In Brief
Under the direction of CPA Evolution Initiative the new Uniform CPA Examination has updated to test more rigorously for the kind of real-world skills that candidates will need to employ in practice. As a result, the way subjects like taxation have traditionally been taught in preparation for the old exam format may no longer suffice. The author provides a roadmap to the new task-based simulations for educators to get students ready for what they will encounter on the exam.
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Effective January 2024, the AICPA and NASBA have updated the Uniform CPA Examination to conform with the CPA Evolution initiative. From a tax perspective, the prior iteration of the CPA exam tested taxation on the Regulation (REG) exam. But the updated CPA exam tests taxation on two exams: 1) the Taxation and Regulation (REG) exam, namely a “core exam” that all candidates must take and 2) the Tax, Compliance, and Planning (TCP) exam, a “discipline exam” that candidates can elect to take as a specialization (see Exhibit 1).
The updated CPA exam, as in the past, contains task-based simulations (TBS). The difference between the old and new TBSs, however, involve not only new content tested on the exam but also the underlying skills needed to complete the TBSs. That is, new TBSs simulate real-world tasks that newly licensed CPAs are asked to perform in practice. As such, the new TBSs require a greater degree of critical thinking and professional skills than in the past.
This article is intended to provide tax educators (and exam candidates) with a roadmap for approaching tax TBSs on the updated CPA exam. Specifically, the article examines a sample representative task from the TCP exam, how the subject matter may have historically been taught, and how it could hypothetically be tested in the future as a tax TBS. Thereafter, the article provides recommendations to accounting educators on how tax TBSs can be used in the curriculum and, more broadly, how the skills needed for TBSs might influence accounting education.
Note that this article assumes, from a normative perspective, that accounting education should be taught in a way that aligns with the updated CPA exam. That is, because the updated CPA exam is based on extensive AICPA studies of the tasks performed by newly licensed CPAs, it follows that teaching to the CPA exam prepares students for professional practice.
Structure & Learning Taxonomy of the Updated CPA Exam
Learning how to approach tax TBSs presupposes an understanding of the structuring and learning taxonomy of the updated CPA exam. Specifically, the CPA Evolution initiative (https://www.evolutionofcpa.org) restructured the exam around content areas, broken down by topic, that are tested through representative tasks—namely the applicable content knowledge and skills required in the context of the work of a newly licensed CPA. In this framework, each representative task is assigned a skill level based on the revised Bloom’s Taxonomy of Educational Objectives. Those skill levels are, in descending order:
- ▪ Evaluation—the examination or assessment of problems and use of judgment to draw conclusions
- ▪ Analysis—the examination and study of the interrelationships of separate areas in order to identify causes and find evidence to support inferences
- ▪ Application—the use or demonstration of knowledge, concepts, or techniques
- ▪ Remembering and Understanding—the perception and comprehension of the significance of an area utilizing knowledge gained.
The updated CPA exam tests representative tasks through multiple-choice questions and TBSs. TBSs, while not new to the CPA exam, are more advanced than multiple-choice questions. According to the AICPA, TBSs represent case studies that allow candidates to demonstrate their knowledge and skills by generating responses to questions rather than simply selecting the correct answer. TBSs test candidates’ higher learning and processing abilities and, for this reason, are well suited for “application,” “analysis,” and “evaluation” representative tasks, namely the highest level of learning taxonomies.
Historical Classroom Coverage of a TCP TBS
As of this writing, the AICPA has not released any sample tax TBSs for the updated CPA exam. It is anticipated, however, that future tax TBSs will follow the established formatting of previous TBSs, with modifications to incorporate the new content and an increased emphasis on professional skills. Based on this expectation, this article explores an analysis-level representative task from the TCP exam, presented as a hypothetical tax TBS. Specifically, the representative task from the AICPA’s Uniform CPA Exam Blueprints is: “Review a shareholder’s stock and debt basis schedules in an S corporation for tax purposes and supporting documentation, including any source data used to create the schedule, to determine the accuracy of transactions reflected.”
Historically, the traditional method of teaching S corporations, from an academic perspective, involves a step-by-step review of the tax lifecycle. This method typically covers: 1) legal requirements and election status, 2) tax consequences of formation, 3) income and loss allocations, 4) stock and debt basis, 5) distributions, and 6) tax consequences of dissolution. Given the complexity of these topics and the fact that students are learning them for the first time, it makes sense to present S corporations in a compartmentalized manner that focuses on fundamental concepts.
