CPA TCP (Tax Compliance & Planning) Glossary
30 essential terms and definitions for CPA TCP (Tax Compliance & Planning). Each definition is written for exam preparation, covering the concepts as they are tested on the 2026 syllabus.
A
- Adjusted Basis (Property)
- Adjusted basis is the original cost of an asset increased by capital improvements and reduced by depreciation, casualty losses, and other recovery items. It determines gain or loss on disposition.
- Alternative Minimum Tax (AMT)
- A parallel tax system that recomputes income by adding back certain preferences and adjustments to reach alternative minimum taxable income, subtracts an exemption that phases out at higher income, and applies AMT rates. The taxpayer pays the excess of tentative minimum tax over regular tax.
- At-Risk Rules (Section 465)
- The at-risk rules limit a taxpayer's deductible loss from an activity to the amount the taxpayer has at risk in that activity. The at-risk amount generally includes cash and adjusted basis of contributed property plus recourse debt for which the taxpayer is personally liable.
B
- Boot (Section 1031)
- Boot is non-like-kind property received in a like-kind exchange. The taxpayer recognizes gain to the extent of boot received, even though the rest of the exchange qualifies for non-recognition.
- Built-In Gain Tax (S Corporation)
- The built-in gain tax applies when an S corporation that was formerly a C corporation sells assets with built-in appreciation within five years of conversion. It is imposed at the corporate level at the highest corporate rate.
C
- Capital Loss Limitation
- Individual taxpayers may deduct capital losses only against capital gains plus up to $3,000 of ordinary income per year ($1,500 if married filing separately). Excess losses carry forward indefinitely until used.
D
- Deferred Compensation
- Deferred compensation arrangements postpone recognition of compensation income. Qualified plans (401(k), pension) follow specific tax-deferral rules; non-qualified plans must meet Section 409A rules to defer income, with severe penalties for failures.
- Depreciation Recapture (Section 1245)
- Section 1245 recapture treats gain on sale of depreciable personal property as ordinary income up to accumulated depreciation. Section 1250 covers depreciable real property; unrecaptured 1250 gain is taxed at a maximum 25% rate.
E
- Estate Tax (Federal)
- The federal estate tax is a transfer tax on the taxable estate at death above the lifetime exemption. The taxable estate is the gross estate (worldwide assets at fair market value) reduced by debts, administration expenses, the marital deduction, and the charitable deduction.
- Estimated Tax Safe Harbor
- Individuals avoid an underpayment penalty by paying, through withholding and estimates, at least 90% of the current year tax or 100% of the prior year tax (110% if prior year AGI exceeds $150,000). Meeting the smaller of these required amounts shields the taxpayer even if actual liability is higher.
G
- Generation-Skipping Transfer Tax (GSTT)
- The GSTT is a flat-rate transfer tax on gifts and bequests to skip persons (typically grandchildren or more remote descendants). It is imposed on top of the gift or estate tax to prevent multi-generation tax avoidance.
- Gift Tax Annual Exclusion
- Each donor may give the annual exclusion amount (inflation-adjusted) to each donee per year without using lifetime exemption or filing a gift tax return. Gift-splitting between spouses doubles the per-donee exclusion.
I
- Installment Sale Method
- The installment method spreads gain recognition over the years in which payments are received. It does not apply to inventory sales, depreciable property sold to related parties, or publicly traded securities.
K
- Kiddie Tax
- A rule that taxes a dependent child's net unearned income above an annual threshold at the parents' marginal tax rate, preventing families from shifting investment income to children in lower brackets. It generally applies to children under 19 (or full-time students under 24) who do not provide over half their own support.
L
- Like-Kind Exchange (Section 1031)
- A Section 1031 exchange defers gain recognition on real property held for investment or productive use in a trade or business when exchanged for like-kind real property. Post-2017 TCJA, personal property no longer qualifies.
M
- Material Participation Tests
- Material participation requires meeting one of seven tests, the most common being the 500-hour test, the substantially-all-the-participation test, and the more-than-100-hours-and-most-participation test. Material participation determines whether activity income is passive or non-passive.
N
- Net Investment Income Tax (NIIT)
- The NIIT is a 3.8% surtax on the lesser of net investment income or modified AGI above thresholds ($200K single, $250K MFJ). Net investment income includes interest, dividends, capital gains, rental and royalty income, and certain passive trade or business income.
P
- Partnership Basis
- A partner's basis in their partnership interest (outside basis) is adjusted for contributions, distributions, share of partnership income and losses, and share of partnership liabilities. Outside basis can differ materially from the partnership's basis in its assets (inside basis).
- Passive Activity Loss Rules
- Section 469 disallows passive losses against non-passive (active or portfolio) income. Suspended passive losses release when the activity is disposed of in a fully taxable transaction to an unrelated party.
Q
- Qualified Business Income (QBI) Deduction
- Section 199A allows up to 20% deduction of qualified business income from pass-through entities. The deduction is limited above income thresholds by W-2 wages and unadjusted basis of qualified property and is largely unavailable for specified service trades or businesses (SSTBs).
R
- Required Minimum Distribution (RMD)
- An RMD is the annual amount that must be withdrawn from a qualified retirement account starting at the applicable required beginning age. Failure to take the RMD triggers a substantial excise tax on the shortfall.
S
- S Corporation Basis
- An S corporation shareholder's stock basis is adjusted upward for contributions and share of income, and downward for distributions and share of losses. Stock basis must be sufficient to deduct losses; debt basis (basis in shareholder loans to the corporation) is a separate pool.
- Section 121 Home Sale Exclusion
- Allows a taxpayer to exclude up to $250,000 ($500,000 for married filing jointly) of gain on the sale of a principal residence, provided ownership and use tests of two of the last five years are met. The exclusion is generally available only once every two years.
- Section 179 Expensing
- An election to deduct the full cost of qualifying tangible business property in the year placed in service rather than depreciating it, subject to an annual dollar limit and a phase-out once total qualifying property placed in service exceeds a threshold. The deduction cannot exceed the taxpayer's aggregate taxable income from active trades or businesses.
- Section 754 Election
- A partnership election that allows an adjustment to the basis of partnership property following a transfer of a partnership interest (Section 743(b)) or certain distributions (Section 734(b)). It aligns the incoming partner's inside basis with the price paid for the interest, preventing distortion of future gain or loss.
- Self-Employment Tax
- Self-employment tax is the combined Social Security and Medicare tax on net earnings from self-employment. The combined rate is 15.3% on earnings up to the Social Security wage base; one-half of self-employment tax is deductible above-the-line.
- Step-Up in Basis
- On a decedent's death, the basis of inherited property is generally adjusted to fair market value at the date of death (or the alternate valuation date). This step-up eliminates pre-death unrealized appreciation from later capital-gain calculations.
T
- Tax-Loss Harvesting
- Tax-loss harvesting realizes investment losses to offset gains and reduce current-year tax liability. The wash-sale rule disallows the loss if a substantially identical security is purchased within 30 days.
- Trust Income Taxation
- Trusts file Form 1041 and pay tax on undistributed income at highly compressed brackets that hit the top marginal rate quickly. Distributions to beneficiaries carry out distributable net income (DNI), which is taxed to the beneficiaries instead of the trust.
W
- Wash Sale Rule
- Disallows a loss on the sale of a security when the taxpayer buys a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the basis of the replacement security and the holding period carries over.