Tax & Business Regulation curriculum

Section 61 sweeps in income from any source and lists examples that it says are not the whole list, so you begin by assuming an item is included and then look for a rule that excludes it. Timing follows availability too: a cash-method taxpayer who receives a valid check before year end has income that year even if it is deposited in January.

The exclusion covers the property itself, not what it later earns: inherited stock is tax-free, but the dividends it pays you are taxable. Life-insurance death proceeds are generally excluded, yet interest paid on those proceeds is income, and the exclusion can be lost when the policy was transferred to you for a price.

A benefit received for your services is compensation by default, valued generally at fair market value. Exclusions are specific: a de minimis benefit is one so small that tracking it would be unreasonable, but cash, gift cards and other cash equivalents never qualify, however small the amount.

Qualified dividends are ordinary dividends taxed at the lower net-capital-gain rates, but only if you held the stock more than 60 days during the 121-day window around the ex-dividend date, so a quick buy before the dividend loses the rate. Original issue discount is a form of interest, and you generally include part of it in income each year you hold the bond, before any cash arrives.

An asset held more than one year produces long-term gain or loss; one year or less, short-term. You net short-term items with each other and long-term items with each other, then combine the two results. The order matters because only net long-term gain reaches the lower rates, so a short-term loss can soak up a long-term gain.

Capital losses first offset capital gains; only a limited excess, a cap written into the Code, can reduce other income each year. The unused loss carries forward until used up and keeps its short- or long-term character. The carryover is figured as if you took the allowable deduction this year, even if you never claimed it.

A sole proprietor or independent contractor generally reports business receipts and expenses on Schedule C, and the net profit or loss, not gross receipts, carries to the income tax return. That same net profit is the starting point for self-employment tax, so a deductible business expense lowers both taxes at once.

Rentals are passive even with material participation, unless you qualify as a real estate professional, and a passive loss generally cannot offset wages or portfolio income. Disallowed losses carry forward. An owner who actively participates, a looser standard than material participation, can use a limited special allowance, and selling your entire interest generally releases the suspended losses.

A traditional IRA distribution is taxable in the year received, except the part that returns your own nondeductible contributions. A Roth distribution is tax-free if qualified, which requires, among other things, that a five-year period has run. Separately, an additional tax generally applies to a taxable distribution taken before age 59 and a half, subject to a list of exceptions.

The test adds one-half of your benefits to all your other income, and that other income includes tax-exempt interest such as municipal bond interest. Exempt interest therefore stays untaxed itself but can make more of your benefits taxable. Above the thresholds, up to 85 percent of benefits can be included, never the full amount.

Alimony under an instrument executed after 2018 is neither deductible by the payer nor income to the recipient; an older instrument keeps the old deduct-and-include rule unless later changed to adopt the new one. Child support is never deductible or taxable. Prizes are income at fair market value, and canceled debt is generally income unless it is a gift or an exclusion such as insolvency applies.

AGI is total income minus the adjustments listed on Schedule 1, such as deductible IRA contributions, student loan interest and half of self-employment tax, and it is figured before the standard or itemized deduction. Where a deduction falls matters because many limits key off AGI: medical expenses, for example, count only above a percentage of AGI.

Itemizing pays only when your itemized deductions exceed the standard deduction for your filing status, age and blindness. The choice is not always free: if you are married filing separately and your spouse itemizes, your standard deduction is zero, so you must itemize too. Some filers, including nonresidents, cannot take the standard deduction at all.

Medical and dental costs count only above a percentage of AGI, so small bills often give no benefit. State and local taxes face a dollar cap, home mortgage interest is limited by the amount of acquisition debt, and charitable gifts are capped at percentages of AGI that depend on the gift and the recipient, with excess gifts carried over to later years.

Owners of sole proprietorships, partnerships, S corporations and trusts and estates can deduct up to 20 percent of qualified business income, whether or not they itemize. Above certain taxable income levels, the deduction can be limited by the business's W-2 wages, its property basis and the type of business. Wages and an S corporation shareholder's reasonable compensation are not business income for this purpose.

You are unmarried for the whole year if a final divorce decree is in place by the last day of the year. Head of household requires being unmarried, paying over half the cost of keeping up the home and a qualifying person living there over half the year, though a dependent parent may live elsewhere. A qualifying surviving spouse gets joint rates for two years after the spouse's death but does not file a joint return.

For a qualifying child, the test is that the child did not provide more than half of their own support; the test looks only at what the child contributed. For a qualifying relative, you must provide more than half of the person's support, and the person's gross income must stay under a limit. A person who is anyone's qualifying child cannot be your qualifying relative.

A deduction reduces taxable income, so what it saves depends on the rate applied to that income. A credit comes straight off the tax owed. A nonrefundable credit can bring your tax down only as far as zero; a refundable one can produce a refund even when you owe nothing.

The child tax credit is nonrefundable, but its additional child tax credit portion is refundable. Of the education credits, part of the American opportunity credit may be refundable while the lifetime learning credit is not, and you cannot claim both for the same student in the same year. The earned income tax credit is refundable and can be claimed even by someone not otherwise required to file.

AMT taxable income starts from regular taxable income, removes or reduces certain exclusions and deductions, such as deducted state and local taxes, and adjusts timing items; an exemption amount and AMT rates then give the tentative minimum tax. You owe AMT only when that figure exceeds regular tax. Exercising an incentive stock option, which creates no regular-tax income, can create AMT income.

Income not covered by withholding is paid through installments, and each installment is judged by its own due date. The penalty can apply even if you end the year owed a refund. The safe harbor compares payments with a share of this year's tax or the full prior-year tax, with a higher prior-year percentage for higher-AGI filers.

