R2, M1-M3 Flashcards
What are the two types of property?
- real property
- personal property
What is included in real property?
land and anything that is permanently affixed to it (buildings)
What is included in personal property?
anything but real property
Are shipping costs and installation fees included in the basis of a purchased asset?
Yes, all costs to get the item placed in service are included in basis.
When does the holding period of purchased property begin?
the date that the property is purchased
Short-term capital gains are taxed at what rate?
the regular ordinary income tax rate
What is your basis in an asset when the sale/exchange is not included in taxable income?
NBV (carryover basis), not FMV!
What is the basis of your shares in a company’s stock in the case of a stock split or dividend?
Your total basis remains the same, but it is divided amongst the larger number of shares.
What is the holding period of shares acquired from a stock split or dividend?
same holding period as when you purchased the original shares
What amount of taxable income is recognized for a stock split? A stock dividend?
None in either case.
Does the donee pay gift tax on a gift received?
Never.
Does the donor pay gift tax on a gift given?
Only if the gift is large and exceeds certain thresholds.
What is the general rule for the donee’s basis in a gifted property?
It is the carryover basis (NBV).
What is the general rule for the holding period for a donee of gifted property?
Add on the holding period of the prior owner (tacks)
When does the exception to the general rule for donee’s basis in gifted property kick in?
when the FMV at the date of the gift is less than the NBV
When FMV is below NBV and the exception kicks in for gifted property, how do you determine the basis?
The basis is the middle value between the (1) NBV, (2) Sales Price, and (3) FMV.
What is the holding period of a gifted property if basis is considered to be FMV?
The holding period starts when the property was gifted to you.
The basis for depreciation (of gifted property) is the lesser of what two values?
What is the general idea here?
- adjusted basis as of the date of the gift
- FMV at date of gift
The IRS wants you to take less depreciation deductions.
What is the holding period of gifted property if the sales price is determined to the basis?
It does not matter, because no gain or loss is recognized.
What is the general rule for the basis of inherited property?
Basis = FMV as of the date of death
Do you pay tax on the difference between basis and FMV for inherited property?
No.
If alternative valuation date is elected, what is the basis of inherited property?
The FMV on the earlier of:
- distribution date of the asset
- 6 months after death
What is the holding period for inherited property?
Always considered long-term property, regardless of the decedent’s holding period.
What is the general rule for determining whether you should expense or capitalize purchased property for a business?
Capitalize if the useful life is greater than one year.
Are improvements to property expensed or capitalized?
capitalized
Are repairs and maintenance to property expensed or capitalized?
expensed
Incidental materials and supplies can be expensed if one of two criteria are met. What are they?
- costs $200 or less, or
- consumed in 1 year or less
The amount that can be deducted under the de minimis safe harbor rule depends on what criteria?
whether the taxpayer has an applicable financial statement (AFS)
What is an applicable financial statement?
audited financial statements
A taxpayer with an AFS can deduct items that cost up to $_____. A taxpayer without an AFS can deduct items that cost up to $_____.
With AFS: $5,000
Without AFS: $2,500
How does the de minimis rule work for property if you purchase something that costs $6,000 per unit (assuming that the taxpayer has an AFS)?
This cannot be deducted at ALL because it is over the $5,000 limit. There is no partial deduction.
What impact does a written accounting policy that allows deductions for items costing up to $7,500 have on the de minimis safe harbor?
It does not impact anything. They simply do things different for GAAP and tax.
Regardless of the de minimis safe harbor, you can still deduct something if the cost iso over the de minimis amount if what criteria is met?
The useful life is less than 1 year.
If property is converted from personal use to business use, what is the tax basis for depreciation? What do you notice about this rule?
The lesser of:
- adjusted basis on date of conversion, including any improvements made, or
- FMV on the date of conversion
This is the same as the rule for depreciation basis for gifted property (IRS wants you to have less depreciation deductions).
What is the basis of property (for purposes of calculating gain or loss) that is converted from personal to business use, if there is a gain?
adjusted basis at the date of sale
What is the basis of property (for purposes of calculating gain or loss) that is converted from personal to business use, if there is a loss?
