Module 1: Basis and Holding Period of Assets

Question 1

What are the 3 ways of legally acquiring an asset and having a basis?

Answer 1

1. Purchase
2. Gift
3. Inherited

Question 2

PURCHASED PROPERTY

What is the basis?

Answer 2

Cost + Capital improvements

Question 3

PURCHASED PROPERTY

What does the cost of the property include?

Answer 3

Purchase of property, preparation of property for use, and placement of property into service

Question 4

PURCHASED PROPERTY

When does the holding period of purchased property begin?

Answer 4

On the date of purchase/acquisition

Question 5

PURCHASED PROPERTY

What is the adjusted basis (tax basis) of a purchased asset?

Answer 5

When the basis is adjusted downward for the amount of any depreciation, allowed or allowable, taken by the taxpayer

Question 6

PURCHASED PROPERTY

Under the IRC, how is the basis for the receipt of nontaxable stock dividend required to be handled?

Answer 6

The shareholder is required to spread the basis of his original share over both the original shares and the new shares received, resulting in the same total basis but a lower basis per share of stock held

Question 7

GIFTED PROPERTY

What is the general rule for the basis of gifted property?

Answer 7

The basis is the rollover cost basis from the donor

Question 8

GIFTED PROPERTY

What is the exception to the rollover cost basis?

Answer 8

If the fair market value at the date of the gift is lower tha the rollover cost basis from the donor, the basis for the donee depends on the donee’s future selling price of the asset

Question 9

GIFTED PROPERTY
What is the basis of gifted property in the following situations:
1. Sale of gift at price > donor’s rollover basis
2. Sale of gift at price < lower FMV
3. Sale < rollover cost basis but > lower FMV

Answer 9

1. Sale of gift at price > donor’s rollover basis
   - – Rollover basis
2. Sale of gift at price < lower FMV
   - – FMV
3. Sale < rollover cost basis but > lower FMV
   - – None; there will be no gain/loss

Question 10

GIFTED PROPERTY

What is the basis for depreciation purposes?

Answer 10

The lesser of:

• the donor’s adjusted basis at the date of the gift; or
• the FMV at the date of the gift

Question 11

GIFTED PROPERTY

What is the holding period for the recipient of gifted property?

Answer 11

Normally would the the donor’s holding period

EXCEPTION: If FMV at the time of gift is used (loss basis) as basis of gift, holding period starts as of date of gift

Question 12

INHERITED PROPERTY

What is the general rule for determining the basis of inherited property?

Answer 12

Generally takes the step-up (or step-down) to the FMV at the date of decedent’s death

Question 13

INHERITED PROPERTY

What is the alternative valuation date?

Answer 13

The earlier of:

• six months after death
• date of distribution/sale

Question 14

INHERITED PROPERTY

When is the alternative valuation date available?

Answer 14

If its use lowers the entire gross estate and estate tax

Question 15

INHERITED PROPERTY
What is the holding period for inherited property?
(“Long” journey out of the grave)

Answer 15

Property acquired from a decedent is automatically considered to be LONG-TERM property regardless of how long it actually has been held

Question 16

CAPITALIZE OR EXPENSE

Tangible property

Answer 16

All tangible property that is not inventory must be capitalized unless there is an exception

Question 17

CAPITALIZE OR EXPENSE

Materials and supplies

Answer 17

Expense

Generally items that cost $200 or less or has life of 12 months or less

Question 18

CAPITALIZE OR EXPENSE

Amounts paid to acquire or produce peroperty

Answer 18

Capitalize

Question 19

CAPITALIZE OR EXPENSE

Improvements

Answer 19

Capitalize

Question 20

What is a single unit of property (UOP)?

Answer 20

All components that are functionally interdependent

Question 21

What building systems are considered separate from the building structure?

Answer 21

• heating
• ventilation
• plumbing
• electrical
• escalators
• elevators
• alarm/fire protection
• gas distribution

Question 22

CAPITALIZE OR EXPENSE

Intangible property

Answer 22

Capitalize amounts paid/incurred for acquiring, creating, or enhancing intangible property

Question 23

What is the holding period for an asset that is required to be capitalized?

Answer 23

The holding period starts as of the date the asset is completed

Question 24

When can a company make a de minimis annual expense election regarding expenditures to acquire/produce property?

Answer 24

If they have a capitalization policy in effect as of the beginning of the year

Question 25

What are the requirements for the de minimus rule?

Answer 25

1. The capitalization policy must be written acct. policy for nontax purposes that treats as an expense in FS:
   - property purchases under certain threshold
   - property w/economic life of 12 months or less
2. Max amount allowed for federal tax purposes is $5,000 per asset if written/applicable FS
3. Mas amount is $2,500 per ass if not written/no applicable FS

Question 26

What is the elective safe harbor for routine maintenance?

Answer 26

Taxpayers can expense routine maintenance that the taxpayer reasonably expects to occur more than once during the class life of asset & does not result in betterment

Question 27

What is the safe harbor for qualifying small taxpayers?

Answer 27

Can expense costs related to an eligible building if they do not exceed the lesser of

• 2% of unadjusted basis of building; or
• $10,000

Question 28

What is a qualifying small taxpayer?

Answer 28

A taxpayer w/ average annual gross receipts of $10M or less during 3 preceding tax years

Question 29

What is an eligible building under qualifying small taxpayer safeharbor?

Answer 29

Any building w/unadjusted basis that is not > $1M