For a gift, your basis for gain is the donor's adjusted basis. If the property was worth less than that basis when given, your basis for loss is that lower value, so a sale price between the two produces neither gain nor loss. Inherited property generally takes its fair market value at the date of death, so your gain is measured only from that value.

Amount realized is money plus the fair market value of property received, plus any of your liabilities the buyer assumes or that ride with the property; subtract adjusted basis to get realized gain or loss. A realized gain is usually recognized and included in income, but nontaxable-exchange rules can postpone it, typically by carrying your old basis into the new property.

Since 2018 the nonrecognition rule covers only real property that you hold for use in a business or as an investment, and never property held mainly to sell. If you also receive money or other non-like-kind property, you recognize gain up to the smaller of the gain realized and that boot, and a realized loss is not recognized. Liabilities shifted to the other party count as money received.

An involuntary conversion occurs when property is destroyed, stolen or condemned and you receive insurance or an award. Buy property similar or related in use within the replacement period and you can elect to postpone the gain. You report gain up to any part of the amount realized not reinvested, and the replacement's basis is its cost minus the postponed gain.

You must have owned the home and lived in it as your residence for at least 24 months of the 5 years before the sale, and the residence months need not be one continuous block. You also generally cannot have taken the exclusion on another home within the prior two years. Missing a test after a move for work, health or an unforeseeable event can still allow a partial exclusion.

A wash sale is a loss sale of stock or securities with substantially identical ones bought within 30 days before or after; the loss is not lost forever but added to the basis of the new shares. A loss on a sale to a related party, such as a sibling or a corporation you own over half of, is also disallowed, though the buyer can use it to reduce a later gain. Aunts, uncles and in-laws are not family here.

Section 1231 covers real or depreciable business property held longer than one year. You combine all such gains and losses for the year: a net loss is fully ordinary, and a net gain is long-term capital gain, except that it is first treated as ordinary income up to net 1231 losses from the previous five years not yet recaptured. A loss year therefore costs capital treatment on later gains until it is recaptured.

Gain on section 1245 property, generally depreciable personal property such as equipment, is ordinary to the extent of depreciation allowed or allowable. Section 1250 real property recaptures only additional depreciation, the excess over straight-line. Long-term gain on real property that reflects depreciation but is not recaptured is called unrecaptured section 1250 gain and gets its own rate treatment.

Under MACRS you recover cost over the property's recovery period using conventions such as half-year or mid-quarter. Section 179 lets you elect to deduct cost instead, but only up to a dollar limit and your taxable income from active business, with the excess carried forward. Bonus (special) depreciation reduces basis before regular MACRS and can be declined for a whole class of property.

A C corporation pays tax on its profit when earned, and shareholders pay again when that profit is distributed as dividends. A partnership files an information return but pays no income tax, passing profits and losses to its partners, and an S corporation passes income through in the same way to avoid the double tax. A sole proprietor reports the business on Schedule C of the personal return.

Control means the transferors together own at least 80 percent of the voting power and of each class of nonvoting stock right after the exchange. Receiving money or other property as well triggers gain up to that amount, and stock received for services falls outside the rule because services are not property. The corporation generally takes the transferor's basis, raised by any gain recognized.

Book income and taxable income differ because some items are counted in one and not the other. Tax-exempt interest is book income that never reaches the return, and nondeductible items such as certain meal and entertainment costs reduce book income without reducing taxable income. Small corporations can skip the schedule, and the largest file the more detailed Schedule M-3 instead.

A corporation owning less than 20 percent of the payer deducts a smaller share of the dividend than one owning 20 percent or more. The deduction is also capped at a percentage of taxable income, but that cap falls away when taking the full deduction would create a net operating loss. Stock held only briefly around the ex-dividend date does not qualify.

A dividend is a distribution out of accumulated earnings and profits or out of the current year's earnings and profits measured at year end. Current earnings can therefore make a distribution taxable even when accumulated earnings are negative. The non-dividend part reduces your stock basis, and once basis reaches zero the excess is capital gain; a corporation distributing appreciated property recognizes gain as if it sold the property.

A net operating loss from a tax year beginning after 2017 generally carries forward with no time limit but can offset only 80 percent of taxable income in the later year. A corporation cannot deduct capital losses against ordinary income at all. A net capital loss is carried back three years and then forward five, and it is treated as short-term wherever it lands, losing its original character.

An S corporation needs one class of stock and a limited number of shareholders, all individuals, estates, certain trusts or certain exempt organizations, none a nonresident alien. All shareholders consent on Form 2553, generally within 2 months and 15 days after the year begins. The election ends if the corporation stops qualifying, by revocation with over half the shares, or after three years of excess passive income with accumulated earnings.

Items whose separate treatment could change a shareholder's tax are stated separately, and the rest is netted into one ordinary figure. Income items raise stock basis and distributions lower it, and losses are allowed only up to the remaining stock basis plus basis in loans the shareholder made to the corporation. A disallowed loss is not lost; it carries forward indefinitely to that shareholder.

With no accumulated earnings and profits, a distribution is tax-free up to the shareholder's stock basis and the excess is treated as gain on a sale. With accumulated earnings and profits from C corporation years, the distribution comes first from the accumulated adjustments account, then as a taxable dividend from those earnings, and then against remaining basis.

Neither the partnership nor the partner recognizes gain or loss when property is contributed for an interest. The partner's outside basis equals the money plus the adjusted basis of property contributed, and the partnership's inside basis in that property equals the partner's basis. An interest received for services is different: its value is generally ordinary income to the partner.

The partnership agreement controls each partner's distributive share, but an allocation without substantial economic effect is replaced by one based on the partner's real interest in the partnership. A guaranteed payment for services or capital is fixed without regard to partnership income, so the partnership can deduct it and the partner reports it as ordinary income even in a loss year.

