R3 Flashcards
Basis of Property and Holding Period
cost + all amounts to prepare the property for use (shipping cost, sales taxes and testing costs). Types of property include:
a.Real Property (land and buildings attached)
b.Personal Property ( all other )
Holding period begins after acquisition
Adjusted Basis referred also as tax basis
Basis - Accumulated Depreciation
Basis Spreading
Receives nontaxable stock dividend requires to spread basis of original shares over original and new shares. Results in the same total basis but lower basis per share.
Gifted Property Basis (GAIN/LOSS)
Holding Period: assumes donor’s holding period unless Lower FMV< Sales Price (loss) starts as of the date of the gift
Nontaxable event, basis = NBV, retains the cost basis of original donor. Basis increases by gift tax paid on net appreciation of the value. Gain/Losses calculated using Rollover Cost Basis.
Exception:
If FMV is less than Donor’s rollover basis, basis for the donee depends on future selling price.
Sale Price < Lower FMV = Loss (basis=lower FMV)
Sale Prices < Rollover cost basis; > Lower FMV = No Loss/Gain recognized & = selling price (middle value)
Gifted Property Basis for Depreciation
Lesser of:
a. Donor’s adjusted basis at the date of gift
b. The FMV at the date of gift
Accumulated depreciation will reduce basis before calculating gain/loss on sale.
Inherited Property Basis & Holding Period (taxable event)
GR: Takes as its basis the step-up or step-down to the FMV at the date of the decedent’s death.
If Alternate Valuation Date is used, then asset is valued using FMV at the earlier of: distribution date or 6 month after death.
Holding Period is automatically considered long-term property
Property Capitalization & Expenses
Holding period: as of the date of completion
Improvements = capitalize
All property except for inventory = capitalize
Amounts paid or incurred for acquiring, creating, or enhancing intangible property MUST be capitalize
Single Unit Property
Single Unit of Property: all components that are interdependent. A component is interdependent if placing in service of one component is dependent on the placing of other components.
Examples: building structure to the extent of building and its structural components.
Building Systems are considered separately from building structure, i.e. plumbing, AC system, fire protection, alarm, elevators, etc…
Property De Minimis Rule
Financial Reporting Vs. Tax Reporting when to recognize capitalize expenditures
annual de minimis annual expense regarding expenditures to acquire or produce property is capitalization policies is in effect as of the beginning of the year states the following:
Property purchases under a certain $ amount
Property with an economic useful life of 12 month or less (expense)
Qualifications of Property Expense Routine Maintenance
Small Taxpayer
Small Taxpayers: is a taxpayer with average annual gross receipts of $10 million, or less during the preceding 3 tax years.
b. adjusted property basis is < $1 million
A small taxpayer is allowed to expense routine maintenance that are expected to occur more than once during the class life of the assets if:
The lesser of :
expenditures do not exceed 2% of unadjusted basis of building or $10,000
Calculating Property Gain/Loss at Disposition
Assets not in the ordinary course of business
Amount Realized
Less: Adjusted Basis of Asset Sold
Equal = Gain/ Loss
*All realized gains and losses are recognized (reported in tax return) unless “HIDE” or “WRaP” applies
Property Amount Realized (Gain/Loss Calculation)
Money received (boot)
Cancellation of Debt (COD) (boot)
FMV of property
Less Selling expenses
Adjusted Basis of Asset Sold
Purchase = Cost Gift = Rollover Cost Inherited = Step-up FMV
Gain on Property Disposition (not in the ordinary course of business)
HIDE IT (nemonic) Homeowner's exclusion Involuntary conversion Divorce property settlement Exchange if like-kind (business assets) Installment sale Treasury capital and stock
- A gain is not taxable if taxpayer HIDE IT, recognition is deferred. Substituting tp’s basis given up for basis of property acquired
** Gain to the extent of boot (cash or COD) is taxable
Loss on Property Disposition (not in the ordinary course of business)
Wash sale losses
Related party losses
And
Personal losses
Deferred Gain Recognition
Homeowner’s Exclusion (HIDE IT)
To qualify for Full Gain Exclusion:
a. Must have owned and used the property as a principal residence for 2 years or more during a 5 year period ending on the sale or exchange asset.
b. Period do not have to be continuous, a gain may be reduced because a nonqualified use (rental of property)
c. Either spouse of MFJ return must meet ownership status and both must meet the use requirement
If both spouses don’t qualify for the full exclusion one spouse is still eligible for $250,000 exclusion for MFJ
Amount of Exclusion:
$500,000 MFJ, Widower
$250,000 MFS, Single, HH
Gain Exclusion for Nonqualified use of property
The portion of the gain attributed to the nonqualified use is not eligible for exclusion.
