?

12. IFRS has me worried – what do I need to know about it to PASS the CPA Exam?

13. How long does it take the average candidate to study for FAR? 14. How many questions on FAR are pre-test in 2011? Auditing and Attestation 15. Can you breakdown all of the changes for AUD from 2010 to

2011? 16. Is the AICPA going to test the International Auditing Standards

(IAS) as in-depth as they do Generally Accepted Auditing Standards (GAAS)?

17. How long does it take the average candidate to study for AUD? 18. I finished AUD with 30 minutes to spare. Is that normal or should

I be worried? 19. How many questions on AUD are pre-test in 2011?

Business Environment and Concepts

20. Can you breakdown all of the changes for BEC from 2010 to

2011?

21. The IT section of BEC is giving me problems. I donʼt work in IT. I donʼt ever want to work in IT. I just want to pass this exam. What is the best way to learn this information?

22. I hate BEC and the thought of writing essays on BEC topics has me petrified. Can you show me how to write a memo on a BEC topic and provide three examples of what they would look like?

23. How long does it take the average candidate to study for BEC? 24. How many questions on BEC are pre-test in 2011? 25. Are BEC MCQs adaptive (the questions get harder the better

you perform) in 2011?

Regulation 26. Can you breakdown all of the changes for REG from 2010 to

2011?

27. Did the AICPA really add taxation on not-for-profit entities to Regulation?

28. How long does it take the average candidate to study for REG? 29. How many questions on REG are pre-test in 2011? Surviving Exam Day 30. What score should I be averaging on my practice multiple choice

questions before I step into testing center?

31. What is a dead-giveaway that the exam questions are getting harder testlet-by-testlet?

32. I rely on caffeine to perform at a high level. How can I get a caffeine boost during my Exam if I need it?

33. After interacting with tens of thousands of CPA Exam candidates, what are the three worst Exam day horror stories youʼve heard?

34. Does my performance on the MCQs having any impact on simulations I see?

35. If I get frustrated and canʼt figure out an answer and need to

guess, should I pick A, B, C, or D? 36. ARGH! I didnʼt click “Done” before my exam time lapsed and my

session shut down. Did my answers get saved? 37. The computer at the testing center was buggy and then just

completely shut down and it cost me valuable time while the testing center personnel got it back up and running. What should I do?

38. How does the difficulty of the current exam format compare to

the “old days” when it was paper and pencil? Surviving the Score Release 39. I rely on caffeine to perform at a high level. How can I get a

caffeine boost during my Exam if I need it?

40. My 18-month window is coming to a close and Iʼm about to lose credit for one of my passed sections. What if I take my exam, but donʼt get my score back for several weeks? Will I lose my credit?

41. I scored a 74. Should I appeal? 42. I scored a 74. I just need a cram, right? 43. I failed yet again. Iʼve been at this for way too long. Is it time to

throw in the towel?

After You PASS 44. I just PASSED! Can I call myself a CPA?

45. What should I do to expedite the certificate & licensing process

once I pass? 46. I need to get licensing and reciprocity information quickly about

three different states. Where should I go? 47. I need to buy the AICPA Ethics Exam to get my certificate.

Should I get the CD or book format? 48. What Continuing Professional Education (CPE) mistake can cost

you your license? 49. Should I expect to get a raise or be promoted after passing the

CPA Exam? 50. Should I join the AICPA and my state CPA society after

passing?

Before We Get Started: Why are you doing this? Why do you want to pass the CPA Exam? Why do you want to be a CPA? Take a few minutes and think about the answer. I want you to write down three reasons why you want to be a CPA. I literally want you to do this. These three reasons are why youʼre sacrificing your time, money, and energy (sanity??) and everything you do from this point forward in regards to the CPA Exam is because of these three things: Write them down, print out this page, and read it every day.

1. _________________________________

2. _________________________________

3. _________________________________

Disclaimer Dear Reader: When you read this book, please keep the following in mind. If you cannot or will not accept what is stated below, please discontinue reading. If you go ahead and read the content of this book, Iʼll conclude that you agree to all of this. I donʼt want there to be any misunderstanding as to the purpose of this book or as to the relationship between author and reader. This is a book that provides information. It is not legal, accounting, or any other professional advice. This book is about opinions, particularly my opinion, which has been wrong at times - just ask my wife. I, Jeff Elliott, am a Licensed CPA, but I am not YOUR CPA and I am not giving advice as such. Instead, think of me as a friend who has been where you are and wants to be helpful. I DISCLAIM ANY AND ALL WARRANTIES RELATING TO THE INFORMATION IN THIS BOOK, INCLUDING, BUT NOT LIMITED TO THE ACCURACY OR CURRENTNESS OF THE INFORMATION CONTAINED THEREUPON. By your continued reading, Iʼll assume that you understand this. Additionally, this book contains links to third parties, which may or may not also be affiliate links, which could benefit me financially. I do not control the content of these sites and am not liable for their content in any way. Jeff Elliott, CPA J.A. Elliott, LLC

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2011 CPA Exam Basics 1. What sections should I take first in 2011? People who have Auditing and Attestation (AUD) and Financial Accounting and Reporting (FAR) remaining in 2011 should try to take them within the first two testing windows of 2011. It is very likely that the AICPA will not go full-bore on the testing of the international material during the first two quarters of 2011. Why? Well, for one – itʼs like a new watercraft – you donʼt crank up the throttle on that thing until you have several hours on it and have broken in the engine while cruising around the lake. The examiners will probably let candidates get used to the exam changes with the time and format changes and not go hardcore international on them. Will it be tested? Sure – the Content Specification says it will. Will they throw you in the deep end of the pool right off of the bat? Likely not. Secondly, the accounting community still hasnʼt fully embraced the implementation of International Standards and that issue is far from settled. Will we have a better vision for the future implementation of international standards by Q3 2011? Thatʼs anyoneʼs guess, but weʼll probably know more then than we do now. For the first two testing windows of 2011, be sure to know what your CPA Review course teaches you and be able to drop some serious knowledge on international topics, but donʼt be surprised if you only are tested on the basic differences between IFRS and U.S. GAAP. All else being equal, candidates with FAR and AUD left to take, should take them first in 2011.

2. With the 2011 changes, is FAR still the “hardest” Exam? Not any more. Of course, there is no easy section of the CPA Exam, but Auditing and Attestation is getting beefed up and could quite possibly take over FAR as the most-strenuous exam to prepare for on exam day. AUD is undertaking three big changes that are cause for concern.