Lesser of: FMV at Conversion or Adjusted Cost Basis
Less: Depreciation Deductions
(same basis as basis for depreciation)
What is a Section 197 intangible asset?
intangible assets acquired in connection with the purchase of an existing business
What is the tax treatment for Section 197 intangible assets?
amortized evenly over a period of fifteen years (180 months), starting from the month of acquisition
Research and experimental costs incurred leading up to obtaining a patent are treated how for tax purposes?
capitalized and amortized
What is the tax treatment of unamortized R&D costs once a patent is obtained?
add to the baiss of the patent intangible asset
What is the initial basis of directly purchased (not in a business acquisition) patents and copyrights?
purchase price
What is the basis of self-created patents and copyrights?
costs of development, legal costs, and government fees
Is the value of the patent inventor’s time included in basis of self-created patents?
No.
What is the tax treatment of loan closing costs?
capitalized and amortized
What is the tax treatement of organizational and start-up costs?
Allowed to immediately expense the $5,000 (reduced $-for-$ by any amounts over $50K), and amortize the remaining costs over 180 months.
What are business organizational costs? What are examples of costs?
costs of forming and organizing a business (legal and accounting fees, filing fees, and cost of organizational meetings)
What costs are not qualifying organizational costs?
Costs associated with adding equity to the business (issuing and selling stock, transferring assets).
What are business start-up costs?
costs to investigate and create the business before the business begins operations
From what date do you begin amortizing organizational and start-up costs?
The date that business begins operations.
What are some examples of start-up costs?
- investigating potential markets
- marketing and advertising
- costs to secure distributors, suppliers, customers
- hiring and training cost
What is the basic equation to calculate gain or loss on a sale or exchange?
FMV of Amounts Realized - Adjusted Basis of Assets Given Up
How is debt relief factored into the gain or loss equation?
Debt relief is included in the amount realized.
The classification of a gain or loss as capital or ordinary depends on what?
how the asset was used by the taxpayer
Capital assets include assets that are held or used for what two things?
- investment
- personal use
Noncapital assets include what three groups of items?
- inventory (held for sale in ordinary course of business)
- accounts receivable
- used in taxpayer’s trade or business (1231 assets)
What is the maximum deductibility of an excess net capital loss for an individual?
$3,000 maximum deduction
What are the CF/CB provisions for a net capital loss (individual)?
CF indefinitely
How do you carryforward a $10,000 net long-term capital loss into the Year 2, if in Year 2 you have a net long-term capital gain of $2,000?
(1) You can offset the entire long-term capital gain of $2,000.
(2) Then, you can take an additional $3,000 LTCL deduction.
(3) This leaves with you $5,000 of CF.
What is the tax rate of long-term gains on collectibles?
28%
What is the tax rate of gains on sale of qualified small business stock?
28%
What is QSBS?
original issue C corporation stock that is held more than 5 years
To be considered QSBS, the C corporations stock basis in its assets can be no more than ___.
$50M
The gain exclusion for QSBS is the greater of ____.
$10M, or
10 * Taxpayer’s Basis in Stock
What is the tax treatement of excess gains that are not excluded?
Taxed at 28%
What is a worthless stock or security?
stock whose price has totally gone to 0 (not 0.01, 0!)
What is the tax treatment of a worthless stock?
Capital loss, as if sold on the last day of the taxable year in which they became worthless.
What is the first step in the netting process for capital gains and losses?
Combine within each of the three tax rate groups:
- ST Ordinary Tax Rate
- LT 28% Rate
- LT 0/15/20% Group
What is the second step in the netting process for capital gains and losses?
Offset the ST and LT 28% tax rate groups first.
Then combine that value with the 0/15/20% tax rate group.
What is the tax treatement of short-term capital gains for a C-corporation? What about long-term capital gains?
There is no distinction between these two for a C-corp, they are both taxed at the Corp’s tax rate with no preferential rates.
What is the tax treatement of short-term capital losses for a C-corporation? What about long-term capital losses?
