10 Basis of Assets

Question 1

How does one determine the basis of inheritances?

Answer 1

Fair market value on date of death or alternate valuation date (as selected by the executor of the estate)

Question 2

How does one determine the basis of gifts?

Answer 2

Gain basis is the donor’s adjusted basis.
Loss basis is the lower of gain basis or fair market value.
Depreciable basis is the gain basis.

Question 3

List the characteristics of organizational expenditures.

Answer 3

$5,000 may be deducted; phased out $1 for $1 once organizational expenses exceed $50,000.
The remaining amount is amortized over 180 months.
The expenditures must be incurred before the end of the first tax year.
Stock issuance fees are not included.

Question 4

Describe FOB shipping point.

Answer 4

Title passes to the buyer when shipped and the costs are capitalized by the buyer as part of the asset’s basis.

Question 5

Describe FOB destination point

Answer 5

Legal title passes when the buyer receives the goods. Therefore,
the shipping costs are paid by the seller and treated as a selling cost.

Question 6

What is a trade discount and how does it affect the purchase price of an asset?

Answer 6

Trade discounts reduce the regular cost or list price of an asset that is offered by the seller as an incentive to buy the asset. It is treated as a reduction from the actual purchase price.

Question 7

Describe what is included in the tax basis of a purchased asset.

Answer 7

Purchase price (less trade discounts)
+ Sales tax
+ Shipping (FOB shipping point)
+ Insurance while in transit
+ Installation costs
+ Cost to make ready for intended use
(less cash received for salvaged materials)
+ Testing fees
=Total tax basis for asset

Question 8

If a business purchases a group of assets for a lump sum, how are the assets allocated? Provide a formula.

Answer 8

The purchase price must be allocated among all of the assets acquired. This is required so that each asset has a basis to be used for depreciation, if applicable, and for determining the gain or loss on disposal.
Individual asset allocated value =
(Individual asset appraised value / Total assets appraised value) × Lump-sum (total cost)

Question 9

How is the adjusted tax basis calculated?

Answer 9

Total capital cost of asset
+ Capital improvements
– Depreciation or amortization expense taken
= Adjusted tax basis

Question 10

What is the safe harbor rule and what is the current maximum amount?

Answer 10

The safe harbor tax provision for certain tangible property (real or personal) permits a taxpayer to deduct qualifying de minimis costs instead of capitalizing and depreciating those costs over the property’s useful life. Up to $5,000 of the cost of qualified property can be deducted if the business has an applicable financial statement (F/S) and up to $2,500 for a business without an applicable F/S.

Question 11

When an asset is converted from personal to business use, how is the basis calculated?

Answer 11

Generally, the tax basis for the business-use asset is the lesser of: (1) the taxpayer’s adjusted basis of the asset (i.e., usually cost or carryover basis depending how the asset was acquired), or (2) the fair market value (FMV) of the asset on the conversion date.

Question 12

When gift tax is paid by the donor, how does this affect the donee’s basis?

Answer 12

If the donor pays a gift tax on the gift, the portion of the tax paid attributable to the property’s appreciation (i.e., increase in value) at the date of the gift is added to the donee’s basis (i.e., considered an additional cost of the property):
Donor’s adjusted basis
+ Portion of the gift tax paid due to appreciation
= Donee’s basis

Question 13

What is the holding period to the recipient when an asset is received through inheritance?

Answer 13

The holding period for inherited assets is deemed to be long-term regardless of how long the beneficiary held the asset.

Question 14

Bernice died on February 22. Her son received her home as his inheritance. The executor properly elects the alternate valuation date. Assuming the following fair market values, what is her son’s basis in the home if it is distributed on August 31?
FMV February 22 $450,000
FMV August 22 $465,000
FMV August 31 $480,000

Answer 14

A beneficiary’s basis for inherited property is generally the FMV of the property. This is often the FMV on the date of death; however, subject to certain requirements, the estate’s executor can elect to use the FMV on the alternative valuation date, which is up to six months after the date of death. Because the asset was distributed after the alternate valuation date, the alternate valuation date FMV of $465,000 is used.

Question 15

True or False: A loss from a wash sale is deductible.

Answer 15

False: Losses from a wash sale are not deductible. The nondeductible loss is added to the basis of the newly acquired securities.

Question 16

Provide three examples of Section 197 intangible assets.

Answer 16

Examples of Section 197 intangible assets include copyrights, goodwill, intellectual licenses, noncompete covenants, patents, and trademarks.

Question 17

How many months are intangible assets amortized?

Answer 17

Acquired intangible assets are referred to as §197 intangibles and amortized over 180 months.

Question 18

If a business purchases the assets of another business for a single purchase price, how is goodwill calculated?

Answer 18

If a business purchases the assets of another business for a single purchase price, the purchaser must determine the initial basis of each of the assets it acquired in the transaction. To determine the basis, the purchaser allocates a portion of the purchase price to each asset acquired (e.g., cash, machinery, real property) according to its fair market value. The purchase price exceeding the FMV of each asset acquired is considered goodwill.

Question 19

Which of the following is considered an organizational cost? There may be more than one correct answer.
Legal services associated with formation of the partnership
Filing fees for incorporating
Cost of stockholder’s meeting
The cost of selling or marketing the stock

Answer 19

Expenditures considered organization costs include:
1. Legal fees incidental to the organization of the business, such as negotiating and drafting of the partnership agreement or corporate charter and bylaws
2. Accounting services in forming the entity
3. Filing fees
4. Costs of organizational meetings of stockholders and directors

The costs of selling or marketing the ownership interest in a business (i.e., stock or partnership interest) is a syndication cost, rather than an organization cost or start-up cost. Syndication costs cannot be deducted or amortized.

Question 20

Describe a start up cost.

Answer 20

Start-up costs are costs that would be deductible as a regular business expense if the business had started, but are not deductible because the business has not began.

Question 21

What is a loan cost?

Answer 21

Certain costs incurred with getting a loan, such as discount points, loan origination fees, mortgage insurance premiums, loan assumption fees, cost of a credit report, fees for an appraisal required by a lender and refinancing fees, are not part of the encumbered property’s basis. However, if the costs are associated with business-use property, these costs are capitalized as loan costs and can be amortized over the period of the loan.