1. Candidates now have 30 minutes less to take it. At first, that might not seem that big of a deal because in 2010, people could finish AUD and still have time to bake a turkey and serve it to the kids doing their after-school tutoring at the testing center (if youʼve ever taken the CPA Exam in the afternoon, you know what kids Iʼm talking about).

2. Under the new format, the written communication section is gone and the time saved by not having two written communications to crank out will be lost by having up to seven task-based simulations to deal with. Have you pounded through 90 multiple choice questions and been so mentally drained that when you started trying to digest the fact pattern being laid out in the first simulation and it took you five times to read it because you spaced out from boredom, fatigue, and your longing for a 22 oz beer at the strip mall restaurant next to the testing center? Maybe you long for a 22oz diet cola, but you get my point. Instead of two, you now have 7 fact patterns to digest and 7 22oz beers to overcome and 30 minutes less to do it.

3. Did I mention that Regulation, being the generous neighbor that

he is skipped town and left Audit takers all of the Ethics and Responsibility to take care of? Itʼs akin to forcing your neighbor to mow your yard to keep squatters out of your foreclosed house. The ethics and accountantʼs responsibility section, now 16-20% of AUD is not fun for the same reason that taking on the Ethics

exam requirement after you pass the CPA Exam (if applicable in your state) is not fun. Thanks REG! Love ya, buddy. Cheers.

3. Can I still get by using my 2010 CPA Review study materials? No, thatʼs a bad idea. Your 2010 CPA Exam Review Course was written in the summer/fall of 2009 and youʼre taking a 2011 exam. The information is outdated. The format is no longer relevant. Spend the money now or spend it later on a new Notice to Schedule (NTS), at which point youʼll probably decide to buy the new course anyway.

4. How do the 2011 CPA Exam changes affect me if I have

already passed some sections? The same 18-month window that applied before applies now. If you have passed FAR and AUD, you still have 18-months from the date you took your respective exam to pass the remaining parts. 5. The 2011 CPA Exam tutorial is not Mac-friendly. What is the

step-by-step method of overcoming this as well as using any CPA Review course that isnʼt Mac-compatible?

If you have a Mac, you can have the best of both worlds: use the Mac that you love and run Windows® at the same time in parallel. I use both an iMac and a Macbook Pro and simultaneously run Mac Snow Leopard OS/X and Microsoft® Windows 7 Pro on both machines. This enables me to run programs like the AICPAʼs sample CPA Exam and tutorial, which is only Windows compatible and needs Internet Explorer to run. Conversely, if your CPA Review course isnʼt Mac-friendly, you can install it and run it on your Mac using Parallels. Note: Use this information at your own risk. Consult a competent professional before doing this who understands your unique computing needs and situation. I am not an IT professional nor am I giving advice as one. I am only sharing what I personally did.

Proceed with caution. If you have any questions whatsoever regarding this and if it is right for you, consult a competent professional.

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6. What did the AICPA do to improve the calculator function on the Exam?

The new calculator function is a big improvement on the 2011 CPA Exam. Gone is the generic Windows-esque calculator from the past. Candidates are now given something that somewhat resembles an actual tool of the trade: A calculator with tape.

Source: AICPA 2011 FAR Sample Test 7. Is the AICPA really considering changing their definition of a

“passing” score? Changing the “75” benchmark is on the table and the AICPA is going to wait and see how the scores look after the first testing window of 2011. I can see a scenario where they analyze the data from the first testing window and then make an announcement that will go into effect starting in the third testing window (July/August) 2011.

8. Instead of two simulations, I now need to worry about seven? Yes. Instead of two simulations with a written communication each, the new examination format has seven task-based simulations (TBS) for FAR, REG, and AUD with no written communications requirement. Those who had a distain for the simulations under the old format will be delighted to know that instead of 30%, the new simulation format is worth 40% of your score for these sections. This is especially significant because 10 of the 30 points under the old format came via the written communications, which were essentially a free 10 points if you were a good writer and could fake your way through a memo and sound reasonably intelligent. Not any more. You should assume that one of your 6 or 7 TBS tabs will be pre-test and not count toward your exam score. Advanced Study Tactics 9. How can I study 20 hours a week and still have a LIFE? Many CPA Exam candidates I encounter are so overwhelmed with work and family obligations that they cannot fathom how in the world they can fit 20 hours a week of studying into their already jam-packed schedule. Introducing my ELL™ CPA Exam Study Plan: (Early, Lunch, Late). It is the plan that I developed once I decided that I was never going to fail again and it worked. The plan is simple. The sacrifice is not. Most people will not implement it, but the payoff is huge if your family suffers less from you being missing in action because of it.

How it works: Early – Get up 1.5 hours earlier than normal. If you are already getting up at 4, donʼt shake your head in disgust. This plan isnʼt for you. For those who normally get up at 6 or 6:30am, start getting up at 4:30 or 5. Stumble to the coffee pot (which you loaded the night before) and hit the ʻgoʼ button. While the coffee is brewing, go take a quick shower and wake up. Head back to the coffee, grab a cup and sit down at your computer and books (which you also set up the night before). Study for an hour. Notice that checking your e-mail, Facebook, sports sites, or news was nowhere in this sequence. Did you really sacrifice an hour and a half of sleep to check celebrity gossip? No you didnʼt. Donʼt even fire up the Internet browser. Not even once. Lunch – Say “no” to the co-workers heading down the street to grab lunch and talk about how dumb their boss is for an hour. While that sounds fun, youʼre here to study so that instead of hanging out with people that you otherwise wouldnʼt outside of work, you can spend more time with loved ones. You take your lunch to your desk (which you also packed the night before). Start eating and hit “play” on your CPA Review course. Your legal pad and pen will get food smears on it while you take notes, as will your mouse, but who cares. Same rule applies as the morning: no e-mail or Internet. Study for an hour. If your boss frowns on one-hour lunch breaks, consider asking for permission because you are trying to study. Unless there are pressing deadlines or they are just a jerk, they will likely have no problem with it. Late – This is where it will differ greatly based on your home situation. If you are single with no children, married with no children, or married with children but your spouse is at home, then this will work for you. If none of these apply to you and you need to get home

after work, then you will need to defer your study time until later in the evening from 8-10pm. At 5pm or as soon as culturally-permitted in the workplace, either start studying at your desk or bolt the office and head to a coffee shop or library. Study 2 hours. Do this four days a week, but only stay late two of those days. That way, you can still have dinner with loved ones three of the five weekdays (you need to take one night off completely – I would save this for Friday, personally). Sample schedule: Monday: ELL – 4 hours (Study late @ work) Tuesday: EL – 2 hours Wednesday: ELL (Study late @ work) – 4 hours Thursday: EL – 2 hours Friday: EL – 2hours Saturday: E – 4 hours Sunday: E – 2 hours Total: 20 hours If your family is feeling left in the dark from you studying all of the time. Mark this schedule on the calendar and let everyone know your plans. When you study – study. When youʼre with your family, leave the laptop and study books put away. Using the ELL™ Plan you can study for any section in 5-6 weeks (100-120 hours). Some people will take less for sections like BEC. Others will need more time for a section like FAR. You can plan accordingly to your comfort level.

