BUSINESS - BUSINESS PROPERTY Flashcards

Question

De Minimis Limitations

Answer 1

The regulations provide a de minimis safe harbor limit of $5,000 per item substantiated by invoice for taxpayers that have an Applicable Financial Statement (AFS). This limit is $2,500 for taxpayers that do not have an AFS. This limit is a "cliff." If you're over the limit on any one item, you can not deduct anything. So, if an item is $3,000 and your limit is $2,500, you can deduct nothing.

Answer 2

An AFS includes a financial statement required to be filed with the SEC, as well as other types of certified audited financial statements accompanied by a CPA report, including a financial statement provided for a loan, reporting to shareholders, or for other non-tax purposes.

Answer 3

A taxpayer electing the safe harbor may deduct and may not capitalize or treat as materials or supplies amounts paid to acquire or produce a unit of tangible property, if Has, at the beginning of the taxable year, accounting procedures that expense for non-tax purposes amounts that are paid for property that: • costs less than a certain dollar amount; or • has an economic useful life of 12 months or less; and The taxpayer treats the amounts paid for the property as an expense on its books and records in accordance with its accounting procedures.

Answer 4

In 2019, you do not have an applicable financial statement and you purchase five laptop computers for use in your trade or business. You paid $2,000 each for a total cost of $10,000 and these amounts are substantiated in an invoice. You had an accounting procedure in place at the beginning of 2019 to expense the cost of tangible property if the property costs $2,000 or less. You treat each computer as an expense on your books and records for 2019 in accordance with this policy. If you elect the de minimis safe harbor in your tax returns for your 2019 tax year, you can deduct the cost of each $2,000 computer. There was no AFS, but they did have an Accounting Policy followed for financial purposes.

Answer 5

Repairs are DEDUCTIBLE. Improvements are CAPITALIZED (both direct and indirect costs). Repairs is upkeep. Improvements make things bigger or better.

Answer 6

A small taxpayer is defined as a taxpayer having average annual gross receipts of no more than $10 million during the preceding three years. Not required to capitalize expenditures if the total amount expended during the year does not exceed the lesser of $10,000 or 2% of the unadjusted basis of the building.

Answer 7

A small taxpayer is defined as a taxpayer having average annual gross receipts of no more than $10 million during the preceding three years.

Answer 8

Routine Maintenance Safe Harbor permits a deduction for any expenditures that the taxpayer reasonably expects to be required more than once during an asset’s class life (or over 10 years in the case of buildings).

Answer 9

Assume a taxpayer has annual gross receipts of less than $10 million and owns an office building that was purchased for $750,000. In 2019, the taxpayer pays $5,500 for improvements to the building. As long as these expenses are no more than the lesser of 2% of the original cost (in this case, $15,000) or $10,000, the taxpayer can immediately deduct all of the costs, regardless of their nature. Because the $5,500 meets these criteria, the small taxpayer safe harbor applies. Now assume the same facts except that the taxpayer spends $10,500 for costs related to the building during 2019. Since $10,500 exceeds the lesser of 2% of the original cost or $10,000, the small taxpayer safe harbor is not available and the taxpayer must capitalize any expenditures that qualify as improvements. Why does this make sense? Because we're talking small potatoes. And the difference between deducting now vs depreciating over a few years is not that big of a difference.

Answer 10

This allows the deduction for any expenditure that the TP reasonably expects to happen more than once over the life of the asset. It doesn't mean it must be performed more than once. When in play the taxpayer can deduct the amounts that: The cost is paid for recurring activities The cost arises from the use of the property in the taxpayer's trade or business The cost keeps the property in an ordinarily efficient operating condition The taxpayer reasonably expects, at the time the property is placed in service, to perform the activity more than once during the 10-year period starting when placed in service for buildings, or more than once during the class life for other property

Answer 11

Gain or loss is the difference between the fair value of what you receive and adjusted basis of the property given up. Keep in mind, debt assumed or transferred needs to be considered as well

Answer 12

A nontaxable exchange is an exchange in which any gain is not taxed and any loss can not be deducted. If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you exchanged.

Answer 13

Listed property includes any property of a type generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video recording equipment). A taxpayer cannot claim a section 179 deduction or a special depreciation allowance if business use of listed property is not more than 50%. Note: A vehicle with a loaded gross vehicle weight of over 14,000 pounds that is designed to carry cargo is an excepted vehicle that is not listed property

Answer 14

In order to determine whether the sale of a business asset resulted in a gain or loss, the seller must calculate whether the amount realized from the sale is greater or less than his adjusted basis in the asset sold. ADJUSTED BASIS is the original basis plus any additions and minus any deductions such as depreciation. In order to determine depreciation, it is necessary to know both the PROPERTY TYPE and the HOLDING PERIOD. Note: Replacement Cost is not relevant.

Answer 15

If the properties in an exchange are “like-kind” (similar in nature or character), and held either for: - productive use in a trade or business, or - for investment, No gain or loss will be recognized on the transaction by either party.

Answer 16

Boot is cash, other property, or the assumption of liabilities that belonged to the other party. If boot is received as part of like-kind exchange, some gain will recognized by the recipient of the boot.

Answer 17

FMV received Minus Basis Given Up = Gain Realized

Answer 18

The LESSER of: Realized gain, or Amount of boot received.

Answer 19

True. A loss is never recognized in like-kind exchanges, even when there is boot included in the transaction.

Answer 20

Basis of Old Property Exchanged + Basis of any BOOT given + Gain Recognized - FMV of BOOT Received = Basis in the Newly Acquired Property (NOTE: The basis of the boot received will be its FMV.)

Answer 21

Generally, you may amortize the capitalized costs of section 197 intangibles ratably over a 15-year period. You must amortize these costs if you hold the section 197 intangibles in connection with your trade or business or in an activity engaged in for the production of income. Section 197 intangibles include: - trademarks, - patents, - goodwill, and - custom software.

Answer 22

EXPLANATION If a taxpayer trades business or investment property for other business or investment property of a like kind, the taxpayer does not pay tax on any gain or deduct any loss until he sells or disposes of the property received. If a taxpayer acquires property in a like-kind exchange, the basis of that property is generally the same as the basis of the property transferred. With the following adjustments: INCREASE BASIS by the total amount of: - Additional money paid, including exchange expenses - FMV of any non-like kind property transferred to other party - Net liabilities assumed by the taxpayer - Any gain recognized on the exchange DECREASE BASIS by the amount of: - Boot received (ie. money, FMV of non-like kind property, net liabilities other party assumes) - Any loss recognized on the exchange

Answer 23

Recognized Gain is the LESSER of: The Realized Gain -or- The amount of BOOT received.