In a current distribution, a partner recognizes gain only when money received exceeds outside basis, and property takes the partnership's basis but never more than the partner's remaining outside basis. In a liquidating distribution, the property simply absorbs whatever outside basis is left. A loss arises only on liquidation when the partner receives nothing but money, receivables or inventory.

Debt changes basis even with no cash moving: a reduced share of liabilities is treated as a distribution of money and can trigger gain if it exceeds basis. Shares depend on who bears the risk. A recourse liability is shared according to each partner's economic risk of loss, while a nonrecourse liability, which no partner bears, is generally shared in proportion to profits.

A trust or estate deducts amounts paid or required to be paid to beneficiaries, limited to its distributable net income, and reports each beneficiary's share on Schedule K-1 so the beneficiaries include it on their own returns. A grantor trust is different: when the grantor keeps certain powers or benefits, the grantor reports the trust's income on their own return.

Exemption covers income from the organization's exempt purposes, such as charitable or educational work under section 501(c)(3). Income from a trade or business regularly carried on that is not substantially related to that purpose is unrelated business income, taxed and reported on Form 990-T. An activity that is not regularly carried on, or that is substantially related to the purpose, does not produce it.

A calendar-year individual or C corporation return is due on the 15th day of the fourth month after year end, while partnership and S corporation returns are due on the 15th day of the third month. A due date that falls on a weekend or holiday moves to the next business day. Form 4868 or Form 7004 extends only the filing deadline, so tax still unpaid at the original date draws interest and penalties.

The assessment clock starts when the return is filed, and a return filed early is treated as filed on its due date, so filing early does not shorten the period. Omitting more than 25 percent of the gross income stated on the return extends it to six years, and a fraudulent return or no return leaves it open indefinitely. A refund claim is due within three years of filing or two years of payment, whichever is later.

Failure to file costs 5 percent of the unpaid tax per month, up to 25 percent, while failure to pay costs one-half percent per month, also capped at 25 percent; when both apply, the filing penalty is reduced by the payment penalty. A separate 20 percent accuracy-related penalty applies to underpayments from negligence or a substantial understatement, and reasonable cause with good faith can remove some penalties.

A position is unreasonable unless it has substantial authority, or, if properly disclosed, at least a reasonable basis; for a tax shelter or reportable transaction, it must be more likely than not to be sustained. The penalty applies only if the preparer knew or reasonably should have known of the position, and reasonable cause with good faith avoids it. Willful understatement or reckless disregard of the rules draws a larger penalty.

The Code is the law; Treasury regulations interpret it; a revenue ruling is an official IRS interpretation, and a revenue procedure gives filing or procedural instructions. A private letter ruling applies only to the taxpayer who asked and cannot be relied on as precedent by others. A revenue ruling carries more weight than a private letter ruling, and treatises and professional opinions are not authority at all.

A practitioner who learns of a client's error or omission must promptly advise the client of it and its consequences. Practitioners must use due diligence, return the client's records needed for compliance even during a fee dispute, avoid conflicts unless each client gives informed written consent, and generally may not charge contingent fees, apart from narrow exceptions such as an IRS examination of the return.

Reasonable basis is well above not frivolous, and a merely arguable claim fails it. Substantial authority is an objective weighing of authorities that sits between reasonable basis and more likely than not, which means a greater than 50 percent chance of being upheld. The chance that a return will not be audited, or an issue not raised, is irrelevant to every rung.

Some examinations happen entirely by mail; others are held at your home, business or an IRS office. If you disagree, you can take the case to an Appeals Office independent of the examiner. Unresolved cases lead to a notice of deficiency, and you have 90 days to petition the Tax Court; alternatively, a denied or ignored refund claim can be taken to a federal district court or the Court of Federal Claims.

Assent is judged by outward words and acts, not private intent, and at common law a counteroffer rejects the original offer, so accepting that offer later fails. Sales of goods fall under the state's enacted Article 2. In Utah, as amended in 2026, it governs a mixed deal of goods and services when the goods predominate, and its goods-related provisions apply even when they do not. That lane decides which formation and writing rules apply.

The classic classes are promises to answer for another's debt, contracts for an interest in land, promises in consideration of marriage, an executor's promise to pay from personal funds, and agreements that cannot possibly be performed within a year, plus sales of goods at or above a price set in the state's enacted UCC. The one-year test is about possibility: a lifetime employment promise could end within a year, so it needs no writing.

A minor's contract is voidable by the minor, not the adult, though the minor owes the fair value of necessaries. Fraud needs a false statement of fact, not opinion or value, and lets the victim rescind the deal or sue for damages. Threatening a lawful suit is not duress. A mistake usually does not excuse performance; a mutual mistake about a vital fact can.

When the parties intend a writing as their agreement, evidence of an oral deal made at or before signing cannot vary it. Evidence can still explain ambiguous or trade terms, or show the writing was not to take effect until some event. The rule does not reach later agreements: a subsequent modification is judged under the ordinary rules, including any writing requirement.

A condition limits when a promise must be kept, and courts may excuse one to avoid forfeiture. A builder who performed substantially and in good faith can still recover, but a willful departure gets no such relief. Only a material breach lets the other party stop performing, and a clear repudiation of future performance does too. Damages are the usual remedy; specific performance is mostly for unique property such as land.

An assignee should notify the obligor at once, because an obligor who pays the assignor without notice is discharged. Personal rights, such as an employer's right to one employee's services, cannot be assigned. A delegating party stays liable unless the creditor agrees to a novation. A third party the contract was meant to benefit can generally enforce it without giving consideration, but one who merely happens to benefit cannot.