Hardship Provision (Partial Exclusion)
Sale due to change in place of employment, health and unforeseen circumstances, and the exclusion has been claimed in the last 2 years.
New place must be at least 50 miles farther from the residence sold to the previous place of employment
Involuntary Conversion (GAIN EXCLUSION) (Nontaxable Event) Destruction, Theft, Condemnation of Property
Proceeds > Cost of Replacement = Gain
Realized Gain-Excess of Cost of Replacement = Boot (RECOGNIZED)
Basis of Replacement = Cost - Gain not recognized
Loss is recognized immediately, Basis = replacement cost
a. Gain excluded if full amount of received proceeds are reinvested. If partially reinvested, then gain is recognized to the extent of the amount not reinvested.
b. No Gain recognized when basis of reinvested property = basis of old asset
c. Personal Property Reinvestment must occur within 2 years after close of taxable year of the gain was realized.
Principal residences for federally declared disaster area is 4 years.
d. Business property reinvestment 3 years from taxable year end.
Divorce Settlement (HIDE IT) Property (Gain Exclusion) Nontaxable event
Recipient property basis = carryover basis of transferor’s
Nonrecognition of gain applies even if property is subject to liabilities greater than adjusted basis
Exchange of Like-Kind Business/Assets;
Timing Requirements (GAIN Exclusion) (applies for trade or business)
Like-Kind Property FMV of Def. Def.
Basis(boot received) = Like-Kind Prop. - Gain + Losses
Losses NOT RECOGNIZED
Real property exchanged for real property
Personal property exchanged for personal property with same personal use.
Identify replacement prop. within 45 days of giving up, like-kind property must be received earlier of 180 days or due date of taxpayer’s income tax return.
Gain only recognized to the extent of boot when received, otherwise is realized gain.
Installment Sales
Deferred Gain, revenue reported when cash pmts received.
Taxable income = annual cash collections x gross profit %
Treasury and Capital Stock ( GAIN EXCLUSION)
Gains are exempt for and losses are disallowed for:
- sales of stock by corporation
- repurchase of stock by corporation
- reissue of stock
Wash Sale Loss (LOSS NONDEDUCTIBLE)
Property Disposition
security sold for a loss and then repurchase within 30 days before or after the sale date.
60 days total window
Repurchased Security (LOSS NONDEDUCTIBLE) Property Disposition
Repurchased security = Purchase Price + Disallowed Loss (wash sale)
Wash Sale Resulting in a Gain
Property Disposition
Security sold resulting in a gain and repurchased within 30 days , MUST pay capital gain tax and use the new purchase price as the basis.
Related Party Transaction (LOSS NONDEDUCTIBLE)
Property Disposition
Sales are not arm’s-length, therefore, the loss is generally disallowed.
Personal Loss (LOSS NONDEDUCTIBLE) Property Disposition
No deduction is allowed. An itemized deduction may be available.
Amount Realized
- Adjusted Basis of Asset Sold
= Gain or Loss
Includes:
- Cash received
- assumption of debt (mortgage, etc.)
- property received at FMV
- services received at FMV
- Minus, any selling expenses
Capital Gains Rules - Individual Taxpayer
Property Disposition
Long Term: More than a year; Tax rate 20% is the maximum, use 15% if taxpayer is within 25,28, 33 or 35%
Short Term: One year or Less, treated as ordinary income
Real property not subject to Section 1250 gain from depreciation, not treated as ordinary income, tax gain at 25% for taxpayers NOT in the [10 or 15% income]
Capital Loss Deduction Carryover Rules - Individual Taxpayer
Limitations
Bad Debt & Worthless Stock and Securities
Widower, HHS, MFJ = Deduct $3000 Capital Loss
Single, MFS = Deduct $1500 Capital Loss from
(ordinary income, passive income, portfolio income)
Capital Losses limited to taxable income. (can’t exceed)
Excess, carry forward an unlimited time until exhausted.