By breaking the material into distinct units, each with its own set of tax rules and illustrative examples, educators aim to make a challenging subject more accessible. While this approach can help students understand individual concepts, it tends to provide information passively, without requiring them to actively engage with source documents or identify relevant details. Moreover, it often fails to highlight the interconnectedness of these concepts and how they are applied in practice.
Thus, applying this framework to the updated CPA exam, the traditional method is effective for teaching foundational tax concepts tested at the remembering and understanding level. Higher-level representative tasks, however, demand critical thinking and professional skills which are not fully addressed by this approach. Such advanced tasks, often tested as TBSs on the REG and TCP exams, require a more integrated and applied teaching strategy.
The Updated CPA Exam Coverage of a TCP TBS
To illustrate the skills needed for tax TBSs on the updated CPA exam, the Sidebar Task-Based Simulation presents a hypothetical TBS. To assist in reader understanding of the simulation, the hypothetical TBS provides the following: 1) the representative task underlying the TBS, 2) the general tax knowledge to solve the TBS, and 3) a detailed answer and explanation to the TBS. Please note that, to illustrate the various components of the representative task, this TBS includes a greater number of variables than might typically appear on the CPA exam.
TASK-BASED SIMULATION
Representative Task
Review a shareholder’s stock and debt basis schedules in an S corporation for tax purposes and supporting documentation, including any source data used to create the schedule, to determine the accuracy of transactions reflected.
Prompt
Shareholder X is an active shareholder in a corporation taxed as an S corporation. A review of client-provided information reveals the following:
Contributions
- ▪ On January 1, Year 1, as part of a 100% shareholder-contribution group, Shareholder X contributed property with a $100,000 adjusted basis and a $125,000 fair market value for a 50% ownership interest.
- ▪ On January 1, Year 3, Shareholder X, the only contributor, exchanged property with a $50,000 adjusted basis and a $65,000 fair market value for a 20% additional ownership (increasing ownership to 70%).
Direct Loans
- ▪ On January 1, Year 2, Shareholder X made a $30,000 direct loan (Direct Loan 1) to the corporation.
- ▪ On January 1, Year 3, Shareholder X made an additional $20,000 direct loan (Direct Loan 2) to the corporation.
- ▪ On December 31, Year 3, the corporation repaid Shareholder X $35,000 (comprised of $30,000 principal repayment and $5,000 for interest) on Direct Loan 1.
Assume the following:
- ▪ Exhibits 1 and 2 are accurate, already include any increases for corporation gains recognized from distributions, and do not need to be updated.
- ▪ All stock purchases constitute a stock block that can be tracked as a single item.
- ▪ The corporation does not have accumulated earnings and profits.
- ▪ Distributions are proportionate and disregard the accumulated adjustments account (i.e., assume it covers all distributions).
EXHIBIT 1
Form 1120S S Corporation Entity-Level Income
EXHIBIT 2
Distributions to Shareholder X
Request: Using the associated exhibits, please review and correct the client-provided stock and debt basis schedule.
Required Tax Knowledge
Shareholder Contributions and Initial Stock Basis
- ▪ Under IRC section 351, shareholder property contributions to a corporation at or after formation are tax-free (realized gain deferred) if, immediately after the contribution, the shareholder contribution group controls (owns greater than or equal to 80%) the corporation.
- If a contribution meets the requirements of IRC section 351, the contribution is tax-free and the shareholder-contributor takes a basis in the stock equal to their adjusted basis in the property contributed.
- If a contribution does not meet the requirements of IRC section 351, the contribution becomes a taxable disposition event and the shareholder contributor takes a basis in the stock equal to the fair market value of the property contributed.
- ▪ If IRC section 351 would apply except for the fact of the shareholder receiving money or other property (i.e., boot) in addition to stock, the shareholder recognizes a gain for the lesser of the fair market value of the boot received or the realized gain from the transfer.
- Shareholders increase stock basis for the recognized gain from the boot received and decrease stock basis for fair market value of the boot received.
- ▪ Generally, the initial stock basis from a transaction meeting the requirements of IRC section 351 comprises the following:
- Contribution—adjusted basis of contributed property less transferred liabilities
- Additions—recognized gain from shareholder receipt of boot; recognized gain from transferred liabilities in excess of the adjusted basis of the transferred property; transaction costs and fees
- Subtractions—fair market value of shareholder boot received
- Initial basis—the initial stock basis.
