10.01 Basis of Assets

Question 1

Define depreciable/amortizable tax basis.

Answer 1

Generally, when an asset is purchases for use in trade or business the cost includes all ordinary and necessary costs to acquire the property, make the property ready for its intended use, and place the property into service. This includes the amount paid in cash and any debt assumed. The sum of these costs is the property’s depreciable/amortizable tax basis, which the business recovers through cost recovery deductions such as depreciation, amortization, or depletion. Ordinary and necessary costs exclude fines and penalties incurred related to the asset.

Question 2

What is included in the cost of real property?

Answer 2

Includes all ordinary and necessary acquisition or construction costs and costs incurred to make the property ready for its intended use. Additional costs, such as recording fees, certain settlement costs, and real estate taxes assumed for the seller, are also part of the purchase price.

Question 3

True or false: shipping costs can be paid by either the buyer or the seller depending on the shipping terms.

Answer 3

True.

Question 4

Does the buyer or seller capitalize the shipping cost if shipped via FOB shipping point?

Answer 4

Costs are capitalized by the buyer.

Question 5

Does the buyer or seller capitalize the shipping cost if shipped via FOB destination point?

Answer 5

Neither. The shipping cost is paid by the seller and treated as a selling cost.

Question 6

What is a trade discount?

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.
This differs from a purchase discount, which is a reduction in the amount due resulting from early payment of the amount due.

Question 7

How are lump sum purchases treated?

Answer 7

The purchase price must be allocated among all the assets acquired.
The most common allocation method used for lump sum purchases is based on the relative FMV (or appraised value) of the assets.

Question 8

How is adjusted tax basis calculated?

Answer 8

Total capital cost of asset + Capital improvements - Depreciation/Amortization expense taken

Question 9

What is the safe harbor tax provision for certain tangible property?

Answer 9

Permits a taxpayer to deduct qualifying de minimis costs instead of capitalizing and depreciating those costs over the property’s useful life.
Amount: up to $5k if have applicable FS; up to $2.5k if no applicable FS

Question 10

When a personal asset is converted to business use, what is the tax basis for the business-use asset?

Answer 10

It is the lesser of:
1. taxpayer’s adjusted basis of the asset; or
2. the FMV of the asset on the conversion date.
As a result, no gain or loss is recognized by the taxpayer when converting a personal-use asset to a business-use asset.

Question 11

What is the basis of property acquired by gift?

Answer 11

Generally, a taxpayer’s basis for property received as a gift is equal to the donor’s adjusted basis and the donor’s holding period caries over. Because most gifts are capital assets, a capital gain/loss is recognized when the donee sells the property. The donee’s holding period dictates whether the capital gain/loss is short-term or long-term.

Question 12

What is the basis of property acquired by gift and the property has appreciated?

Answer 12

If the gift is appreciated property, the donee’s basis and holding period are the same as the donor’s. Therefore when the donee sells the property, any gain/loss is recognized based on the carryover adjusted basis and holding period.

Question 13

What is the basis of property acquired by gift and the property has depreciated?

Answer 13

If the gift’s FMV is less than the donor’s basis on the date of the gift, the donee must keep track of dual basis.

Question 14

What rules apply when gifted depreciated property is sold?

Answer 14

If the gifted property is later sold for more than the donor’s adjusted basis, the donor’s adjusted basis and holding period are used to calculate the gain.
If sold for less than the FMV, the FMV is used to calculate the loss and the donee’s holding period begins on the date of the gift.
If the gifted property is sold for an amount between the donor’s adjusted basis and the FMV when gifted, no gain/loss is recognized.

Question 15

True or false: If the donor pays a gift tax on the gift, the portion of the tax paid attributable to the property’s appreciation at the date of the gift is added to the donee’s basis.

Answer 15

True.

Question 16

True or false: Inherited property is generally excludable from the recipient’s gross income upon receipt.

Answer 16

True.
An individual’s estate if subject to the estate tax, which is imposed on the FMV of the estate’s assets. Because the FMV of the inherited property has already been subject to the estate tax, inherited property is generally excludable from the recipient’s gross income upon receipt, avoiding double taxation on the property’s FMV.

Question 17

What is the holding period for inherited assets?

Answer 17

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

Question 18

When does a wash sale occur?

Answer 18

A wash sale occurs when the securities are sold at a loss and the taxpayer acquires the same or substantially identical securities within 30 days before or after the sale. The repurchase period is 61 days: the day of sale plus 30 days before and after this date.

Question 19

True or false: Losses from a wash sale are deductible.

Answer 19

False.
The nondeductible loss is added to the basis of the acquired securities.

Question 20

True or false: Gains from wash sales are taxable.

Answer 20

True.

Question 21

What is the basis of an intangible asset?

Answer 21

The cost to buy or create the asset. Purchased intangibles include the purchase price, including sales taxes and similar charges paid to acquire the property. Amounts paid for performing services under an agreement are treated as amounts that do not create a separate and distinct intangible asset. Also, the value of an inventor’s time spent on an invention, or the value of an author’s time spent authoring isn’t included in the basis of a patent or copyright.

Question 22

What are organization costs?

Answer 22

Cost incurred for forming a partnership or corporation. Expenditures considered organization costs include: legal fees incidental to the organization of the business; accounting services in forming the entity; filing fees; costs of organizational meetings of stockholders and directors.

Question 23

Are the costs of selling or marketing stock and syndication costs to sell a partnership interest qualify as organizational expenditures?

Answer 23

No

Question 24

What are included in start-up costs?

Answer 24

Start-up costs governed by Section 195 include those incurred in:
1. creating an active trade or business,
2. acquiring an active trade of business, and
3. anticipation of an activity becoming an active trade or business.

Question 25

If a business has deemed to make an election to deduct start-up and/or organizational expenses in the tax year in which the business began, how much can be deducted?

Answer 25

The deemed election allows the partnership or corporation to immediately deduct up to $5k of organizational costs and $5k of start-up costs in the first year of business.

Question 26

What is included in loan costs?

Answer 26

If these costs are associated with business-use property, these costs are capitalized as loan costs and can be amortized over the period of the loan.
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.