10. What is the CPA Review NINJA™ Advanced Study Framework?

CPA REVIEW NINJA™: Slicing and dicing antiquated conventional study wisdom

In addition to the ELL™ CPA Exam Study Plan, I also created the CPA REVIEW NINJA™ Advanced Study Framework (I love me some acronyms). NAIL THE VIDEOS The CPA Review industry says to watch a section of CPA Review video and then work the accompanying MCQs. This perspective stems from the old-school approach to the paper and pencil exam where you had to sit in a live classroom and learn from an instructor on weekends. Today, there is a smarter way to study. You donʼt have to go to a weekend live course. You can fire up the laptop on a Tuesday morning and knock out two hour of material before you even brush your teeth. If you work MCQs in week one over your week one topic, guess what? – you will work them again in week 5 or 6 when you review because you will forget what you learned.


If you watch a video in week one and score an 85 on the corresponding MCQs, will you be able to score an 85 four weeks later? Not likely. You will need to work them again anyway and itʼs not a smart use of study time. Instead, let the CPA REVIEW NINJA™ plan guide you. INTENSE NOTES Repeat after me: “PUT THE HIGHLIGHTER DOWN.” Which method do you think will help you learn the material better – painting printed words in a book with pretty florescent colors or writing them down on a legal pad and thinking about the information? Grab a stack of legal pads, put the highlighter down, and start writing. NON-STOP MCQS Now is the time to start working multiple-choice questions and do them with a focused frenzy. Do so many MCQs that youʼre absolutely sick of them. As you encounter little “fact nuggets” that you didnʼt know or are prone to forget, write it down and add it to your voluminous stack of notes. JUST RE-WRITE IT This is where it gets tedious. This is also where the pay off happens. You may be familiar with the fact that if you had a choice between $3 Million and 1¢ doubled daily for 31 days, the penny doubled for 31 days ends up tripling the $3 Million. The payoff, however doesnʼt happen until the 31st day. The road is long, but ends up being worth it in the end.

The same goes for re-writing your study notes. The thought of grabbing that stack of legal pads and going to town re-writing what youʼve already written may sound like a ridiculous suggestion at first, but I am a firm believer in its impact. Merely writing down your notes and then reviewing them before your exam doesnʼt have near the impact as taking your furious scribbles and converting them into re-packaged, easily-digestible “fact nuggets”. Not only will your notes mean more when youʼve whittled away the non-essentials, but you are actually learning the material twice. Re-processing the material by re-writing your notes is like letting the information marinade in your mind. Just like a well-prepared steak, you will taste the payoff of this extra step. Plan wisely because this will likely take a week to complete. I recommended this to my audience in Club 75 and this is what one person wrote: “When I first heard of Jeff's tip to re-write your notes, I thought it would be a ridiculous waste of time. However, since I am committed to passing this exam and not taking any shortcuts, I decided to follow his advice. You know, he has passed the exam and all... : ) I have found this to be unbelievably helpful! This is now my second section that I have followed this piece of advice and, once again, I am amazed at how much the material "clicks" as I review and write the notes a second time. Sure, it's time-consuming, but for me, it is worth it. No questions asked. Not only does it help with processing and understanding the material, but it also results in a better, more organized set of study notes to use for review up until exam date.” – Sandy, Club 75 Forum

ALL COMES TOGETHER You have watched the videos. Youʼve taken ridiculous notes and have done hundreds (thousands?) of multiple-choice questions. Youʼve re-written your notes. Now, study that stack of review Gold in your hands multiple times, work MCQs over weak topics, study your notes even more, and then go in and PASS the CPA Exam. Financial Accounting and Reporting 11. Can you breakdown the 2011 FAR Exam?

4 Hours

o Same as 2010

90 MCQs

o Same as 2010

7 Task-Based Simulations (TBS)

o Worth 40% of overall score

Up from 30% in 2010

o No Written Communication

o TBS can be answered in any order and candidates can click from tab to tab to see which one they want to answer first

Content weights basically staying the same

o IFRS integrated throughout the material

12. IFRS has me worried – what do I need to know about it to PASS the CPA Exam? CPA Exam candidates will need to be proficient in the differences between U.S. GAAP and IFRS, but they need to remember that this hasnʼt all of the sudden become the “Uniform IFRS Exam”. Itʼs the CPA Exam with some IFRS mixed into it. In your 2011 Financial Accounting and Reporting CPA Review course, your instructors should be laying out the differences between U.S. GAAP and IFRS on each topic where it is relevant. U.S. GAAP is very detailed and specific, whereas IFRS is more general and conceptual. For instance, Revenue Recognition for U.S. GAAP is voluminous and industry-specific. IFRS however, has only two basic revenue standards and four interpretations as of this writing. IFRS is not industry-specific. Know how IFRS treats each topic differently from U.S. GAAP and know it with a decent level of proficiency. You donʼt need to be an IFRS expert – you just need to have a working knowledge of it for exam purposes.

13. How long should the average person study for Financial

Accounting and Reporting? Some people can study for FAR in 3-4 weeks and be done with it. Others will take more than 2 months. Both of these are outliers and are not really in-line with the norm. My suggestion is that you plan on 6-8 weeks of intense, focused studying at 20 hours per week. 14. How many FAR questions are pre-test? Up to 18 of the 90 multiple-choice questions across the three testlets could be pre-test on Financial Accounting and Reporting in 2011. These questions do not count toward your exam score.

Auditing and Attestation 15. Can you breakdown the 2011 AUD Exam?

4 Hours

o 30 minute reduction from 2010

90 MCQs

o Same as 2010



Up from 30% in 2010

o No Written Communications


Ethics and Responsibilities inherited from REG

o Now 16-20% of Auditing & Attestation

International Standards on Auditing (ISAs) integrated

throughout the material 16. Is the AICPA going to test the International Auditing

Standards (IASs) as in-depth as they do Generally Accepted Auditing Standards (GAAS)?