In Utah's enacted Article 2, a merchant's signed offer promising to stay open is irrevocable without consideration for the stated time, never longer than three months. An acceptance adding terms still forms a contract unless it is made conditional on them; between merchants the new terms join it unless the offer limited acceptance, they materially alter it, or there is an objection. Each state enacts its own version, so the wording can vary.

Under Utah's enacted Article 2, risk passes in a shipment contract, F.O.B. the place of shipment, when the seller delivers the goods to the carrier, and in a destination contract, F.O.B. the named destination, when the goods are tendered there. When goods are neither shipped by carrier nor held by a bailee, a merchant seller holds the risk until the buyer receives them, and a non-merchant passes it on tender. The parties can agree otherwise.

In Utah's enacted Article 2, an affirmation of fact, description or sample that is part of the bargain creates an express warranty, but praise or a statement of value does not. A merchant impliedly warrants goods merchantable, and fitness for a purpose is implied when the seller has reason to know the purpose and the buyer relies on the seller. A merchantability disclaimer must mention merchantability, and “as is” can exclude implied warranties.

Under Utah's enacted Article 9, attachment makes the interest enforceable and requires value, the debtor's rights in the collateral and, usually, a signed security agreement describing it. Perfection, typically by filing a financing statement or taking possession, protects it against others. Perfected interests rank by the earlier of filing or perfection, beat unperfected ones, and a purchase-money interest perfected in time can jump ahead.

In Chapter 7 a trustee sells nonexempt property and pays creditors, and a consumer case can be dismissed as abusive. Chapter 11, usually for businesses, lets the debtor stay in possession and propose a plan that creditors vote on. Chapter 13 lets an individual keep property and pay over three to five years, and it can stop a home foreclosure.

Priority claims are paid first in statutory order, starting with domestic support obligations, then administrative expenses, with capped employee wages and certain taxes further down; general unsecured claims come after. A trustee can avoid a transfer to a creditor for an old debt, made while insolvent within 90 days before filing, or a year for an insider, if it let that creditor get more than in a liquidation.

A surety's liability is measured by the principal's obligation, so a defense that defeats the debt generally defeats the surety, though the debtor's bankruptcy discharge does not. A binding change to the debt or a valid extension of time made without the surety's consent can release it, but mere delay in collecting does not. A surety who pays can seek reimbursement from the debtor and contribution from co-sureties beyond its share.

Actual authority can be express or implied from the job and the usual course of business. Apparent authority binds the principal only when the principal's own conduct led the third party to believe the agent had authority; the agent's word alone is not enough. Ratification after the fact must cover the whole transaction, not the parts the principal likes, and it relates back to the original act.

When an authorized agent contracts for a disclosed principal, the principal is bound. When the principal is undisclosed and the agent contracts in its own name, the third party can still hold the principal liable once it learns of it, or hold the agent, who can seek reimbursement. An agent who acts without authority is liable to the third party for warranting authority it did not have.

You become a sole proprietor automatically by doing business without registering any other entity, and you carry unlimited personal liability, as do general partners. A limited partnership, an LLC or a corporation is created by registering with the state, and owners of an LLC or a corporation are generally not personally liable for its debts. Corporations give the strongest protection but cost more to form.

Care means reasonable diligence, and a director who uses reasonable care is not liable for a business decision that turns out badly; knowingly acting beyond the charter or bylaws is different. Loyalty bars acting for the corporation where a personal interest conflicts. The duties run to the corporation, so shareholders who sue on a breach do so for the corporation, which receives any recovery.

Each state sets its own LLC rules, so the details depend on where the LLC is formed. For federal income tax, a single-member LLC is disregarded and a multi-member LLC is a partnership by default, and either can elect corporate treatment on Form 8832. The same legal entity can therefore be taxed in different ways while its owners generally keep limited liability.

A buyer of a registered security can sue an accountant named with consent as having certified part of the registration statement if that part contained an untrue or omitted material fact. Liability is limited to the expertised part. The accountant has a defense if, after reasonable investigation, it had reasonable ground to believe, and did believe, that the statements were true when that part became effective.

The IRS weighs behavioral control, financial control and the type of relationship, and no single factor decides. For an employee, the business withholds income tax and the employee's Social Security and Medicare taxes, pays the matching employer share and pays unemployment tax; for a true contractor it generally does none of this. Misclassifying without a reasonable basis can leave the business liable for the employment taxes.

It applies to children under 18 and to older children, an 18-year-old or a full-time student under 24, whose earned income did not cover more than half their support. Unearned income above a threshold is taxed at the parent's rate when that rate is higher, so shifting investments to a child does not avoid the parent's rate on that excess. Earned income from a job is not affected.

The 3.8 percent tax applies to the lesser of net investment income or the amount by which modified AGI exceeds a threshold set by filing status, and those thresholds are not indexed for inflation. Wages, Social Security benefits, alimony and most self-employment income are not investment income, and gain excluded from income, such as on a home sale, is not taxed.

Net earnings are business income minus ordinary and necessary expenses, and generally 92.35 percent of that amount is subject to the tax. Only the Social Security part stops at an annual earnings cap; the Medicare part applies to all net earnings. You deduct half of the tax in figuring AGI.

The IRS weighs factors such as businesslike records, time and effort, dependence on the income, a history of profit and the owner's expertise, and no one factor controls. An activity showing a profit in three of five consecutive years is presumed to be for profit. Hobby income is still reported, and related expenses can never total more than that income, so a hobby cannot produce a deductible loss.

You are at risk for money and property you contribute and for loans you are personally liable to repay. Nonrecourse loans and amounts protected by guarantees or stop-loss arrangements generally do not count, with an exception for qualified nonrecourse financing on real property. A loss blocked by the at-risk limit carries over to the next year, and only what passes this test moves on to the passive-activity test.