Shareholder Stock Basis
- ▪ Shareholder stock basis equals the shareholder’s initial stock basis, as increased by additional contributions and the shareholder’s share of income, and as decreased by distributions and the shareholder’s share of non-deductible items and losses. Shareholder losses cannot reduce shareholder basis below zero.
- ▪ Generally, shareholder stock basis (after initial formation) comprises the following:
- Beginning basis—initial stock basis
- Additions—additional contributions; shareholder’s percentage of ordinary business income and separately stated items
- Subtractions—distributions; shareholder’s percentage of non-deductible items, ordinary business items, and separately stated loss items
- Ending basis—ending stock basis.
Shareholder Debt Basis
- ▪ Shareholder debt basis equals the shareholder’s outstanding direct loans to the corporation, less any principal repayments on such direct loans.
- ▪ Shareholder-level losses in excess of stock basis reduce debt basis, but they cannot reduce it below zero. Subsequent shareholder-level income restores debt basis before increasing stock basis.
- ▪ Generally, shareholder debt basis comprises the following:
- Beginning basis—direct loans
- Additions—additional direct loans; restoration of debt basis from net increases in stock basis
- Subtractions—losses in excess of stock basis, repayments on direct loan principal
- Ending basis—ending debt basis.
EXHIBIT 3
Client-Provided Stock and Debt Basis Schedules
Nonliquidating Distributions
- ▪ Shareholders reduce stock basis by any non-liquidating distributions.
- ▪ Generally, the distribution equals the fair market value of the property received less any liabilities assumed by the shareholder (but not below zero).
As illustrated in the above example, the client made various mistakes in their stock and debt basis schedules. Some of these mistakes result from misapplication of substantive tax law, such as the effects of contributions, operations, and distributions on stock basis and debt basis. However, some of these mistakes result from human error, such as the transposition of a number or incorrect use of ownership percentage.
Year 1 Analysis
- ▪ The Year 1 contribution meets the requirements of IRC section 351 and the stock basis should be increased by the adjusted basis of the property contributed. In error, the client increased stock basis by the fair market value of the property contributed.
- ▪ The shareholder assumed a liability on the property distributed in Year 1, which should reduce the amount of the distribution. In error, the client ignored the liability assumption and accounted for the entire distribution.
Year 2 Analysis
- ▪ The distribution in Year 2 should reduce stock basis. Thereafter, stock basis should be reduced by the shareholder’s share of ordinary business losses, with losses in excess of stock basis reducing debt basis.
- ▪ In error, the client reduced debt basis for the distribution, which resulted in sufficient stock basis to absorb the shareholder’s share of ordinary business loss.
Year 3 Analysis
- ▪ The Year 3 contribution of property did not meet the requirements of IRC section 351, so stock basis should be increased by the $65,000 fair market value of the property. In error, the client transposed digits and entered $56,000.
- ▪ The debt basis should be reduced by the $30,000 principal portion of the debt repayment. In error, the client reduced debt basis by $35,000, which included the $5,000 interest portion of the debt repayment.
- ▪ Year 3 stock and debt basis adjustments should be based on a 70% shareholder ownership interest to reflect the shareholders additional stock acquisition. In error, the client based the Year 3 stock and debt basis adjustments on the shareholder’s original 50% ownership interest.
Bridge-Gap Recommendations for Accounting Educators
To better prepare students for tax TBSs and the skills required by the updated CPA exam, accounting educators should consider revising their teaching approaches. This could involve reviewing course materials to ensure alignment with the content tested on the updated CPA exam, integrating tax TBSs into the curriculum, and enhancing teaching methods to focus more on critical thinking and professional skills. In addition, educators should evaluate the composition and roles of their accounting faculty to maintain a balance between traditional academics and experienced practitioners.
Review course materials for conformity with the updated CPA exam.
To prepare students for tax TBSs, accounting educators should ensure their course materials align with the content tested on the updated CPA exam. This involves carefully reviewing key resources such as the AICPA’s CPA Evolution Model Curriculum (https://tinyurl.com/murfzyjz), CPA Evolution Model Supplement (https://tinyurl.com/27kk2tcw), and the Uniform CPA Examination Blueprints (https://tinyurl.com/mrymxj4m). These documents outline the content areas, topics, and higher-level representative tasks that may be tested as tax TBSs on the REG and TCP exams.