CPA Exam candidates who take Auditing and Attestation in 2011 will need to understand the differences between GAAS and International Auditing Standards. In addition, candidates will need to understand

the role of the International Auditing and Assurance Standards Board (IAASB) in the establishment of the International Auditing Standards. Bottom line: candidates needs to know how the IASs are different and how they are made. 17. How long should the average person study for Auditing

and Attestation? In 2010, I recommended candidates devote 4 to 5 weeks @ 20 hours per week to AUD. For 2011 however, the time needed to appropriately study for AUD is more in-line with that of FAR. 6-8 weeks @ 20 hours per week is recommended. 18. How many AUD questions are pre-test? Up to 18 of the 90 multiple-choice questions across the three testlets (6 per testlet) could be pre-test on Auditing and Attestation in 2011. These questions do not count toward your exam score.

Business Environment and Concepts

19. Can you breakdown the 2011 BEC Exam?

3 Hours

o 30 minute increase from 2010

72 MCQs

o Down from 90 questions in 2010

o Worth 85% of the overall score

3 Written Communications

o New in 2011

o Covering BEC topics

o Worth 15% of the overall score

Business Structures are now tested on REG

New Business Globalization topics will be tested

20. The IT section of BEC is giving me problems. I donʼt work

in IT. I donʼt ever want to work in IT. I just want to pass this exam. What is the best way to learn this information?

IT is a bear on Business Environment and Concepts. My #1 piece of advice and it is what I would personally do (and personally did) is to work every multiple choice I.T. question in the Wiley book the afternoon before your exam. Start after lunch and just start cranking on MCQs and donʼt stop until youʼre done. Read every single answer explanation to every problem – not only the correct answer but also why the other three are incorrect. 21. I feel somewhat uneasy about writing. How can I write a

solid memo for the BEC written communication requirement?

Some people flat-out fear the written communication requirement of the CPA Exam. For some, they just donʼt think theyʼre a good writer. For others, if they are an International candidate, or English is their second language and they worry about this requirement. The written communication section for BEC is 15% of a candidateʼs overall score, so letʼs go over some pointers on how to maximize your score potential for this area.

1. Your written communication starts with a thesis statement. A thesis statement is the main point of the entire memo. Price elasticity of demand is a confusing topic that causes many CPA Exam candidates trouble on exam day. There is your thesis. I spelled out exactly what the memo is about. I follow the thesis with a few supporting statements. Candidates often fail to remember the correlation between total revenue and demand elastic goods. Similarly, the correlation between total revenue and demand inelastic goods is also easily mistaken.

2. The second part of memo is the body. This is where you support your thesis statement.

It is often very difficult to remember that when demand for a good is inelastic and the price is raised, total revenue goes down. Conversely, when demand for a good is elastic and the price is raised, total revenue goes up. CPA Exam candidates have trouble keeping these relationships in check and not getting them confused.

3. Finally, you recap your thesis point with a conclusion. In closing, CPA Exam candidates often struggle with price elasticity of demand, but if they can remember the relationship between total price and elasticity of demand, they will have success on exam day.

4. This is optional, but I always ended my CPA Exam written communications with: Sincerely, Jeff Elliott, CPA I wanted the graders to picture me as a future CPA, so I tried to look the part.

5. If you found yourself confused or shaking your head at what I

wrote in #2, you are correct. I intentionally switched around the relationships between elasticity, price increases, and total revenue. My statements were wrong, but it doesnʼt matter – the exam doesnʼt grade for technical accuracy. I wrote a solid memo, used good key words, and didnʼt have any misspellings or grammatical errors. A+.

22. How long should the average person study for Business

Environment and Concepts? CPA Exam candidates should plan on devoting 4-5 weeks of intense studying @ 20 hours per week for BEC. 80-100 total hours is recommended. Of course, with all study hour recommendations, adjust it according to your own personal needs. Some will require less study time while others will need more.

23. How many BEC questions are pre-test? Up to 14 of the 72 questions on Business Environment and Concepts could be pre-test and not count. Additionally, plan on one of the three tabs in the BEC written communication section being pre-test as well. Which ones are pre-test? Only the AICPA knows.

24. Are BEC MCQs adaptive (the questions get harder the better you perform) in 2011?

Yes! BEC questions are now “adaptive” in 2011. If the questions seem like they are harder in testlet two than they were in testlet one – thatʼs a good thing. Regulation 25. Can you breakdown the 2011 REG Exam?

3 Hours

o Same as 2010

72 MCQs

o Same as 2010



Up from 30% in 2010

o No Written Communications


Ethics and Responsibilities sent to AUD

Business Structures inherited from BEC

Some 501(c)(3) taxation topics added in 2011

No International material tested

26. How in-depth will the AICPA test the newly added taxation of 501(c)(3) organizations on Regulation?

The exam is likely going to test:

1. The requirements for qualifying as a non-profit organization. 2. The treatment of unrelated business income (UBI). 3. You should also be familiar with the Form 990.

501(c)(3) taxation isnʼt going to be huge – itʼs just another facet of the Estate/Gift area, but you need to be familiar with it enough to answer a few questions on your exam. 27. How long should the average person study for Regulation? Regulation study time is different for candidates based on their work background. Candidates who are neck-deep in “tax season” who then transition into studying for REG when they are fresh off of preparing every type of tax return imaginable will require less study time over the tax topics than someone who has never touched a tax return in their life, much less tell you what an 1120S is all about. In general, candidates should plan on spending a solid 6-8 weeks studying for Regulation @ 20 hours per week. Just like the other sections of the CPA Exam, some will need more time studying for Regulation and others will require less.

28. How many REG questions are pre-test? Up to 14 of the 72 multiple-choice questions (4-5 per testlet) on Regulation could be pre-test and not count toward your score. Additionally, one of the six TBS tabs could be pre-test as well. 29. I couldnʼt finish REG in the allotted 3 hours. Is that normal

or should I be worried? Struggling to finish Regulation is perfectly normal. Why they allotted 4.5 hours to Auditing and only 3 hours to Regulation from 2004-2010 is beyond me. It was common for people to breeze through Auditing and leave 30 minutes to an hour early, but sweat bullets trying to finish that last simulation on Regulation. In 2011, REG still isnʼt getting any love, so be prepared to use your time efficiently or you will pay for it when those task-based simulations rear their ugly head. Surviving Exam Day 30. What score should I be averaging on my practice multiple

choice questions before I step into testing center? Some people think that you need to be scoring in the high-90s on their multiple-choice questions, but this is not the case. My recommendation is that CPA Exam candidates score in the 70-80% range consistently on a topic heading into their exam. Notice that I said heading into their exam. You canʼt score in the 80s on a topic in week two of your exam prep and not look at it again. As you do your final exam review, go down the list of topics and do 20 question “mini-testlets” over the topic and keep doing them until youʼre scoring the 70-80% range. Once this has been accomplished, move on to the next topic.