The American opportunity credit covers only the first four years of postsecondary education and is partly refundable, while the lifetime learning credit has no limit on years and is nonrefundable. You choose one credit per student per year. Expenses paid with tax-free help such as scholarships or employer assistance cannot also support a credit, which is the no-double-benefit rule.

To contribute to an HSA you must be covered by a high deductible health plan with no disqualifying other coverage, not be on Medicare and not be someone's dependent. Your contributions are deductible even without itemizing, distributions for qualified medical expenses are tax-free, and unused money stays in the account. A health FSA forfeits unused amounts unless the plan allows a limited carryover or a grace period.

The foreign earned income exclusion requires a foreign tax home, foreign earned income and either the bona fide residence test or physical presence abroad for 330 full days in 12 consecutive months. Once you exclude income, you cannot take a foreign tax credit or deduction for foreign taxes on that same income, so each dollar gets one form of relief, not both.

You report gain as the payments arrive. Gross profit divided by contract price gives a percentage, and that share of each payment (after interest) is gain while the rest returns basis. The method cannot report a loss, regular inventory sales are excluded, and any depreciation recapture is taxed in full in the year of sale even if no cash came in.

If you sell on the installment method to a related person who resells within two years and before paying you in full, you treat what they realized as received by you at the resale. For marketable securities the two-year limit does not apply. Separately, an installment sale of depreciable property to certain related buyers generally cannot use the method at all.

A noncorporate holder can exclude some or all gain on qualified small business stock. The stock must come at original issue from a C corporation under a gross-assets ceiling that uses at least 80% of its assets in a qualifying business; fields such as health, law, accounting and consulting do not qualify. The excluded share and holding period depend on the acquisition date, and Congress changed both in 2025.

A security that becomes completely worthless during the year is treated as sold on the last day of that tax year, which can make a short holding a long-term loss. Abandoning a security counts only if you permanently give up every right and get nothing back. A refund claim based on a worthless security gets seven years from the return's due date instead of the usual three.

For individuals, a personal-use casualty or theft loss is deductible only if it is tied to a federally declared disaster or, for tax years beginning after 2025, a state-declared one; other personal losses can only offset personal casualty gains. Business or income-producing property has no such limit, and when it is stolen or completely destroyed the loss starts from adjusted basis rather than the drop in value.

Shareholders owe tax only when dividends are paid, so a corporation that keeps profits beyond its reasonable business needs can owe a penalty tax on the excess. Real expansion plans count as a need; signs against the corporation include a lack of regular distributions and shareholder withdrawals classified as personal loans. Marketable securities bought with earnings are valued at net liquidation value, not cost.

A personal holding company is a closely held corporation living mostly on passive income: at least 60% of its adjusted ordinary gross income is personal holding company income, and five or fewer individuals own more than half its stock during the last half of the year. The penalty tax falls only on undistributed income, so paying that income out as dividends removes the base.

A redemption is taxed as a sale of stock only if it passes a test: not essentially equivalent to a dividend, substantially disproportionate, a complete end of your interest, or a qualifying partial liquidation. Otherwise it is a distribution, a dividend to the extent of earnings and profits. Shares owned by your spouse, children, grandchildren and parents can count as yours under the attribution rules.

In a complete liquidation the corporation recognizes gain or loss as if it sold each distributed asset to the shareholders at fair market value, and shareholders treat what they receive as payment for their stock. Appreciation is therefore taxed twice. A subsidiary liquidating into an 80% parent is the main exception: special nonrecognition rules apply and no loss is recognized.

An affiliated group, a common parent and corporations linked to it by at least 80% of both voting power and value, may file one consolidated return in place of separate ones. The privilege requires every member to consent to all the consolidated return regulations, and a corporation that is a member for only part of the year is included for that part.

When a C corporation becomes an S corporation, gain that built up during the C years can still be taxed at the corporate level if it is recognized during a five-year recognition period. Only appreciation that existed on the first S day counts, net operating loss carryforwards from C years can offset it, and the tax uses the highest corporate rate.

A buyer of a partnership interest pays today's value, but the partnership's own asset basis does not change, so the buyer's share of inside basis can lag the price paid. A Section 754 election adjusts partnership asset basis for that transferee alone. Once made it covers every later transfer and distribution, and the adjustment is required anyway when the partnership has a substantial built-in loss.

A partnership ends for tax purposes only when no part of its business, financial operation or venture is carried on by any partner in a partnership. The old technical termination, triggered by a sale of 50% or more of capital and profits interests within 12 months, was repealed for partnership years beginning after 2017. Converting to an LLC taxed as a partnership is not a termination; a true termination closes the tax year.

The general deadline for a refund claim is the later of two dates: three years after the original return was filed, or two years after the tax was paid. The amount is capped too: a claim inside the three-year window recovers only tax paid within the three years, plus any filing extension, before the claim. Worthless securities and bad debts get a seven-year window instead.

A joint return makes each spouse liable for the whole tax, even after a divorce decree says otherwise. Innocent spouse relief, separation of liability and equitable relief can lift that liability for a spouse who did not cause the problem. Injured spouse relief is different: it returns your share of a joint refund that was taken to pay only your spouse's past-due debts.

A federal tax lien is a legal claim on property that secures the debt, and the public Notice of Federal Tax Lien alerts other creditors. A levy goes further and actually seizes property. Before levying, the IRS must send a final notice of intent to levy and of your right to a hearing at least 30 days ahead. A lien is released within 30 days after full payment.

