Midterm #2

Question 1

Expense or Capitalize?

Deduction allowed for all ordinary and necessary business expenses.
But, similar to GAAP:

Answer 1

The line between a deductible expenditure and one that must be capitalized is not always clear.

• Repairs and and maintenance.
• environmental cleaning

Question 2

Expensing of certain “capital” expenditures.
- Immediate deduction is allowed for certain types of “capital” expenditures.

Answer 2

• research and development(until 2021)
• advertising cost
• certain specific deductions allowed for certain industries (i.e. farmers, oil and gas producers).

Question 3

What is tax basis:

Answer 3

Tax basis is essentially the unrecovered cost of an asset. (Every asset has a tax basis).

Question 4

Basis is key to calculting…

Answer 4

Cash flows because taxpayers recover basis at no tax cost.

Question 5

An Asset’s adjusted tax basis will likely be different from the asset’s adjusted book value per GAAP. True/False

Answer 5

True

Question 6

Cost recovery methods:
Inventory-
Tangible Asset-
Intangible- Asset-
Natural Resources-

Answer 6

Inventory- COGS
Tangible Asset- Depreciation
Intangible- Asset- Amortization
Natural Resources- Depletion

Question 7

What inventory costing methods are allowed for tax purposes?:

Answer 7

• Specific identification method.
• FIFO convention
• LIFO convention—> better for taxes
  LIFO conformity rule- if you are
  using it for taxes you must
  use it on your financials
  statements.

Question 8

Depreciation applies to tangible assets that:

Answer 8

Lose value over time due to wear and tear and obsolescence and

Have a reasonably ascertainable useful life

Question 9

Buildings are depreciable, but not ______.
Artwork is ________.

Answer 9

Land
not depreciable- investment.

Question 10

Before______, tax depreciation was based on an asset’s _________________.

Answer 10

1981
useful life.

Question 11

Under MACRS, estimated useful life is irrelevant.

Answer 11

The MACRS recovery period is prescribed by the IRC.
Usually shorter than an asset’s
estimated useful life (i.e. faster
deductions).

Question 12

MACRS RECOVERY PERIODS AND METHODS:
Depreciation for 3,5,7 year and 10-year property is computed under the

Answer 12

200% declining balance method

Question 13

MACRS RECOVERY PERIODS AND METHODS:
Depreciation for 15 and 20-year property is computed under…

Answer 13

the 150% declining balance method.

Question 14

MACRS RECOVERY PERIODS AND METHODS:
Depreciation for 25, 27.5, 39, and 50-year property is computed under the

Answer 14

the straight-line method

Question 15

Depreciation for personalty is generally based on ____________.

Answer 15

half-year convention.
Convention built into IRS depreciation tables for year of acquisition, but not for year of disposition.

BUT, the mid-quarter convention applies if >40% of personalty acquired in a year is placed in service in the 4th Quarter.

Question 16

Depreciation Conventions for Realty: Depreciation for realty is generally based on a ____________ ____________.

Answer 16

midmonth convention.
Convention built into IRS depletion
tables for year/month of acquisition,
but not for year/month of
disposition.

Question 17

the 179 deduction in any year is limited to ________ _______ income before the deduction

Answer 17

taxable business

any nondeductible expense carries forward into the future.

Question 18

The _______ ________ rules permit immediate expensing of 100% of the cost of qualifying property placed in service after September 2017 and before Jan 2023

Answer 18

Bonus depreciation.

Question 19

What Qualifies for Bonus Depreciation:

Answer 19

depreciable personalty, computer software, and certain leasehold improvements.

Question 20

What are intangible assets:

Answer 20

Assets that have no physical substance.
E.X. leases, patents, trade names, and other contractual rights.

Question 21

Intangible assets are generally amortized on a _________ over their determinable life.

Answer 21

straight-line basis

Intangible assets with no determinable life are not amortized.
includes securities & partnership interests.

Question 22

R&D (POST TCJA):
Research and development costs incurred after 2021 must be _______ and ________.