If there is a topic that you absolutely loathe like not-for-profit accounting for FAR or AMT for REG, do those first. Ignoring those pesky sections because itʼs painful to study them will not serve you on Exam day. You at least need to give yourself a fighting chance on the topic once youʼre in the testing center. If youʼre rushed for study time, at least know something useful about the topic. If you ignored AMT for instance, be sure to know what items on Schedule A get added back for the AMT calculation. See? You know something about AMT after all that you could see on the exam.

31. What is a dead-giveaway that the exam questions are

getting harder testlet-by-testlet? Candidates are always wondering how they can tell if their exam is getting “harder”. The default exam difficulty for REG, FAR, and AUD is “moderate” and if you do well on the first testlet, it will transition to “difficult”. Letʼs say that youʼre on testlet one and you canʼt believe how basic the questions are – 2-3 sentence questions that donʼt seem like they are a big deal. Then, it happens. Ted Corp, a wholly-owned subsidiary of Ace Corp… The question is so long that you read it three times to digest it all. Congrats – you likely did well on testlet #1 and these “difficult” questions are much more wordier. Relax. The best thing you can do is read the last sentence in the question first because it shapes the context of the entire question. The question is asking for “X”, so you read the question in light of your pursuit of X”. Remember: Difficult questions are worth more points than moderate questions. Also be sure to remember that if it didnʼt seem like any of the testlets got more “wordy”, that doesnʼt necessarily mean anything – just do your best and donʼt look back.

32. I rely on caffeine to perform at a high level. How can I get a caffeine boost during my Exam if I need it?

Ah yes, caffeine – a beautiful thing. It can be a curse, however if you donʼt plan accordingly on exam day. In the midst of all of your exam-day anxiety, donʼt forget caffeine if your body is used to it. I personally drink about a pot of coffee a day. Yeah, I know, I know…itʼs bad for me, yada yada. Even if you drink ¼ the amount that I do, your body is still used to performing with it, so does it make sense to go in and take a 4 hour exam without it? The results could be tragic. I distinctly remembering thinking that I was going to die during an exam. I had hit the two hour mark and I was ready to mail it in because I was soooooo sleepy. If you rely on caffeine to perform at a high level, itʼs a double-edged sword. Too much before testing and youʼll need a restroom break 20 minutes into testlet one. Too little and you may literally fall asleep with those ʻfiring range muffsʼ on your head. GOO. My personal recommendation is to ask to use the restroom at the last possible second prior to walking into the testing room. Thatʼs what I did and it worked. Before answering the next question – I need a re-load.

33. What are common exam day blunders? Exam day horror stories…Iʼve heard a lot of them. Iʼll sum them up by telling you what not to do.

I. Donʼt kick the power cord to you computer II. Donʼt take more than a few minutes to read the opening

screens – your exam will lock and you are out of luck, my friend – see you next testing window.

III. Donʼt leave one of your photo IDs unsigned – aka if your credit card is intended to be used as a photo ID, donʼt write “see photo ID” on the back where the signature strip is. The testing center people wonʼt think itʼs funny. I know from personal experience

IV. Donʼt let your hacking, carpet-bomb-farting neighbor at the terminal next to you distract you. Again – personal experience.

V. Donʼt spend 10 minutes pissed off at a calculation because you just know your answer is correct. Youʼre well on your way to a 54 if you keep that up.

34. Does my performance on the MCQs having any impact on

simulations I see? Your performance on the multiple-choice questions has no impact on what types of simulations you get. They are not related and nothing can be gained by analyzing the correlation between the two, because there is no correlation. If you get sims that you think are “easy”, donʼt freak out – it doesnʼt mean that you did poorly on your MCQs.

35. If I get frustrated and canʼt figure out an answer and need

to guess, should I pick A, B, C, or D? People in a jam need to know what answer to choose if they need to guess. I did an “audit sample” of 100 CPA Exam questions to prove my theory that A and D are correct the least-often. According to my sample size, I was right. A and D were each correct 20% of the time, whereas B and C were correct 30% of the time. So, assuming that

there is no Audit Sampling Risk, you need to guess, you stand a better chance of getting it correct if you choose B or C. Perhaps you have some other framework for guessing. If so – use it. If you donʼt, perhaps picking B or C is more scientific than eenie meenie miny moe. 36. ARGH! I didnʼt click “Done” before my exam time lapsed

and my session shut down. Did my answers get saved? This happens to a lot of people! It happened to me on more than one occasion – including my REG exam where I scored a 92. Donʼt worry – if you didnʼt click “Done” your exam should have still been saved. 37. The computer at the testing center was buggy and then

just completely shut down and it cost me valuable time while the testing center personnel got it back up and running. What should I do?

Donʼt freak out if things go terrible at the testing center. If your exam messed up – you will have the choice of accepting your score as-is or getting a re-take if you file a complaint and the AICPA can verify. If you choose the latter, you will never see your score.

38. How does the difficulty of the current exam format compare to the “old days” when it was paper and pencil?

Looking for some ammo to refute that snobby boss or rude uncle who took the CPA Exam back in the “paper and pencil” days who claim you have easy? Let them chew on this:

I. The historical first time pass rate is basically the same as it was ʻback in the dayʼ

II. Their exam day experience was more rigorous – they had to go site in some big room with hundreds of other people for 2.5 days.

III. Your actual exam is more rigorous. In addition to all of the basics that the paper and pencil crowd had to know, the advent of SOX, IFRS, the PCAOB and testing on topics that you couldnʼt care less about like Information Technology makes the current CPA Exam content more rigorous than the olden days. The verdict? Itʼs a push. Donʼt take any lip from the Old School. Your certificate says CPA just like theirs.

Surviving the Score Release 39. What??? There wonʼt be a Wave 1 anymore in 2011?

Seriously??? The AICPA is holding all scores for a testing window and releasing them once per testing window in 2011. In the past, there has been a Wave 1 and Wave 2. The January/February 2011 testing window as an example, under the previous method, Wave 1 scores would appear in February 2011 and Wave 2 in March. Under the new plan, there would only be one score release – in March.

Essentially, people who took their exams early January are in for a lonnngggg wait. You could basically file your income taxes and get a refund in March before you get your CPA Exam score. Any time the Federal Government moves quicker than you, maybe itʼs time to re-think that strategy. Maybe itʼs just the free-market capitalist in me.