An installment agreement pays the full balance over time, and penalties and interest keep accruing until it is paid. An offer in compromise settles for less than the full amount, judged against income, expenses and asset equity, and it is generally not accepted if a payment plan or asset equity could cover the debt. Applicants must have filed all required returns and made required estimated payments.

A paid preparer who decides head-of-household status or eligibility for the earned income credit, child tax credits or the American opportunity credit owes specific due diligence for each. The preparer may not ignore information that looks incorrect, inconsistent or incomplete, must ask reasonable follow-up questions, and must document those questions and the answers at the time. Each failed item is a separate penalty.

Paying less than was demanded settles a claim only when there was a real dispute. Washington's enacted UCC, for example, discharges a claim that was unliquidated or in bona fide dispute when the debtor in good faith tenders a check with a conspicuous full-satisfaction statement and the claimant obtains payment. The claimant can generally undo that by repaying the amount within 90 days.

Besides full performance, a contract duty can end by agreement, by excuse or by operation of law. Washington's enacted UCC, for example, lets parties modify a sale of goods without new consideration, excuses a seller when an event whose nonoccurrence was a basic assumption makes performance impracticable, and avoids the contract when identified goods are totally lost without fault before risk passes. Such excuses are kept for exceptional cases.

Filing a financing statement is the default way to perfect a security interest. In Washington's enacted Article 9, for example, possession also works for goods, instruments, tangible negotiable documents and tangible money, and is the only way for tangible money; control is the only way for a deposit account; and a purchase-money interest in consumer goods is perfected when it attaches. Possession perfects only while it lasts.

In Washington's enacted UCC, for example, a buyer in ordinary course, one buying in good faith from a seller in the business of selling goods of that kind, takes free of a security interest the seller created, even a perfected one the buyer knows exists. The protection fails if the buyer knows the sale violates another's rights, buys farm products from a farmer, or faces an interest an earlier owner created.

Under Washington's enacted UCC, for example, leaving goods with a merchant who sells that kind of goods gives the merchant power to pass all your rights to a buyer in ordinary course. Entrusting covers any delivery or acquiescence in possession, whatever conditions you set and even if the merchant's sale is criminal. Someone with voidable title, such as a buyer whose check bounced, can pass good title to a good-faith purchaser for value.

A purchase-money security interest secures credit used to buy the collateral itself: the seller's credit, or a lender's value actually used for the purchase. In Washington's enacted Article 9, for example, it beats an earlier conflicting interest in goods other than inventory if perfected when the debtor gets the goods or within 20 days after; for inventory it must be perfected on delivery and the earlier filed lender notified in advance.

Filing a bankruptcy petition stops most collection at once, with no court order: lawsuits, wage garnishments and even calls demanding payment generally must stop. Some actions continue, including criminal proceedings and certain domestic support matters. A creditor can ask the court to lift the stay for cause, for example when its interest lacks adequate protection, or when the debtor has no equity in property not needed for reorganization.

A trustee can recover a preference: a transfer on an old debt made while insolvent within 90 days before filing, or a year for an insider, that leaves the creditor better off than liquidation would. Insolvency is presumed for those 90 days. Fraudulent transfers reach back two years and cover transfers meant to hinder creditors or for too little value while insolvent or left undercapitalized.

A Chapter 7 discharge wipes out most debts, but some survive automatically, including domestic support, certain taxes, certain government-backed education loans, injury from intoxicated driving and criminal restitution. A second group, debts from fraud, false pretenses, fiduciary defalcation or willful and malicious injury, is discharged unless the creditor sues in time and wins.

Reaffirming keeps you personally liable for a debt after discharge, usually so a secured creditor will not repossess property such as a car. The agreement must be signed and filed before the discharge, with required disclosures; if your budget shows it cannot be paid, undue hardship is presumed. Without an attorney the judge must approve it, and you may always repay voluntarily without reaffirming.

The Securities Act of 1933 bars selling a security through interstate commerce unless a registration statement is in effect, so each offer and sale needs registration or an exemption. Exemptions such as Regulation D and Regulation A trade full registration for limits: Rule 506(b) bans general solicitation and caps non-accredited buyers, while 506(c) allows it if every buyer is verified as accredited.

A reporting company files annual reports on Form 10-K and quarterly reports on Form 10-Q, with CEO and CFO certifications, plus current reports on Form 8-K for listed events, often within four business days; a change of certifying accountant is one. Exchange Act registration can be required without any public offering, by listing on an exchange or crossing asset and holder-of-record thresholds.

Section 11 of the 1933 Act lets a buyer sue when a registration statement held a material misstatement or omission when it became effective; the issuer has no due-diligence defense, and a buyer who knew of the untruth when buying cannot recover. Rule 10b-5 is broader, reaching any fraudulent scheme or material misstatement in connection with the purchase or sale of any security.

Under Section 11, an accountant named as certifying part of a registration statement avoids liability for that part by proving it had, after reasonable investigation, reasonable ground to believe the statements true when it became effective, judged by a prudent person managing their own property. Section 18 of the 1934 Act requires the plaintiff's reliance and allows a defense of good faith without knowledge.

The gift tax applies to transfers for less than full value, whatever the donor intends, and the donor normally pays it. Gifts up to the annual exclusion per recipient, tuition or medical bills you pay for someone, and gifts to a spouse are not taxable. Taxable gifts use up the applicable credit, which is shared with the estate tax, so lifetime giving reduces what is left at death.

The gross estate is the fair market value at death of everything you own or have certain interests in, not what you paid. Debts, administration costs, property passing to a spouse and bequests to charity are deducted to reach the taxable estate; lifetime taxable gifts are added back before the tax is figured. To pass unused exclusion to a surviving spouse, the estate must file a timely return electing portability.