Bad Debt treated as short-term capital loss in the year it becomes worthless. Treated as sold or exchanged in the last year
The cost or (basis) of worthless stocks or securities is treated as capital loss.
Short-Term Capital Gain and Losses - Individual Taxpayer
Short-term losses first offset short-term capital gains taxable at the ordinary income rate, any excess offset long-term capital gain from 28%, long-term gains 25%
Offset goes from highest tax rate % to lowest.
Corporation Capital Gain and Losses Treatment
C Corporation ONLY
Net of short-term/long-term capital gains and losses are added to ordinary income and taxed at regular rate.
Net Capital Losses (Long/Short Term) no deduction from ordinary income, and carried back 3 years and forward 5 years. Losses deducted from capital or Section 231 Gains.
Net Capital Gains are treated as assets used in the business
Section 1231 - Sale Depreciable Personal & Real Property
Long-Term Assets
Capital Gains and Losses Treatment
(C Corporations Only)
Long-term Capital Gains (tax rate of 0, 15%, or 20% from sales, exchanges, or involuntary conversion of noncapital assets.
Note: All C corporation capital gains are taxed at ordinary income tax rates
“Capital Loss” is treated as ordinary loss, excess of loss over gain can’t be deducted except for ($3000, or $1500 if MFS).
Section 231 net loss is deducted in full without consideration of capital gains.
Section 1245 - Sale Machinery and Equipment
used in a trade or business
Gains ONLY
Personal business property- Recapture of Acc. Dep.
- The lesser of gain recognized or accumulated depreciation is recaptured as ordinary income
- Any remaining gain is Section 1231 gain
Section 1250 - Real Business Property
Assets placed in services pre-1987 accelerated method
Gains ONLY
Sale of real property gain is recognized by recapturing only the portion of the depreciation taken on real property that is in excess of straight-line.
Section 291 Depreciation Recapture for Corporations
Real Property used in a trade or business
Total amount of recapture on real property is ordinary income equal to 20% of the lesser of the recognized gain or the accumulated straight-line depreciation.
Gain in excess of the amount recognized as ordinary income is allowed capital gain treatment under Section 1231.
Section 291 Depreciation Recapture for Individuals
Gain characterized with Section 1231 gains and netted with other 1231 gains and losses.
In a sale of a Section 1250 at a gain and included the gain with 1231 gains, an amount equal to the lesser of:
- recognized gain on the sale of 1250 asset, or
- the straight-line accumulated depreciation on the 1250 asset taxed at 25%
Section 291 Depreciation Recapture for Individuals
Gain characterized with Section 1231 gains and netted with other 1231 gains and losses.
In a sale of a Section 1250 at a gain and included the gain with 1231 gains, an amount equal to the lesser of:
- recognized gain on the sale of 1250 asset, or
- the straight-line accumulated depreciation on the 1250 asset taxed at 20%
Installment Sale - Reporting Gains ONLY
Calculation
Installment sale is not available for stock or securities.
- Gross Profit = Sale - Cost of Good Sold
- Gross Profit % = Gross Profit / Sales Price
- Earned Rev (Tax Inc.) = Gross Profit % x Cash Collections
Seller charges interest on an installment sale, reported separately
Installment sale treatment resulting in gain is allowed between related individuals.
Related Party Transaction - TREAT AS A GIFT
Rule 1: Stock owned directly or indirectly by a corp, partnership, estate or trust is treated as owned proportionately by its shareholders, partners, beneficiaries.
Rule 2: Individual is considered as owning stock owned by family members listed in Section 267 (Add all interest for family members related in lineal descent)
Rule 3: Stock owned by a person under Rule 1 is treated as actually owned by that person for Rules 1 & 2
Related Party Transactions - Capital Gains & Capital Loss
Basis of the 2nd buying relative party
Capital gains are subject to tax on all sales of non-depreciable property (i.e Land) b/w related parties.
No Gain recognized for :
- Sales b/w husband & wife where basis remains the same
- An individual or a 50% plus controlled Corp. or partnership.