40. I scored a 74. Should I appeal? Nope. Instead, drive down the highway and throw your bucket of one-dollar bills that you would have spent on the appeal out the window (and video it). Youʼll get more satisfaction that way – and it might even go viral on YouTube®. I have yet to hear of anyone score an appeal and in my interview with the AICPA, they said that in 2008 zero appeals resulted in a change from a fail to a passing score. 41. I scored a 74. I just need a cram, right? Nope. Well, not necessarily anyway. Keep in mind that you scored that 74 what – 1.5 months ago? Maybe more? Could you roll into the exam center today and score it again? Doubtful. I recommend starting over with your exam prep and not cutting any corners. When I scored my first 74 on REG and lost my FAR credit, which was a miserable experience, btw (perhaps you can relate). I thought I could “cram” and score that extra point. Rejected. Another74. I then proceeded to roll up my sleeves and get medieval on REG and rocked a 92. Take THAT, Like-Kind Exchanges. Learn from my mistake and go through your full course again and if you have time – consider a CRAM course.

42. I failed yet again. Iʼve been at this for way too long. Is it

time to throw in the towel? I know that right now is a miserable time and itʼs very easy to start believing thoughts that simply are not true. Thoughts like: youʼre not smart enough to pass, accounting isnʼt for you, the AICPA has it out for you and doesnʼt want you in the profession, etc. I personally felt all those emotions and had those thoughts going through my head as well. A few years removed from the exam process, I can tell you that being on the other side truly is worth it. My problem was always commitment to the exam I wanted to be a CPA, but I didnʼt really want to be a CPA. As soon as I got serious about things, I realized that hey, I am smart enough and the AICPA truly does not hate me. Picture yourself three years from now. Will this momentarily failure – be it a 55, a 71, or a 74, mean anything? No. It will be a distant memory and like most things, you look back at tough times with a fondness that wasnʼt there when you were in the middle of it. This very well could be one of the toughest times you encounter in your career outside of getting downsized or laid off. Stay with it – it will pay off in the end. Just the sheer fact that you got this far tells me you are MORE than smart enough to pass this exam. Youʼll be fine – keep fighting!

43. My 18-month window is coming to a close and Iʼm about to lose credit for one of my passed sections. What if I take my exam, but donʼt get my score back for several weeks? Will I lose my credit?

This could quite possibly be the #1 question that I get asked on a monthly basis. If your 18-month window expires April 30th, you need to walk into your testing center and sit for your exam before that date. It doesnʼt matter when you get your score. What matters is when you physically took your exam. Oh, and you need to have passed it too. Bottom line: sit for your exam prior to your 18-month window expiring. After You PASS 44. I just PASSED! Can I call myself a CPA? No you cannot. Disappointing, right? All of that work and you are still not officially a CPA. This is a very big deal, so donʼt jump the gun on this. You cannot represent to yourself to the public, your neighbor, or your favorite barista steaming your celebratory latte that you are a CPA until you are so deemed by the state in which you intend to operate as such. You canʼt put in on a business card or put it in your work e-mail signature until your state grants you a license or a permit to practice. In order to get this, you likely have a lot of paperwork to fill out, experience requirement hoops to jump through and need to scratch out a check and send it to them. I know, I know – youʼve already paid a ton of money to be able to call yourself a CPA. Guess what? The expensive part never stops. Always double-check with your state board of accountancy if you have any questions whatsoever as to whether or not you can call yourself a CPA. You donʼt want to incur the wrath of your state disciplinary board!

As a room of thumb, most people who recently passed the CPA Exam cannot call themselves CPAs – yet.

45. What should I do to expedite the certificate & licensing

process once I pass? This is something that I had to figure out on my own. Once you pass your fourth and final section, simply go to your state board of accountancy website and download all of their PDFs for getting your certificate/license (if applicable). Fill them out, write a check, and mail it in. Donʼt wait for them to take their sweet time in sending some packet to you. Chances are you can send them the forms and get the process rolling before they even slap the postage on your envelope. 46. I need to get licensing and reciprocity information quickly

about three different states. Where should I go? There is one place that has all of this info and itʼs run by NASBA. https://www.alllibrary.com/ A usage fee will apply, depending on what package you sign up for. The consolidated info will be well-worth it if it saves you from poking around on three different state websites that look like they were designed in 1996. 47. I need to buy the AICPA Ethics Exam to get my certificate.

Should I get the CD or book format? CD! Definitely CD. The nice thing about the CD is that you can search for keywords in the text as you hunt down the answers. It is a huge time-saver.

48. What Continuing Professional Education (CPE) mistake can cost you your license?

I mentioned a few questions ago that the CPA Exam is just the beginning when it comes to the expense world of professional accounting. CPE – ahh, yes…such a beautiful thing. CPE is the “150 hour rule” of the accounting profession. You know how you can go take some meaningless community college classes to get you toward your 150 hours after you graduate with a bachelorʼs degree? You can go take business law and junk like that. Does it help you protect the public any more? No. Do you have to do it? Yes. Why? Because they said so. CPE is the same way. Many states require 120 hours over 3 years or 80 hours over 2 years, etc. In theory, I could go take 80 hours of strategies for Farm Taxation and it would count for my CPE requirement. Does it help me be a better accountant? No. I donʼt work with farmers or farm taxation. Of course, the natural response is “uh – go take something that does pertain to your area.” Sounds simple, right? Letʼs see…Iʼm scanning the CPE offerings…IFRS…no. Estates and Trusts…no. Health Care Legislation impact on your clients…no. I donʼt want any of that stuff…Iʼm not interested. I look at seminars on Social Media and Utilizing Technology for 16 credits of CPE. Guess what? I likely know more about that than the person teaching it. Thatʼs a no-go. The point is that CPE is a nice idea, but in many cases, I think CPAs find themselves hunting for relevant CPE courses to take. At the end of the day – people just pay the money so they can get checked off the list. Ok – thatʼs my rant about CPE. Here is what YOU need to know about CPE that can cost you your license if youʼre not careful. NASBA-approved CPE does not necessarily equal state-approved CPE.

I learned this one the hard way. I signed up for a seminar that was NASBA-approved for CPE and gave me 35 hours of credit. I mistakenly assumed that because NASBA said it was legit, my state board of accountancy would agree. They didnʼt. I found myself up the proverbial creek and no paddles, facing an 8 hour CPE penalty and a $250 fine. Oh, and I had to not only complete the 35 hours they disallowed and do the additional 8 hours all within 60 days. Did I mention the $250 fine? After pleading my case as to why the state should allow the course (of all the CPE out there in accountancy-land, this was the most relevant to my personal occupation and ironically, it wasnʼt being allowed) and making phone calls, the board saw my point (which I am very thankful for) and allowed most of it. In the end, I had 6 hours to make up plus the 8 hour penalty plus the $250 fine. 14 hours is a lot better than 43 hours where I come from. What if the next two months would have been “busy” season and required me to work 70 hour weeks? How would I have fit 43 hours of CPE into that time? It could have cost me my license. Donʼt make the same mistake I did. If youʼre unsure about whether CPE will count for your stateʼs requirements, call them. Donʼt be afraid to bug them. If you mess up, they will be bugging you soon enough.