Gift basis generally carries over from the donor, but when value at the gift is below the donor's basis you use donor basis for gain and the lower value for loss; a sale between the two gives neither. Inherited property instead takes value at death. That reset is denied when you give appreciated property to someone who dies within a year and it passes back to you or your spouse.

The gross income thresholds vary with filing status and age, and a dependent faces separate rules. Some situations require a return even below those thresholds, such as net self-employment earnings above a low floor. A person not required to file may still want to, since filing is how you get back withheld tax or claim a refundable credit.

When no one provides over half of a person's support but a group of people who could otherwise claim them does together, the group can agree that one of them claims the person. That one must have provided more than 10 percent, and each other member who gave over 10 percent signs a statement waiving the claim. A member giving 10 percent or less can neither claim the person nor needs to sign.

A corporation's required annual payment is the smaller of 100% of this year's tax or 100% of last year's, paid in four equal installments. Last year's tax is unavailable if that year was short or showed no tax, and a large corporation may use it only for the first installment. When income is uneven, an annualized or seasonal installment can be lower.

When you sell part of a holding bought in several lots, the gain depends on which shares count as sold. Adequate identification, such as naming the lot to your broker and getting written confirmation, lets you choose; without it, the shares acquired first are treated as sold first. Average cost is allowed only for certain mutual fund shares, and nontaxable stock dividends spread basis over old and new shares.

A dwelling you both rent and use is treated as a home if your personal days exceed the greater of 14 days or 10% of the days rented at fair value. If such a home is rented fewer than 15 days, the rent is left out of income and no rental expenses are deducted. Otherwise expenses are split by days of use, and a home with a rental loss deducts only part of it, carrying the rest forward.

A transfer to a spouse, or to a former spouse incident to divorce, produces no gain or loss, and the recipient takes the transferor's adjusted basis for both gain and loss, whatever the value or any payment. Incident to divorce means within one year after the marriage ends, or related to ending it under the divorce instrument within six years. A later sale by the recipient carries the built-in gain.

Gambling winnings are fully taxable, including the fair market value of prizes, whether or not you get a Form W-2G. A casual gambler deducts losses only by itemizing, only up to winnings, and only with records of both. For tax years beginning after 2025, the statute allows just 90% of wagering losses, so a year that breaks even can still leave taxable income.

A minister can exclude a housing allowance that the employing church designates in advance; for an owned home it is capped at the smallest of the amount used, the amount designated and fair rental value. The exclusion is for income tax only, not self-employment tax. Enlisted members exclude all combat zone pay, while commissioned officers are capped at the highest enlisted pay plus imminent danger or hostile fire pay.

Under the tax benefit rule, a recovery is income only to the extent the earlier deduction reduced your tax. A state income tax refund is therefore taxable only if you itemized and deducted that tax; if you took the standard deduction that year, none of it is income. A federal income tax refund is never income, because federal income tax was never deductible.

An S corporation must pay a shareholder-employee reasonable wages for services before making non-wage distributions, since distributions escape employment taxes. The IRS can reclassify distributions as wages. The test looks at where gross receipts come from: income produced by the owner's personal services points to wages, while income from other employees and from capital can support distributions.

A flow-through loss must clear basis first, then the at-risk rules, then the passive activity rules, and for noncorporate taxpayers the excess business loss limit after all of those. Each gate sees only what survived the one before: a deduction disallowed for lack of basis or amount at risk is not a passive deduction that year, so it waits under the earlier limit.

A corporation that distributes appreciated property recognizes gain as if it sold the property at fair market value, and the corporate rules generally apply to S corporations too. A partnership distribution is different: the partner generally recognizes gain only if money distributed exceeds the basis of the partner's interest, and loss only in certain liquidating distributions.

When a partner sells a partnership interest, the part of the price attributable to the partnership's unrealized receivables and inventory items is ordinary income, not capital gain. Unrealized receivables include unbilled rights to payment for goods or services, such as a cash-method firm's receivables, and depreciation that would be recaptured if assets were sold.

When someone receives a gift of a capital interest in a partnership where capital is a material income-producing factor, two limits stop income shifting. Income is first reduced by reasonable pay for the donor's services, and the donee's share per unit of donated capital cannot exceed the donor's. A purchase from a spouse, ancestor or descendant counts as a gift for this test.

C corporations, partnerships with a C corporation partner, and tax shelters generally cannot use the cash method. The first two can escape the ban as a farming business, a qualified personal service corporation, or an entity whose average annual gross receipts for the prior three years stay under an inflation-adjusted limit. A tax shelter has no gross receipts escape.

Schedule M-1 starts from net income on the corporation's books and reconciles it to taxable income on the return. Expenses booked but not deductible, such as disallowed meals and entertainment, are added back; book income that is not taxable, such as tax-exempt interest, is subtracted. A corporation with $10 million or more in assets files the more detailed Schedule M-3 instead.

An offer invites assent, and a contract forms only when acceptance comes in the manner the offer invites or requires. A merchant's firm offer is a statutory limit on revoking an offer with no consideration behind it: in Washington's enacted UCC, a merchant's signed record assuring that an offer for goods stays open binds for the stated time, or a reasonable time, never beyond three months.

Contract law normally enforces only bargained-for promises, where each side's promise or performance is given in exchange for the other's. Promissory estoppel is the main substitute: a promise the other party detrimentally relied on can be enforced when justice requires, though courts construe it narrowly. Washington's enacted UCC, for example, lets an agreement modifying a sale of goods bind without new consideration.

In Washington's enacted UCC, for example, an instrument is negotiable only if it is an unconditional promise or order to pay a fixed amount of money, payable to bearer or to order, on demand or at a definite time, with no other undertaking beyond a short list such as collateral terms. Negotiability matters because a holder in due course, who took it for value, in good faith and without notice of problems, cuts off many defenses.

