REG (CPA Exam study)

Common Law Contracts

RISE: Real estate, insurance, services, employment

Mirror image rule: Acceptance must exactly match the offer. A change is generally a counteroffer.

Substantial performance: A party that substantially performs generally has a right to payment, reduced by damages for minor defects.

Modification: Requires new consideration, unless an exception applies.

UCC Contracts

Perfect tender rule: Goods and delivery generally must conform exactly to the contract. The buyer may reject nonconforming goods, subject to important exceptions.

No mirror image rule. A definite acceptance can form a contract even with additional or different terms, unless it is expressly conditional on agreement to those terms.

Modifications: No new consideration is required, but the modification must be made in good faith.

Common Law vs UCC Contracts

Ask whether the subject is a good or a service. If it is a good, apply the UCC. If it is a RISE contract, apply common law.

For acceptance:

Common law: mirror image

UCC: acceptance may contain additional or different terms

For performance:

Common law: substantial performance

UCC: perfect tender, subject to exceptions

For modification:

Common law: generally requires new consideration

UCC: requires good faith, but not new consideration

What are the elements needed for a contract?

LOCAL: Legal capacity, offer, consideration, acceptance, legality

A contract generally does not have to be in writing. However, which contracts need to be in writing?

MYLEGS:

Marriage

Year, meaning contracts that cannot be performed within one year

Land

Executor's promise to pay estate debts personally

Goods priced at $500 or more

Suretyship, or a promise to pay another person's debt

Who can't be forced into involuntary bankruptcy?

FAN: Farmers, Anyone under $21,050 (see below), Non-profits

How to bring about involuntary bankruptcy:

Fewer than 12 unsecured creditors: One or more creditors may file, and their claims may be combined to reach at least $21,050.

12 or more unsecured creditors: At least three creditors must join, and their claims must total at least $21,050.

Who can't file for bankruptcy?

7 RIBS , 11 BIBS

Chapter 7: railroads, insurance, banks, small invest firms

Chapter 11: brokers, insurance, banks, small invest firms

Which debts are nondischargeable during bankruptcy?

WAFTED:

W, Willful and malicious injury: Debts caused by intentionally harming another person or their property.

A, Alimony and child support: Domestic support obligations.

F, Fraud: Debts obtained through fraud, false pretenses, embezzlement, or similar misconduct.

T, Taxes: Certain tax debts, especially recent taxes and taxes involving fraudulent returns.

E, Educational loans: Student loans, subject to limited exceptions.

D, Debts not listed: Debts omitted from the bankruptcy filing, particularly when the creditor did not receive proper notice.

What is the order of priority for unsecured priority claims in a Chapter 7 bankruptcy distribution?

SAG WEG CTI:

S - Support obligations (child support and alimony)

A - Administrative expenses (court costs, trustee fees)

G - Gap creditors (claims arising in the gap period between an involuntary petition and the order for relief)

W - Wage claims (up to the statutory dollar limit per employee earned within 180 days before filing) (17,150)

E - Employee benefit plans (contributions arising from services within 180 days, offset by wage limits)

G - Grain farmers and fishermen (claims against storage or processing facilities)

C - Consumer deposits (for goods or services not delivered)

T - Tax claims (certain federal, state, and local taxes)

I - Intoxication personal injury claims (injuries resulting from driving while intoxicated)

What are the elements of actual fraud?

MAIDS:

M: Material misrepresentation of fact

A: Actual and justifiable reliance

I: Inducement, meaning the misrepresentation caused the person to act

D: Damages

S: Scienter, meaning knowledge of the falsity or intent to deceive

What are the elements of constructive fraud?

MAIDR:

M: Material misrepresentation of fact

A: Actual and justifiable reliance

I: Inducement

D: Damages

R: Reckless disregard for the truth, or gross negligence

What causes the automatic termination of an agent's actual and apparent authority?

BID LID:

B: Discharge in bankruptcy of the principal

I: Incapacity of the principal

D: Death of either the principal or agent

L: License, Failure to acquire a necessary

I: Illegality after-the-fact, meaning subsequent illegality

D: Destruction of the subject matter

What are the adoption credit expenses?

TACA (kid home with me):

T: Travel

A: Adoption

C: Court

A: Attorney (agency)

What are the refundable tax credits? (can reduce tax liability to zero and any excess can be received as a refund.)

FAAACES:

F: Federal income tax withheld (Form W-2)

A: American Opportunity Credit (40% refundable)

A: Adoption credit (up to $5,120 refundable in 2026)

A: ACA premium tax credit (amount in excess of any advance payments)

C: Child tax credit ($2,200 deduction, only $1,700 is refundable)

E: Earned income credit

S: Excess Social Security tax paid

What are the fundamental corporate changes requiring shareholder approval?

DAMS:

D: Dissolution

A: Amendments to the articles of incorporation that materially affect shareholder rights

M: Mergers, consolidations, and compulsory share exchanges

S: Sale of all or substantially all corporate assets outside the ordinary course of business

For what reasons will a court pierce the corporate veil?

I C Fraud:

I: Inadequate Capitalization, The corporation was undercapitalized or "thinly capitalized" when formed and could not reasonably meet its expected liabilities.

C: Commingling funds, mixing personal and corporate funds or using corporate assets for personal purposes

Fraud: The corporation was formed or used to commit fraud, especially to avoid paying existing creditors.

What are the requirements for a child to qualify as a dependent? (Qualifying Child)

CARES:

C, Close relationship: The person must be the taxpayer's child, stepchild, foster child, sibling, or a descendant of one of them.