Answer 22

Capitalized and amortized

straight line amortization, with midyear convention
if domestic, amortized over 5 years
if international, amortized over 15 years

Question 23

A firm that purchases an entire business for a lump-sum price must allocate the cost of both ______ and _______ assets.

Answer 23

Tangible and intangible

Cost allocation is based on FMV of identifiable assets.
Any residual cost is allocated to purchased goodwill.

Question 24

Cost Recovery- Natural Resources: What is cost depletion:

Answer 24

The method for recovering the capitalized cost of an exhaustible natural resource. Cost depletion equals an unrecovered basis in the resource (mine or well) multiplied by the ratio of units of production sold during the year to the estimated total units of production at the beginning of the year.
can also be percentage depletion.

Question 25

Realized gains or losses (appreciation or decline in value) are neither _____ nor _____.

Answer 25

Realized nor recognized

Question 26

Seller-financed leases- the installment sales method permits deferral of ___ ________ until cash is received.

Answer 26

gain recognition

Question 27

Losses realized on sales of property between related parties are _______.

Answer 27

disallowed (not recognized).

Question 28

What are related parties?

Answer 28

Family members

a corporation or a majority shareholder (>50%).

A corporation with common shareholders “owned by the same corporation”

HOWEVER, future gain from the sale by the purchaser (related party) is reduced by the seller’s disallowed loss.

Question 29

Character if Recognized Gain or Loss:
Capital gain or loss results from the ____ or ______ of a capital asset.

Answer 29

sale or exchange

Depositions of capital assets other than by sale or exchange typically do not result in capital gain/loss. Character is generally ordinary.

Question 30

Noncapital assets- inventory and A/R:
Sales of inventory and accounts receivable results in…

Answer 30

ordinary income taxed at regular rates.

Question 31

Depreciation Recapture:
prevents taxpayers from “double dipping” to get the dual benefits of _____________ and ___________.

Answer 31

Depreciation deduction and special Section 1231 gain treatment.
“recapture” means to treat gains as ordinary.

Question 32

Depreciation recapture- Section 1245: what is it and what does it apply to?

Answer 32

Requires full recapture of all depreciation taken.

applies to depreciable personal property and amortizable intangibles.
(any gain in excess of accumulated depreciation is section 1231 gain).

Question 33

Depreciation Recapture: Sections 1250 and 291 apply to what kind of property:

Answer 33

depreciable real property.

Question 34

Section 1231 Recapture: Net Section 1231 gain is characterized as ______ income to the extent of unrecaptured 1231 losses in recent years.

Answer 34

Ordinary

recent years means any of the preceding 5 years.

Finally… any remaining net section 1231 gain is treated as a capital gain. No look-backs for loss.

Question 35

Tax Neutrality: The government recognizes that certain types of ____ _____ do not constitute a “cashing out” of a taxpayer’s investment in the asset.

Answer 35

asset dispositions

e.g. the investment has essentially just been converted into another form.

Question 36

For Taxpayer Receiving Boot:

Answer 36

Realized gain is recognized up to the FMV of the boot.

Basis in qualifying property received equals: substitute basis + gain recognition -boot

Question 36

For Taxpayer Paying Boot:

Answer 36

Paying boot does not trigger gain recognition.

Basis in qualifying property received equals: substitute basis + FMV Boot Paid

Question 37

What is like-kind property:

Any assets that are not eligible for line-kind exchange treatment?

Answer 37

real estate- any business or investment real estate if traded with any business or investment real estate WITHIN THE US

not eligible- anything else -vehicles, etc.

Question 38

No gain or loss is recognized by a taxpayer who transfers property to a corporation solely in exchange for _____ if the transferor is in control of the corporation immediately after the exchange.

Answer 38

Stock

Need to own at least 80% of the stock.

Question 39

Partnership formation: no gain or loss is recognized by the partner or the partnership in the exchange of ________ for an interest in the partnership.

Answer 39

Property

Question 40

BTD from Nontaxable Exchanges: For financial reporting purposes, gains and losses realized on property exchanges will generally be included (recognized) in _____ _______.

Answer 40

Book income

if so, and the exchange is nontaxable, the gain/loss realized is a book-tax difference.

Temporary