Educators should conduct a gap analysis between their current curriculum and these resources to identify and address any substantive deficiencies. For example, while the previous CPA exam format did not generally test personal financial planning on the REG exam, the updated TCP exam now includes this area. As a result, accounting educators may need to revise their course materials to incorporate this new content.
Incorporate TBSs into the curriculum.
To prepare students for tax TBSs, accounting educators should integrate these complex exercises into their courses. Due to the intricacy of tax TBSs, they are often best suited for advanced tax courses or in-depth classroom coverage. For example, a TBS could be used as the final, cumulative lecture on a specific tax topic, where the educator guides a discussion that breaks down each step of the TBS and highlights common pitfalls.
Alternatively, tax TBSs can be assigned as take-home projects, either individually or in groups, or included as detailed exam questions. To support these efforts, many textbook publishers provide tax TBSs through their learning platforms. Additionally, educators can collaborate with CPA review providers, such as UWorld CPA Review, which offer free access to tax TBSs and instructional videos with guided solutions.
Topics should be approached holistically to prepare students for both the academic rigor and professional skills required for tax TBSs.
Update teaching pedagogy for greater use of critical thinking and professional skills.
To prepare students for tax TBSs, accounting educators should foster critical thinking and professional skills in the classroom. While introductory tax concepts can be taught at the foundational levels of remembering and understanding, intermediate and advanced tax courses should focus on the higher levels of application and analysis.
To achieve this, educators should incorporate more “fuzzy” problems—those that lack immediate answers, integrate multiple concepts, and require detailed, step-by-step solutions. Consequently, exams consisting solely of multiple-choice questions are inadequate for developing the skills necessary for tax TBSs.
Furthermore, educators should move beyond textbooks to help students grasp the real-world context in which tax knowledge is applied. For example, tax can be taught: 1) academically, from an accounting or legal perspective; 2) functionally, through the use of tax software and forms; and 3) practically, through real-world tax consulting exercises. In essence, topics should be approached holistically to prepare students for both the academic rigor and professional skills required for tax TBSs.
Balance faculty composition to include both traditional academics and practitioners in roles that drive change.
To prepare students for tax TBSs, accounting educators should consider reassessing their faculty composition to ensure that practitioners are not only represented but also are in roles that allow them to drive change. A balanced mix of traditional academics and practitioners blends critical thinking with practical skills, aligning more closely with the evolving requirements of the CPA exam.
It is worth noting that the AACSB accreditation standards require AACSB-accredited schools to maintain a faculty composition of traditional academics and practitioners. But such standards are silent as to which faculty should be tenure-track or contingent faculty. This distinction is important because clinical faculty—who are more likely to possess the practice experience tested on the updated CPA exam—are normally contingent faculty and lack the protections of tenure. Consequently, their ability to update and modernize accounting education may be limited by concerns over contract renewal.
In the author’s view, both traditional academics and practitioners provide invaluable insights into the field of accounting. Balancing faculty composition and offering more meaningful opportunities to practitioners helps to create a more equitable academic environment, as well as the positive freedom to effectuate change. This approach not only attracts more practitioners to academia but also better equips students for tax TBSs, the CPA exam as a whole, and real-world accounting practice.
Adapting to the New Exam
The REG and TCP exams, as in the past iterations of the CPA exam, contain tax task-based simulations. The difference between the old and new TBSs, however, involve not only the new substantive content tested on the exam but also the underlying skills needed to complete the TBSs. Specifically, the new TBSs simulate real-world tasks newly licensed CPAs are expected to perform in practice.
Given the changes to the REG and TCP exams and how material might be tested through tax TBSs, it follows that accounting educators will have to change how they teach. In short, the historical method of teaching tax may no longer be sufficient to prepare students.
While the REG and TCP exams are changing, there is no guarantee that accounting education will change. Some schools will adapt and other schools will fail to adapt to the CPA Evolution initiative. Given this dynamic, it is foreseeable that the nature and type of accounting education received will vary from one institution to another in the next five years. Institutions that better utilize practitioner faculty may be better positioned to prepare students with the skills needed to pass the exam and be ready for practice. Changes implemented today will have a large impact in the future.
