REG has one of the higher pass rates among CPA exam sections, but that does not mean it is easy. The section is packed with detailed tax rules, complex calculations, and areas where a single misunderstanding can cascade into multiple wrong answers. In this article we break down the five hardest REG topics and provide targeted study strategies so you can approach each one with confidence.
1. Basis Calculations
Basis is the single most important concept on the REG exam. It appears in questions about property transactions, entity taxation, depreciation, and gain or loss recognition. If you do not understand basis, you cannot pass REG.
Why It Is So Hard
- Basis rules differ depending on how property was acquired (purchase, gift, inheritance, exchange).
- Each entity type (C corp, S corp, partnership) has different rules for computing a shareholder or partner's basis in their entity interest.
- Adjusted basis requires tracking additions and subtractions over time, including depreciation, distributions, and additional contributions.
- The distinction between inside basis and outside basis in partnerships trips up many candidates.
How to Master It
- Learn the basis rules by acquisition method. For purchased property, basis equals cost. For gifted property, basis depends on whether the FMV is above or below the donor's basis at the time of the gift (the dual-basis rule). For inherited property, basis is generally FMV at date of death. Build a matrix that covers every acquisition method.
- Master partnership and S corp basis separately. Do not try to learn both at the same time. Study partnership basis rules until you are comfortable, then move to S corp basis. The rules are similar but have important differences (e.g., debt allocation in partnerships vs. at-risk limitations in S corps).
- Practice multi-step basis problems. The exam often tests basis through a series of transactions. A partner contributes property, receives distributions, shares in income, and then sells their interest. Each step adjusts the basis. Work through complete lifecycle problems.
2. Property Transactions
Property transactions encompass the sale, exchange, and disposition of assets, along with the tax treatment of the resulting gain or loss. This topic requires you to apply basis knowledge in combination with rules about character (ordinary vs. capital), holding period, netting of gains and losses, and special provisions like Section 1231, Section 1245, and Section 1250.
Why It Is So Hard
- The interplay between Section 1231, 1245, and 1250 is complex and frequently tested.
- Like-kind exchange rules under Section 1031 require careful basis tracking and boot recognition.
- Involuntary conversions, wash sales, and related party transactions each have unique rules.
- The netting process for capital gains and losses (short-term vs. long-term) has specific sequencing rules.
How to Master It
- Build a flowchart for gain/loss character. Start with "Is the property Section 1231 property?" and branch through the 1245 recapture rules, 1250 recapture rules, and capital gain/loss classification. This flowchart forces you to apply the rules in the right order.
- Practice Section 1031 exchanges extensively. Like-kind exchanges appear on nearly every REG exam. Know how to compute the basis of the new property, the recognized gain, and the deferred gain. Practice with and without boot.
- Create a chart of special provisions. Wash sales, related party losses, installment sales, and involuntary conversions each have unique rules. Summarize them in a single reference document and review it regularly.
3. Entity Taxation
REG tests the taxation of C corporations, S corporations, partnerships, and sole proprietorships. You need to understand how each entity type is formed, how income is computed, how distributions are taxed, and how the entity is terminated or liquidated.
Why It Is So Hard
- Each entity type has different rules for formation, operation, distribution, and liquidation.
- The distinction between separately stated items and non-separately stated items in S corps and partnerships requires understanding of what flows through to the owner level.
- Built-in gains tax, accumulated earnings tax, and personal holding company tax are C corp-specific concepts that many candidates find obscure.
- Self-employment tax rules for sole proprietors and general partners add another computation layer.
How to Master It
- Study one entity type at a time. Do not study C corps and S corps simultaneously. Finish C corps, take a practice quiz, then move to S corps. Mixing them causes confusion.
- Focus on the high-frequency topics. Formation (contributions of property), shareholder/partner basis, distributions, and the pass-through of income are the most heavily tested topics. Liquidation and termination are tested less frequently but are still fair game.
- Use comparison tables. After studying each entity type individually, create a comparison table highlighting the differences. Common comparison points include eligibility requirements, number of shareholders allowed, types of stock permitted, and treatment of losses.
4. Individual Income Taxation
Individual income taxation is the largest content area on REG. It covers gross income, adjustments, deductions, credits, and the computation of tax liability. The sheer volume of rules and exceptions makes this a challenging area.
Why It Is So Hard
- The distinction between above-the-line deductions (adjustments to gross income) and below-the-line deductions (itemized deductions vs. standard deduction) requires careful categorization.
- Phase-outs for credits and deductions change frequently based on legislation.
- The alternative minimum tax (AMT) adds a parallel computation that many candidates find confusing.
- Filing status rules, dependency requirements, and related definitions are detailed and heavily tested.
How to Master It
- Memorize the Form 1040 structure. Gross income minus adjustments equals AGI. AGI minus the greater of standard deduction or itemized deductions equals taxable income. Taxable income times the tax rate equals tax liability. Credits reduce tax liability. This structure provides a framework for organizing hundreds of individual rules.
- Focus on what is included in and excluded from gross income. Life insurance proceeds, municipal bond interest, gifts, and inheritances are excluded. Wages, interest, dividends, alimony (pre-2019 agreements), and business income are included. Make flashcards for the common inclusions and exclusions.
- Practice credit computations. Child tax credit, earned income credit, education credits, and retirement savings contribution credit are the most commonly tested. Know the eligibility requirements, phase-out thresholds, and maximum amounts.
5. Business Law
Business law represents approximately 10 to 20 percent of the REG exam. While it is a smaller content area than taxation, it is worth enough points that neglecting it is risky.
Why It Is So Hard
- Business law is fundamentally different from taxation. Candidates who have been deep in tax study for weeks may find it jarring to switch to contract law and agency concepts.
- The Uniform Commercial Code (UCC) and its provisions regarding sales, negotiable instruments, and secured transactions require memorization of specific rules.
- Debtor-creditor relationships, bankruptcy priority, and suretyship involve detailed rules that are not intuitive.
How to Master It
- Do not leave business law for the last day. Dedicate a focused week to business law during your study plan. The topics are straightforward when you give them adequate attention.
- Focus on contracts and agency. These are the most heavily tested business law topics. Know the elements of a valid contract, the statute of frauds, breach remedies, and the duties and liabilities of agents and principals.
- Use practice questions heavily. Business law questions tend to be more straightforward than tax questions. A solid bank of practice questions can help you learn the rules efficiently.
Integrating These Topics Into Your Study Plan
The hardest REG topics are not isolated. Basis feeds into property transactions, which feeds into entity taxation. Individual taxation provides the framework for understanding entity taxation at the pass-through level. Studying these topics in sequence, rather than jumping around, creates a compounding knowledge effect.
A suggested order for REG study:
- Individual income taxation (the broadest foundation)
- Basis rules (the most essential concept)
- Property transactions (applies basis in context)
- Entity taxation (builds on basis and individual tax concepts)
- Business law (a change of pace, best studied as a focused block)
- Ethics and professional responsibilities (high-yield, low-effort)
Think CPA's REG Preparation
Think CPA structures our REG course around the topics that cause candidates the most trouble. Our basis practice module alone contains hundreds of questions spanning every acquisition method and entity type. We pair that with detailed explanations and step-by-step solution walkthroughs so you understand not just the answer but the reasoning behind it. When the hard topics become your strong topics, passing REG is well within reach.