- Capital Loss is disallowed
Basis depends on whether the resale price is higher, lower, or between the first’s relative basis and the lower selling price to the second relative
Related Party Recognition of Gain and Loss
SAME AS GIFT GAIN/LOSS Recognition
Gain is recognized when Sales Price > 1st Relative’s costs basis
Loss is recognized when Sales Price < 1st Relative’s Cost basis
Below-Market Loans and Imputed Interest to Related Parties
Individual who makes a below-market loan must report the foregone interest as interest income. It may be deductible, unless is personal interest.
For the exception of (De Minimis):
Gift Loans between individuals the imputed interest don’t apply on any day on which the aggregate outstanding loan amount is less than $10,000.
Compensation-Related & Corporate-Shareholder loans imputed interest shall not exceed the aggregate outstanding loan amount of $10,000
Cost Recovery - Depreciation
Property other than Real Property
Mainly focus on 5-yr 200% class - asset dep. range 4-10 yrs automobiles, trucks, computers, & copiers and
7-yr 200% class - asset dep. range 10-16 yrs includes furniture, fixtures, equipments,
MACRS Depreciation Rules
Real Property
No salvage value
Deduct land costs
Residential Rental Property: 27.5 years- Straight-Line
Nonresidential Real Property: 39 years-Straight-Line
For Machinery and Equipment:
Half-Year Convention
Mid-Quarter Convention
For Real Estate Properties:
Mid-Month Convention
H-Y Conv: property placed or disposed at mid year, mid yr depreciation calculation applies
M-Q Conv: If more than 40% depreciable personal property is placed in the last qtr, then mid quarter must be used
M-M Conv: 1/2 is taken the month the property was placed in service and 1/2 when disposed.
Bonus Depreciation
extended until 2019
A taxpayer can expense and additional percentage of qualified property placed into service in the current yr.
Qualified Property:
- Recovery period of 20 yrs or less & the original tp only
- Bonus depreciation is 50% of 2015-2017, 40% in 2018, & 30% in 2019
- Additional $8000 in the 1st year of depreciation
Cost Depletion Vs. Percentage Depletion
GAAP NON-GAAP
Depletion used for natural resources
Cost Depletion = Remaining basis of property / # of units
Percentage-Depletion = % x Gross Income
*Deduction limited to 50% of taxable income (5-22% range)
Amortization- Intangible, Business Start-Up Costs
Intangibles may be amortized with straight-line over a 15 yr period
Intangible with “indefinite lives” are subject only to impairment tests
Business organization and start-up permitted to take $5000* to be expensed, the remainder is amortized over 180 months.
**The $5000 expense is reduced when expenses exceeds $50,000 for each item
Research expenses amortized over 60-months.
Cost Recovery Adjustments Considerations
“After-Tax Cash Flow Calculation”
Since amortization, depreciation and depletion represent a declining economic value of an asset, it must be added back to net income for the calculation of
After-Tax Cash Flow =
Earnings after tax + Amortization+Depletion+Depreciation
Basis of Like-Kind Property when Boot is Paid
New Basis = NBV of property given up + Boot Paid
** Liabilities assumed during exchange are considered boot paid
Basis of Like-Kind Property when Boot is Received
New Basis =NBV of property given up + Gain Recognized - Boot Received
Basis of Like-Kind Property when Realized Loss
NBV > FMV = Loss Realized NOT Recognized
New Basis = FMV of New Property + Loss Deferred -Boot Received
Capital Assets Definition
Property (real or personal) held by the taxpayer for investment.
Property used in the ordinary course of business is excluded
Long-Term Capital Gains and Losses - Individual Taxpayer
If long-term losses must:
1st- Offset any long-term gains from the 28% , then those gains in 25% group, then from the 15 or 20% rate group
Section 1244
Treated as ordinary loss or gain
Section 179-Expenses
A taxpayer is allowed to deduct a fix amount of depreciable assets during a taxable year that exceeds 2,010,000 in 2016
Requirements:
1- Limit of 500,000 for new or used property (not to increase loss or if the deduction will create a loss)
2- Must be acquired from an unrelated party during the year of 2016 and purchased for the active use of the taxpayer’s trade or business.
3- Limits the cost of SUV that may be expensed to $25000