They can at most be offset against capital gains.
Any excess is carried back 3 years, then CF 5 years.
What mnemonic tells you the three types of non-deductible losses?
WRaP
What does WRaP stand for?
Wash Sales
Related Party Transactions
and
Personal Losses
When does a wash sale occur?
If you sell a security for a loss and repurchase identical securities anywhere in the 60-day window around (+- 30 days) the sale date.
How does a wash sale impact the basis of the repurchased securities?
The basis of the repurchased securities is the purchase price + the disallowed wash sale loss.
You have two shares of stock. One is acquired in January and the other in March. If you sell one share in April, which share are you assumed to have sold?
The January share.
Who are included within “related parties”?
anyone in a close familial relationship
Does the NBV of an asset stay constant if you do not claim depreciation on that asset in that year?
No, the NBV still decreases by the depreication amount regardless of whether you claim the depreication deductions on your return.
Over how many years is land depreciated for tax purposes?
Land is never depreciated!
What items are included in the 5-year MACRS class?
Computers, Copiers
Automobiles
Trucks (light)
What items are included in the 7-year MACRS class?
Furniture
Fixtures
Equipment
Machinery
What items are included in the 15-year MACRS class?
qualified improvements to non-residential buildings
How does salvage value impact the MACRS depreciation taken?
It does not!
What does the half-year convention do?
assume that property is placed into service half-way through the year in acquisiton and disposed of half-way through the year of disposition
If personal property is disposed of before the last year, how does this affect your use of the MACRS table?
Take the % in the MACRS table and multiply it by 50% to get the number you will use.
What number do you multiply by the % in the MACRS table, the full basis or remaining basis of the asset?
full basis (as of acquisition date)
When is the mid-quarter convention used?
when more than 40% of personal property is placed in service in the last quarter of the year
How do you pick which MACRS table to use if you have to use the mid-quarter convention?
For that piece of property, check the quarter that it was put into service. Use the table for that quarter.
Real property can be divided into what two categories?
residential and non-residential
Which property has a shorter useful life, residential property or non-residential property?
Residential, because it has more wear and tear.
What is the depreciation method, convention, and life for residential property?
straight-line, mid-month convention, 27.5 years
What is the depreciation method, convention, and life for non-residential property?
straight-line, mid-month convention, 39 years
In what order do you apply the three tax depreciation deductions?
Section 179, then Bonus Depreciation, then MACRS
To qualify for Section 179, the property must be used …
in the active conduct of a trade or business.
Does Section 179 deduction apply to real property?
No, but it can apply to qualified improvements to non-residential property only.
What is the maximum Section 179 deduction for 2024?
$1,220,000
How does the Section 179 deduction phase out?
It phases out $-for-$ for qualifying purchased property exceeding $3,050,000.
The qualified property must be acquired from what type of person to be eligible for the Section 179 deduction?
unrelated party
The Section 179 deduction cannot be used … (2 OR)
- to create a loss, or
- if you already have a net operating loss
Qualified property for bonus depreication must have a recovery period of ___ years or less.
20
Qualified property for bonus depreciation cannot be acquired from …
related parties.
Are inherited property or assets received as a gift eligible for bonus depreciation?
No.
Are assets that are converted from personal use to business use eligible for bonus depreciation?
No.
What is the bonus depreciation % allowed for 2024, 2025, and 2026?
2024: 60%
2025: 40%
2026: 20%
What is the GAAP treatment of intangible assets with definite lives? What about indefinite lives?
Definite: Amortize.
Indefinite: Test for impairment.
Over what time period and convention are domestic research and development expenditures amortized?
5 years, using half-year convention
Over what time period and convention are foreign research and development expenditures amortized?
15 years, using half year convention
Amortization period for purchased intangibles begins the later of what two dates?
(1) date of acquisition, and (2) commencing of business operations
Over what time period are purchased patents and copyrights amortized?
over the remaining life of the patent or copyright
Over what time period are self-created patents and copyrights amortized?
over the life of the patent or copyright
Over what time period are debt issuance costs amortized?
the term of the loan