A, Age: Under age 19, or under age 24 if a full-time student. There is no age limit if permanently disabled.

R, Residency: The child lived with the taxpayer for more than half the year. Temporary absences, such as being away at school, generally count as living at home.

E, Exception: Certain exceptions apply, including the scholarship rule.

S, Support: The child must not provide more than half of their own support. The taxpayer does not necessarily have to provide more than half of the child's support.

What are the requirements for a relative/other person to qualify as a dependent? (Qualifying Relative)

SUPORT:

S, Support: The taxpayer provides more than half of the person's total support.

U, Under the gross-income limit: The person's gross income is below the applicable limit. (2026: $5,300)

P, Precludes anyone filing married filing joint return.

O, Only certain citizens or residents: The person is a U.S. citizen, U.S. national, or resident of the United States, Canada, or Mexico.

R, Relative: The person is an approved relative, such as a parent, sibling, niece, nephew, aunt, uncle, or grandparent.

OR

T, Together in the household: If the person is not a qualifying relative, they must live with the taxpayer for the entire year as a member of the household.

For an IRA, the 10% additional tax generally applies to taxable distributions before age 59½. Common exceptions include what?

HIM DEAD TED:

H: Home purchase, first home, up to $10,000 lifetime

I: Insurance premiums while unemployed

M: Medical expenses exceeding the applicable AGI threshold

D: Disability

E: Education expenses

A: Adoption or birth distributions

D: Death, distributions to a beneficiary

T: Tax levy by the IRS

E: Equal periodic payments, substantially equal periodic payments

D: Disaster-related distributions

What are the adjustments for AGI? (Above-the-line deductions)

SMASH APIE:

S - Student loan interest deduction (Limited to $2,500 per year and subject to modified AGI phase-outs)

M - Moving expenses (Only deductible for active-duty military personnel moving pursuant to a military order)

A - Alimony paid (Only deductible if the divorce or separation agreement was executed prior to December 31, 2018)

A - Archer MSA contributions (Contributions to Medical Savings Accounts, which are older, less-tested precursors to HSAs)

A - Attorney fees (Deductible only for certain discrimination, whistleblower, or civil rights claims)

S - Self-employment deductions (This is a 3-for-1 category: it includes 50% of self-employment tax, self-employed health insurance premiums, and contributions to self-employed retirement plans like SEP, SIMPLE, or Keogh plans)

H - Health Savings Account (HSA) deduction (Contributions are deductible only if paired with a High Deductible Health Plan, or HDHP)

A - Armed forces reservists, performing artists, and fee-basis government officials (Certain out-of-pocket, unreimbursed business expenses for these specific professions)

P - Penalty on early withdrawal of savings (For example, the interest penalty paid to a bank for breaking a Certificate of Deposit early)

I - IRA deduction (Contributions to a Traditional IRA, which may be limited or subject to phase-outs if the taxpayer is an active participant in an employer-sponsored retirement plan)

E - Educator expenses (Up to $300 for qualified K-12 teachers buying classroom supplies out-of-pocket)

What are the nondeductible losses for individuals?

WRaP:

Wash sale loss

Related party transactions

and

Personal loss: A loss from selling or disposing of a personal car, home, furniture, clothing, or other personal asset is not deductible

For sales of goods for $500 or more, the contract generally must be evidenced by a writing. What are the exceptions?

SWAP:

S, Specially manufactured goods: Goods specially made for the buyer and not suitable for sale to others. The exception applies once the seller has substantially begun manufacturing or making commitments to manufacture.

W, Written merchant confirmation: One merchant sends a written confirmation to another merchant. The recipient is bound even without signing if they do not object within 10 days.

A, Admission: The party being sued admits in court that an oral contract existed. The contract is enforceable, but only up to the quantity admitted.

P, Performance: The buyer has paid for the goods, or the goods have been received and accepted. The contract is enforceable only to the extent of the payment or accepted goods.

What are the common nontaxable or deferred gains that will not be taxed?

HIDE IT:

H - Homeowner's exclusion (You can exclude up to $250,000 of gain—or $500,000 if married filing jointly—on the sale of a primary residence, provided you owned and used the home as your principal residence for at least two of the five years preceding the sale).

I - Involuntary conversions (Gains realized from property destroyed, stolen, or condemned are deferred if you reinvest the insurance proceeds into "similar or related in service or use" replacement property within the statutory time limit, which is typically two years for personal property and three years for business property).

D - Divorce property settlement (Transfers of property between spouses or incident to a divorce are nontaxable events; the recipient spouse simply takes a carryover basis in the property).

E - Exchange of like-kind business or investment property (Under Section 1031, you do not recognize a gain if you exchange real estate used in a trade or business or held for investment for other business/investment real estate; remember that this no longer applies to personal property like equipment or machinery).

I - Installment sales (Instead of recognizing all the gain in the year of the sale, the gain is recognized proportionally as cash payments are actually received over time).

T - Treasury and capital stock transactions (A corporation does not recognize any gain or loss when it sells or repurchases its own stock, including treasury stock).

What are the duties of an agent to a principal?

LORA:

Loyalty

Obedience

Reasonable care

Account

What types of income are commonly included in gross income?

WIGG-P:

Wages

Interest and dividends

Gains

Guaranteed payments from partnerships

Punitive damages

What types of income are commonly excluded from gross income?

GILT:

Gifts received

Insurance proceeds from life insurance

Local and state municipal bond interest

Tax-exempt income

What are the MACRS conventions?

Half-year convention: property placed in service throughout the year

Mid-quarter convention: applies when more than 40% of applicable property is placed in service during the last quarter

Mid-month convention: generally used for real property