Gleim CPA Review Updates to Regulation 2014 Edition, 1st Printing March 2014

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1 Page 1 of 6 Gleim CPA Review Updates to Regulation 2014 Edition, 1st Printing March 2014 NOTE: Text that should be deleted is displayed with a line through the text. New text is shown with a blue background. Study Unit 2 CPAs and the Law Page 56, Subunit 2.1, 8.c.3)-4): This update reflects recent Rule 506 changes. 3) Rule 505 provides exemption from registration to all issuers other than investment companies for a limited offering of securities up to $5 million in any 12-month period. a) The issue may be purchased by an unlimited number of accredited investors. b) The issuer must reasonably believe that there are no more than 35 purchasers are not nonaccredited investors/offerees. 4) Rule 506 implements the private placement exemption from registration for transactions by an issuer not involving any public offering. Section 4(2) provides this exemption. Rule 506, unlike Rules 504 and 505, has no ceiling amount. a) Rule 506 provides a safe harbor for a private placement, but noncompliance with Rule 506 does not necessarily mean that the exemption cannot be claimed. b) The offering may be purchased by an unlimited number of accredited investors. c) General solicitation and advertising are permitted if sales are to accredited investors only. d) No more than 35 of the purchasers are not accredited investors. But their knowledge and experience must suffice to allow them to evaluate the risks and merits of the investment. c e) The company issuer must take reasonable steps to confirm that all purchasers are accredited investors per SEC requirements as defined by the SEC if the offering is to the general public. d f) Generally, the issuer requires the purchaser to sign an investment letter stating that (s)he is purchasing for investment only and not for resale. For this reason, the shares are called lettered stock. d. Section 4(6) exempts up to $5 million of offers and sales if made only to accredited investors. The number of such investors may be unlimited, and no information is required to be given to them, but general advertising and solicitation are not permitted. Moreover, (1) the SEC must be informed of sales under the exemption, (2) resale is restricted, and (3) precautions must be taken to prevent nonexempt or unregistered resales.

2 Exempt Transactions by Issuers Exemption Maximum Price Investors Method of Offer Resale Rule 147 (intrastate offerings) Regulation A (excludes issuers that report under 1934 act) Regulation D -- Rule 504 (excludes most issuers that report under 1934 act) No maximum $5 million in 12-month period $1 million in 12-month period -- Rule 505 $5 million in 12-month period Purchasers and offerees must be state residents No limit No limit No more than 35 purchasers who are not nonaccredited -- Rule 506 No maximum No more than 35 purchasers who are not nonaccredited. but mmust have needed experience and the knowledge and experience to evaluate the risks and merits. Rule 4(6) $5 million Only accredited but number unlimited General solicitation and advertising allowed, but interstate distribution not permitted Testing the waters; sales after approval of offering statement General solicitation allowed if compliant with state law No general solicitation or advertising No general solicitation or and advertising unless all sales are to accredited investors No general solicitation or advertising Page 2 of 6 No resales to nonresidents for at least 9 months Not restricted Not restricted if compliant with state law Restricted Restricted Restricted Page 77, Subunit 2.1, Question #5: This update reflects recent Rule 506 changes. 5. An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer A. File an offering circular with the SEC. B. Sell only to nonaccredited investors. C. Provide investors with the prior 4 years audited financial statements. D. Provide investors with a proxy registration statement. Answer (A) is correct. REQUIRED: The requirement for a stock offering made under Regulation A. DISCUSSION: Under Regulation A, a small public issue of securities is exempt from full registration with the SEC if certain requirements are met. Regulation A applies to issuances not exceeding $5 million if the issuer files an offering circular with the SEC, provides it to each offeree and purchaser, and observes the 20-day waiting period. Answer (B) is incorrect. Regulation A does not restrict resale, have an investor sophistication requirement, or limit the number of buyers. Also, no disclosure is necessary if the offering is $100,000 or less. Answer (C) is incorrect. Regulation A provides an exemption from the otherwise required filing of a registration statement and prospectus. Answer (D) is incorrect. Filing proxy statements is required under the 1934 act. Regulation A provides exemption from filing requirements of the 1933 act.

3 Page 3 of 6 Study Unit 4 Self-Employment, Farming, and Adjustments Page 167, Subunit 4.5, Question #21: This update corrects the 2013 contribution limit for an IRA. 21. In 2013, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer s adjusted gross income? A. $55,000 B. $50,000 C. $46,000 D. $40,000 Answer (D) is correct. REQUIRED: The taxpayer s AGI. DISCUSSION: In 2013, self-employed individuals can deduct 50% of FICA taxes paid and 100% of payments made for health insurance coverage for the individual and his/her family. Alimony is gross income to the recipient and deductible by the payor. Contributions of up to $5,000 $5,500 to an individual retirement account are deductible. The taxpayer s AGI is $40,000 ($57,000 GI $4,000 SE tax paid $6,000 health insurance $5,000 alimony $2,000 contribution to IRA). Answer (A) is incorrect. Self-employment taxes and health insurance, along with alimony paid, also reduce GI to arrive at AGI. Answer (B) is incorrect. Self-employment taxes and health insurance paid also reduce GI to arrive at AGI. Answer (C) is incorrect. Self-employment health insurance paid also reduces GI to arrive at AGI. Study Unit 6 Property Transactions Page 234, Subunit 6.3, 4.d.-e.: This edit adds the 20% basket throughout the outline. d. If a long-term basket has a net loss, the loss will be used first to offset net gain for the highest long-term rate basket, then to offset the next highest rate basket and so on. EXAMPLE A taxpayer realizes a $10,000 net loss in the 15% 15/20% basket, a $5,000 net gain in the 25% basket, and an $8,000 net gain in the 28% basket. The taxpayer will first apply the net loss against the gain in the 28% basket, reducing the gain in this basket to zero. Then, the remaining $2,000 loss is applied against the gain in the 25% basket, leaving a $3,000 net capital gain in the 25% basket. e. A carryover of a net long-term capital loss from a prior year is used first to offset any net gain in the 28% basket, then to offset any net gain in the 25% basket, and finally to offset any net gain in the 15% 15/20% basket. Likewise, net STCL is also used first to offset net gain for the highest long-term basket and so on. EXAMPLE A taxpayer has a $1,000 long-term capital loss carryover, a net short-term capital loss of $2,000, a $1,000 net gain in the 28% basket, and a $5,000 net gain in the 15% 15/20% basket. Both losses are first applied to offset the 28% rate gain, using the $1,000 loss carryover first until completely exhausted. Since no gain exists in the 28% basket after applying the carryover, the net STCL is then applied against the next highest gain in the 15% 15/20% basket. As a result, only a $3,000 net capital gain remains in the 15% 15/20% basket.