49. Should I expect to get a raise or be promoted after passing the CPA Exam?

Not necessarily. If passing the CPA Exam means that your employer can bill you out at a higher rate, then yes you should get a raise. If youʼre a front-office employee that is a true revenue generator, then you should be worth more. If youʼre a back-office employee, donʼt expect your grumpy boss to stand next to your desk with hundred dollar bills and “make it rain”. Passing the CPA Exam will get you noticed and will be a major feather in your cap in the corporate world. Internal politics aside, it should move you up faster. As a rule of thumb, when it comes to raises, I like what my mentor Dave Ramsey says regarding the subject: “Your raise is effective when you are.” Youʼve already done the hard part in setting yourself above your peers by passing the CPA Exam. Continue this by doing your work with excellence while they engage in petty chat about how bad things are around the company and how stupid your boss is. It will pay off and that raise will come. If youʼre sitting here reading this and screaming at the page “RAISE!?!? I just want a JOB, man!!!”, please understand that you are not alone. I think most people assumed that accountants would always have jobs and be in demand. While over history, this is mostly true, over the past few years, solid jobs have been hard to come by and are very competitive. I am spoken with candidates who have passed the CPA Exam and have settled for Accounts Payable positions just to get their foot in the door. If you find yourself trying to gain employment, I want to encourage you to keep after it and know that you are doing the right thing by studying for this exam. A CPA certificate is the “new bachelors

degree”. It is becoming the minimum to stay competitive in the job marketplace. Thankfully, you “get” that. Your peers who are vying for the same positions as you donʼt understand that and you should hold a competitive advantage over them throughout the interview process. Stick with it and keep your head high! 50. Should I join the AICPA and my state CPA society after

passing? Joining the AICPA and your state CPA society is an excellent way to not only keep your finger on the pulse of the profession, but also add additional credibility to your resume as well. The fees for the AICPA should pay for themselves if you find yourself buying your own CPE and use their discounts. I personally have not used any of their added “perks” that they offer like additional insurance and things like that. I do intend on buying my future CPE courses from them. If nothing else, know that the AICPA membership certificate is BIG It dwarfs my state CPA certificate on my wall and looks pretty cool. The biggest benefits you derive from joining these organizations will be networking and as mentioned before, added credibility. I am an active member of both the AICPA and my state CPA society and plan on continuing my membership in the future.

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Individual Taxation


CASH BASIS ACCOUNTING

Allowed for Individuals

Not allowed for:

o Corporations

o Partnerships with a C-Corp Partner

o Inventory DEDUCTIONS TO ARRIVE AT AGI

MSA/HSA Contributions

Investment penalties for early withdrawal

Self-employed medical premiums

50% of self-employment tax

SEP, Keogh, Simple IRA contributions

Student loan interest - can't be another taxpayer's dependent

Tuition - can't take Hope/Lifetime Learning credit for

same expense

Alimony paid

Attorney fees in a discrimination lawsuit

Teacher expenses

Moving Expenses

CARRYOVERS

Passive Activity Loss

o No carryback

o Can carry forward indefinitely

Excess 179 Expense

o Carry forward to next year

o The 179 deduction is limited to taxable income

Investment interest expense in excess over Investment Income

o Carry forward Indefinitely

Charitable Contributions

o Carry forward 5 years

AMT Paid

o Carry forward indefinitely

o Can only apply against future income tax

Not against future AMT liabilities

Capital Loss

o Take $3,000 loss and carry the rest forward indefinitely

o Loss retains its character (STCL vs LTCL)

Compare this to a Corporation 3 years back/5 years forward Carry forward as a STCL only

INSTALLMENT SALES

Gross Profit / Contract Price

o Contract Price = Sales Price – Liability assumed by buyer

HOME MORTGAGE INTEREST

Regular Mortgage Interest is deductible on loans up to $1,000,000

Home Equity Loan interest is deductible on loans up to $100,000

BUSINESS GIFTS (SCHEDULE C)

$25 per person are deductible

Service awards - up to $400 are deductible

BUSINESS LOSSES

Business losses only offset active business income

o W2 wages are considered active business income

Passive losses don't offset active income

o W2 wages = Active Income

Can't be offset by Passive Losses

o Ltd Partnership income = Passive Income

Can be offset by passive losses

o Interest/dividend income = Portfolio Income

NOT PASSIVE!

CONVENTIONS

Personal Property = Mid-year/Mid-quarter

o Use mid-quarter if 40% or more of all purchases occur in 4th quarter

Real Property = Mid-month

Leasehold improvements = 15 year S/L

BUSINESS START-UP COSTS OVER $5,000

Amortize over 180 months

Reduced dollar-for-dollar by amount over $50,000 MEDICAL EXPENSES - FAMILY

Deductible once 7.5% AGI threshold is reached on Schedule A

o If your AGI is $100,000 your first $7,500 of medical expenses are not deductible

Accident/disability insurance premiums are not deductible on Schedule A

MEDICAL EXPENSE - PAID ON BEHALF OF ANOTHER

Must be a citizen of North America

If person is your mother/father or relative closer than a cousin, they don't have to live with you

Otherwise, they must live with you

Must provide more than 50% support to individual

FOREIGN TAXES PAID – SCHEDULE A

Foreign income tax and real estate taxes are deductible

Foreign personal property taxes are not deductible

Foreign tax assessments are not deductible - they are added to basis

INVESTMENT INTEREST EXPENSE – SCHEDULE A

Deductible only the extent of net investment income

Gross Investment Income

<Investment expense in excess of 2% of AGI>

= Net Investment Income

Note: Investment expense doesn't include Interest Exp

Investment interest expense on tax-free securities is not deductible

MORTGAGE POINTS

Deductible if it represents prepaid interest on purchase of a new home or improving a home

Refinance points are amortized over the life of the mortgage

MORTGAGE INTEREST EXPENSE

If used to purchase a house (i.e. not to pay off credit cards) deductible on Schedule A on debt up to $1M

Refinance interest expense deductible up $100k of debt

CHARITABLE CONTRIBUTIONS

LTCG Property + Property related to the charity's function

o Deduction for FMV of property o Up to 30% of AGI

STCG Property + property not related to the charity's function

o Deduction for Adjusted Basis in property o Up to 50% of AGI

CASUALTY LOSS

Decrease in FMV of property vs. Basis

Use the lower of the two numbers

Lower of above number <insurance proceeds> <$100> (Note – this was $500 in 2009 tax year) <10% of AGI>