Under Washington's enacted UCC, a holder in due course is subject only to real defenses: infancy, duress, incapacity or illegality that nullifies the obligation, fraud about the very character of what was signed, and discharge in insolvency. Defenses that would work against an ordinary contract claim are cut off. The FTC Holder Rule makes consumer credit contracts state that any holder is subject to the buyer's claims against the seller.

Under Washington's enacted UCC, a warehouse receipt is issued by someone storing goods for hire, and a bill of lading by someone transporting or forwarding them. A document is negotiable if its terms deliver the goods to bearer or to a named person's order; one consigned to a named person, or conspicuously marked nonnegotiable, is not. While a bailee holds goods under a negotiable document, perfecting in the document perfects in the goods.

In Washington's enacted UCC, for example, a buyer gets an insurable interest in goods as soon as they are identified to the contract, even if they are nonconforming, and the seller keeps one while it holds title or a security interest. Subrogation is stepping into another's place after paying: a guarantor who pays a loan can take the lender's place and pursue the borrower.

An exception means no cancellation income arises at all: debt canceled as a gift or bequest, debt whose payment would have been deductible, and certain student loans. Exceptions apply first and do not require reducing tax attributes. Exclusions such as bankruptcy and insolvency remove income that did arise, and most require reducing credits, losses or basis by the amount excluded.

The cancellation exclusions are not a menu. Debt canceled in a title 11 bankruptcy case uses the bankruptcy exclusion, and insolvency does not apply there. Insolvency, qualified farm debt and qualified real property business debt each apply only after the exclusions ahead of them. Home mortgage debt that qualified for the principal residence exclusion used it unless you elected insolvency instead.

You are insolvent to the extent your liabilities exceed the fair market value of your assets immediately before the cancellation, and you exclude only up to that amount. Assets include everything, even pension and retirement accounts that creditors cannot reach. Nonrecourse debt counts only up to the collateral's value, plus any excess that is itself forgiven.

Excluding canceled debt under bankruptcy or insolvency has a price: you reduce tax attributes in a set order, starting with net operating losses, then business credits, the minimum tax credit, capital losses, property basis, passive carryovers and foreign tax credits. Losses fall a dollar per dollar excluded and credits 33 1/3 cents. You may elect to cut depreciable basis first.

In a foreclosure on recourse debt, the amount realized is the smaller of the debt you are released from or the property's value, so the sale result is figured on that amount, and any debt above value becomes separate ordinary cancellation income that may be excludable. With nonrecourse debt the full outstanding debt is the amount realized, even when the property is worth less.

Abandoning property that secures recourse debt usually produces no gain or loss until the lender completes a foreclosure, and any debt the lender cancels is separate ordinary income. Abandoning property that secures nonrecourse debt is itself a sale or exchange, with the debt as the amount realized. Either way, a loss on a home or other personal-use property is not deductible.

Qualified principal residence indebtedness is debt to buy, build or substantially improve your main home and secured by it. Excluding canceled amounts required reducing the home's basis, so the gain came back on a later sale. The exclusion covered only declines in home value or financial hardship, and it is not available for discharges or agreements after December 31, 2025.

A Form 1099-C means a lender reported an identifiable event about your debt, coded in box 6, such as bankruptcy, an agreement or a decision to stop collecting. The form does not decide taxability: an exception or exclusion can still keep the amount out of income, and a canceled debt is still income even if no form arrives.

A deduction requires a gift to a qualified organization; gifts to individuals, even needy ones, political groups, lobbying groups and most foreign organizations do not count. The donee's category also sets the ceiling: first-category organizations such as churches, schools, hospitals, government units and publicly supported charities allow higher limits than others, such as private nonoperating foundations.

Your deduction is capped as a share of AGI, set by what you give and to whom. Under the 2025 rules, cash to first-category organizations can reach 60% of AGI, other property to them 50%, and capital gain property to them 30%; gifts to second-category organizations are capped at 30%, or 20% for capital gain property. The limits interact, and the overall cap is generally 60% of AGI.

Property that would give ordinary income or short-term gain if sold, such as inventory or capital assets held a year or less, is deducted at fair market value minus that gain, which usually means basis. Property that would give long-term gain is generally deducted at full fair market value. Property worth less than its basis is limited to its value either way.

Capital gain property is normally deducted at full value, but the deduction drops to basis when it goes to most private nonoperating foundations, or when tangible personal property is put to a use unrelated to the charity's exempt purpose. If the charity sells the item, even to fund its mission, that counts as unrelated use. Publicly traded stock given to a foundation generally keeps full value.

Contributions over the AGI limits carry forward up to five years, or 15 for qualified conservation gifts, and keep their original percentage category. Within each category you deduct the current year's gifts first and carryovers after them, oldest year first, so a large current-year gift can crowd out an older carryover.

When you get something back for a contribution, such as a dinner, an event ticket or membership perks, you deduct only what you paid above the value of the benefit. For a payment over $75 that is partly a gift and partly for goods or services, the charity must give you a written statement with a good-faith estimate of that value.

A contribution of $250 or more needs a contemporaneous written acknowledgment from the charity. Noncash deductions over $500 add Form 8283, Section A; a deduction over $5,000 for an item or group of similar items moves to Section B and generally needs a qualified appraisal received before the return is due. The thresholds follow the amount you deduct, not what you paid.

Selling property to a charity for less than its value is part sale and part gift. The gift part is fair market value minus the price received. Your basis is split between the two parts by their shares of value, so the sale part cannot use your whole basis and can show a taxable gain even when the price is below what you paid.