4 Page 243, Subunit 6.7, Figure 6-1: This edit adds the 20% basket throughout the outline. Page 4 of 6 Figure 6-1 Page 244, Subunit 6.7, 2.f.: This edit adds the 20% basket throughout the outline. f. The installment method can apply to Sec property. Sec merely characterizes gain or loss. Any Section 1231 gain that is recharacterized as capital gain will first consist of 28% gain, then 25% gain, and finally, 15% 15/20% gain. Study Unit 7 Corporate Taxable Income Page 289, Subunit 7.4, Question #23: This update increases the years by one. 23. For each of the years 2010 through 2012, Geyer, Inc., a calendar-year corporation, had net income (loss) per books as follows: $ , (60,000) Included in Geyer s gross revenues for 2012 were taxable dividends of $20,000 received from an unrelated 20%- owned domestic corporation. If Geyer elects to give up the carryback period, what is its NOL that may be carried forward to 2013? A. $35,000 B. $51,000 C. $60,000 D. $76,000 Answer (D) is correct. REQUIRED: The net operating loss (NOL) carryover. DISCUSSION: Barring any allowable special election, an NOL may be carried back to each of the 2 preceding taxable years and forward to the 20 succeeding taxable years. The NOL must be carried to the earliest possible year, unless an election is made to give up the 2-year carryback. Because Geyer made this election, the 2012 net operating loss is a carryforward to In computing the net operating loss, the dividends received deduction (DRD) is computed without regard to the 80%-of taxable-income limitation. Net loss per books $(60,000) Allowable DRD ($20,000 80%) (16,000) NOL carryover $(76,000)

5 Page 5 of 6 Study Unit 12 Estates, Trusts, and Wealth Transfer Taxes Page 450, Subunit 12.3, 10.d.: This edit updates the gift tax exclusion amounts for Computing the Gift Tax a. Tentative tax is the sum of taxable gifts to each person for the current year and for each preceding year times the rate. Taxable gifts to a person is the total of gift amounts (FMV) in excess of exclusions and the marital and charitable deductions for a calendar year. b. The unified transfer tax rates are used. 1) Current-year applicable rates are applied to both current and preceding years taxable gifts. 2) The rate is 18% for taxable gifts up to $10,000. 3) The rates increase in small steps (e.g., 2%, 3%) over numerous brackets. 4) The maximum rate is 40% on cumulative gifts in excess of $1 million in c. The tentative gift tax is reduced by the product of prior years taxable gifts and the current-year rates. d. Applicable credit amount (ACA). Tentative tax may also be reduced by any ACA. The ACA is a base amount ($2,045,800 in 2013) reduced by amounts allowable as credits for all preceding tax years. This excludes the first $5.12 $5.25 million of taxable gifts. Study Unit 18 Sales and Secured Transactions Page 695, Subunit 18.8, 2.: This update reflects recent Article 9 changes. 2. Perfection by Filing a Financing Statement a. Filing is required to perfect a security interest in the absence of a specific exception. The debtor s location controls the place of filing. 1) Security interests in most forms of collateral may be perfected by filing. b. The financing statement must contain the following: 1) The names of the debtor on the public organic record (but not a trade name only) and the name of the secured party. EXAMPLE Mr. Zero is the sole proprietor of Z Club. Mr. Zero borrowed money from Bank and gave a security interest in the pool tables in Z Club. Bank should file the financing statement under Zero. XYZ Partnership owns Dave s Plumbing. XYZ borrowed money from Bank and conveyed a security interest in its fleet of trucks. Bank should file the financing statement under XYZ Partnership, not Dave s Plumbing. 2) An indication of the covered collateral a) For example, a fixture filing must (1) indicate that it covers fixtures, (2) be filed in the real property records, and (3) describe the real property.

6 Page 6 of 6 c. A financing statement may be filed before a security agreement is reached or a security interest attaches. 1) Errors or omissions do not make the financing statement ineffective unless they are seriously misleading. d. A filed financing statement is effective for 5 years. A continuation statement extending perfection for 5 years may be filed during the last 6 months of this period. e. If a debtor moves out of the state where the security interest is perfected, it is perfected for 4 months automatically. For the security interest to remain perfected, a financing statement must be filed in the state of the debtor s new location. Page 709, Subunit 18.8, Question #25: This update reflects recent Article 9 changes. 25. A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC Secured Transactions Article, which of the following must be included in the financing statement? A. An indication of the collateral. B. An after-acquired property provision. C. The creditor s signature. Answer (A) is correct. REQUIRED: The item that must be included in the financing statement to perfect a security interest. DISCUSSION: To be effective, the financing statement must (1) include the name of the debtor on the public organic record, (2) include the name of the secured party or representative, and (3) indicate the collateral covered. D. The collateral s location.