Basis/ Depreciation/ Cost Recovery

Question 1

Original Basis

Answer 1

Taxpayers investment in asset or property
Unrecovered $$

Basis increased by: 
legal fees
commission
sales tax
freight
improvements 

not(deducted as expenses immediatly)
repairs
real estate taxes
normal business expense

When basis is increased by above it becomes cost basis

Question 2

Adjusted Basis

Answer 2

Cost basis- cost recovery

cost recovery is a deduction for depreciation
generates tax savings and reduces basis

Question 3

Amortization

Answer 3

tax basis of intangible assets (capital expenditures) that can be recovered using amortization

Section 197

Similar to straight line depreciation

Example: amt paid to acquire membership in a trade association 15 yr straight line

Question 4

Accretion

Answer 4

Discount on a bond must be accreted over the life of the bond

Each yr a portion of the discount must be earned

Included in taxable interest income

Bonds basis is increased

Question 5

Basis for property received by gift

Answer 5

If FMV on date of gift is GREATER than donors adjusted basis - use donor’s adjusted basis

GIFT LOSS PROPERTY!
If FMV on date of gift is LESS than donors adjusted basis:
- sold for loss use FMV on date of gift
-sold for gainuse donors basis
-If the sale price of gift is between donors basis and FMV no gain or loss recognized

Question 6

Basis on inherited property

Answer 6

FMV on date of decedents death or
alternate valuation date if elected

Community property states spouse gets FULL step up in basis if 1/2 of the whole property is included in the decedents gross estate

Non community property - spouse gets 1/2 step up

HOLDING PERIOD ALWAYS LTCG

Non spouse FULL step up in basis

Question 7

Depreciation and cost recovery concepts

Answer 7

allowance for exhaustion and wear and tear used in trade or business or held for production of income

Question 8

MACRS

Answer 8

Modified accelerated cost recovery
no land or intangibles

placed in service after 1986 (prior ACRS)

Straight line is an option but half-year convention must be used.

*If more than 40% of property (non real estate) is placed in service during last three months of year, mid quarter must be used

Question 9

MACRS Property Classes

Answer 9

1245 Property - 5 Year:
computers, autos, light duty trucks

1245 Property - 7 Year:
office furniture, fixtures, office equipment

1250 Property - 27 1/2 Year:
residential real property

1250 Property - 39 Years:
nonresidential real property

Question 10

MACRS / Straight line Tables

Answer 10

MACRS Straight
Recovery Year 5 Year 7 Year 5 year 7 year
1 20% 14.29% 10% 7.14%
2 32% 24.49% 20% 14.29%
3 19.2% 17.49% 20% 14.29%

Use cost basis to make calculation
Always! use MACRS unless question says to use straight line

Question 11

Expensing

Answer 11

Section 179
can expense a limited amount of tangible property rather than capitalize using MACRS

179 Deduction

up to $500,000 in the year of acquisition
1245 property for trade or business
NO 1250 property!

reduced $ for $ by cost of qualifying property exceeding 2M

Further limited to taxable income derived from active conduct of trade or business
Can’t create a loss

can carryover