=Deductible amount for casualty loss

Expenses incurred to repair damaged personal property are not deductible

MISC SCHEDULE A DEDUCTIONS

Must Exceed 2% of AGI

Education - if required to keep your job

Business travel expenses

50% of meals/entertainment

Union Dues

Tax prep fees

Legal fees to collect alimony

Appraisal fees to value casualty loss or charitable contributions

ITEMIZED DEDUCTIONS NOT SUBJECT TO REDUCTION

Medical

Casualty

Gambling

Investment Interest Expense

QUALIFYING CHILD

Must be resident of North America

Under age 19 or age 24, if student

QUALIFYING RELATIVE

Must be citizen of North America

Same "relative" test as the test for medical expenses paid for another person

o If person is your mother/father or relative closer

than a cousin, they don't have to live with you

o Otherwise, they must live with you

o Must provide more than 50% support to individual

o Can't earn more than $3,500 (Social Security doesn't count as income)

MINOR INCOME TAXES AT PARENTS’ RATE

Child's unearned income

<early withdrawal penalties> <$950> <greater than $950 or child's itemized deduction related to unearned income> =Amount taxed at parents' rate

MARRIED FILING JOINTLY

Different accounting methods between spouses are ok if they each own a small business

Non-resident aliens can file MFJ with their spouse

MARRIED FILING JOINTLY

Real Estate depreciation on property purchases pre-'99 vs Straight Line 40

Difference between 200% MACRS vs 150% MACRS on personal property

FMV of stock options vs amount paid for them

7.5% medical deduction threshold for Schedule A vs 10% allowed for AMT

Add back any mortgage interest on funds not actually

used on the home

No state income tax, real estate tax, or personal property tax allowed for AMT

No personal exemptions or standard deductions

For construction: only percentage of completion method allowed

No installment method on sales allowed

AMT paid is carried forward indefinitely and only reduces future regular tax, not future AMT

SELF-EMPLOYMENT TAX

15.3% of Net Profit

Executor of an estate is not self-employment income

Copyright © 2010 – Jeff Elliott, CPA All rights reserved worldwide.

No part of this e-book may be copied or sold.

57

REFUNDABLE TAX CREDITS

If the credit takes the amount of tax owed for the year below zero, the government owes the taxpayer money

Earned Income Credit

Child Tax Credit EDUCATION CREDITS

Hope Credit

o Per student, not refundable

Lifetime Learning Credit

o Per taxpayer, not refundable ESTIMATED TAX PAYMENTS

90% of current balance due

100% of prior year's balance due

110% of prior year's balance due

o If AGI is $150,000 or more

FARMING

Costs incurred to preserve soil/water = deductible

Costs incurred to drain wetlands or prep for irrigation = not deductible

If you want to preserve resources, you can deduct



58

If you want to use resources, you cannot deduct

Prepaid feed costs for livestock can be deducted up to 50% of other farming expenses

Personal tangible property (i.e. non-real estate) uses

MACRS 150

AUDIT APPEALS

If no deal is reached after appeal, taxpayer has 90 days to petition the tax court

If no petition filed, then taxpayer has 10 days to pay the tax due

STATUTE OF LIMITATIONS FOR A TAX AUDIT

3 years

6 years if 25% or more of gross income (gross receipts + capital gains) was omitted from the tax return

The clock starts ticking on the due date of the return

(4/15 normally – in 2011, the due date is 4/18, but for exam purposes, use 4/15) or the date the return was filed - whichever is later

No statute of limitations for:

o Fraud

o Failure to file a return

NON-BUSINESS BAD DEBT

Treated as a Short-Term Casualty Loss (STCL)



59

TAX REFUND CLAIMS

Must be claimed within 3 years of return due date or within 2 years of tax being paid, whichever is later

DIVIDEND INCOME

Treated as ordinary income (i.e. not capital) LIFE INSURANCE

Employer can pay premiums for up to $50,000 in covereage without it being included in income

Premiums on covereage in excess of $50,000 count as income to the taxpayer

SCHOLARSHIPS

Scholarships are not taxable as long as

o They are not in return for services redered

If a graduate assistant gets a scholarship in return for teaching classes, that's not a tax-free scholarship

o The money is used for tuition and books

Room and Board counts as income TAX-FREE INTEREST INCOME

State & Municipal Bonds

US EE Savings Bonds

o US HH Bonds are taxable



60

Remember: US Treasuries are taxable!!! TAX-FREE DIVIDEND INCOME

Stocks

S-Corps

Life Insurance SOCIAL SECURITY BENEFITS

Up to 85% of Social Security income can be taxed for people in higher income brackets

UNEMPLOYMENT COMPENSATION

Taxable DAMAGES AWARDED

Any payment made to make you 'whole' = Not Taxable

o You lose a limb in an auto accident and get paid $500,000

o Not taxable income

Any payment made for punitive damages = Taxable WORKMAN’S COMPENSATION

NOT Taxable

Think of it as similar to being awarded damages to make who whole = Not Taxable



61

DIVORCE, ALIMONY, & CHILD SUPPORT

Not Taxable & Not Deductible

o Divorce Property Settlement

o Child Support

Taxable & Deductible

o Alimony ADOPTIONS

Treated as personal expense and are not deductible

Only tax benefits allowed are through the adoption credit

ALIMONY RECAPTURE

2nd Year: (3rd year - 2nd year - $15,000)

1st Year:

1st Year Alimony Paid

<Avg alimony paid in 2nd & 3rd years>

<$15,000>

<Recapture from 2nd year>

=1st Year Alimony Recapture

Total Recapture = 1st Year Recapture + 2nd Year Recapture



62

NET OPERATING LOSS (NOL)

Carryback 2 years

Carryforward 20 years

Remember: 2/20

IRA CONTRIBUTIONS

Traditional IRA = Deductible

Roth IRA = Not Deductible

FILING STATUS

Married Filing Jointly

o Must be married at end of year

o If spouse dies, must be married at end of year

Head of Household

o Has a dependent child

o Provides more than 50% support

o Lives with them more than 50% of year

Qualifying Window(er)

o Has a dependent child

o Gets MFJ status for year of death + 2 tax years



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“I cannot tell you how big of a help your notes have been. I have yet to write one note and have relied on yours 100% and passed FAR, REG, and BEC on try #1. Thanks for all your help and support through this.” - Heather

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50 Things You MUST Know 2011 Edition

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