R4-A. Flashcards
As of the beginning of Year 3, Wolf, Inc. has a written accounting policy to expense amounts paid for tangible property costing up to $8,000. Wolf does not have an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis rule, how much can Wolf deduct for tax purposes in Year 3?
a.
$4,000
b.
$0
c.
$1,500
d.
$12,000
Choice “b” is correct. The de minimis rule will apply because Wolf does have a written policy to expense certain property as of the beginning of the year. Because they do not have an applicable financial statement, the de minimis rule allows the company to expense items costing up to $500 each. These three items cost $4,000 each, which is in excess of $500 each. Therefore, none of these costs can be expensed under the de minimis rule.
Choice “c” is incorrect. $500 per item is the maximum expense because the company did not have an applicable financial statement. $1,500 would only be correct if the company did not have an applicable financial statement and the cost of each item did not exceed $500.
Choice “a” is incorrect. $4,000 would be the deductible cost per item if the company had an applicable financial statement.
Choice “d” is incorrect. $12,000 is the full amount of the three items purchased.
Davis, Inc. has had an average annual gross receipts of $8.5 million during Years 1 through 3. During Year 4, Davis pays $9,250 for repairs and improvements on a building it owns with an unadjusted basis of $700,000. The costs do not qualify as routine maintenance. Under the safe harbor rules, how much can Davis deduct as repairs and maintenance in Year 4?
a.
$0
b.
$5,000
c.
$9,250
d.
$500
Choice “c” is correct. Davis is a qualifying small taxpayer because the average annual gross receipts during the preceding 3 years are below $10 million. The building is a qualifying building because the unadjusted basis is below $1 million. Therefore, Davis may deduct improvements that do not exceed the lesser of $10,000 or $14,000 (2% of $700,000 unadjusted basis of the building). The improvement of $9,250 is below the $10,000 threshold, so it can be deducted in Year 4. (Note:Because Davis is a qualifying small taxpayer, the amounts will qualify even though they are not considered routine maintenance.)
Choice “a” is incorrect. $0 would be correct if Davis was not a qualifying small taxpayer.
Choice “d” is incorrect. $500 is one of the maximum de minimis amounts for acquisitions and materials and supplies. It does not apply to improvements to a unit of property (UOP).
Choice “b” is incorrect. $5,000 is one of the maximum de minimis amounts for acquisitions and materials and supplies. It does not apply to improvements to a unit of property (UOP).
Davis, Inc. has had an average annual gross receipts of $15 million during Years 1 through 3. During Year 4, Davis pays $9,250 for repairs and improvements on a building it owns with an unadjusted basis of $700,000. The costs do not qualify as routine maintenance. Under the safe harbor rules, how much can Davis deduct as repairs and maintenance in Year 4?
a.
$5,000
b.
$500
c.
$0
d.
$9,250
Choice “c” is correct. Davis is not a qualifying small taxpayer because the average annual gross receipts during the preceding three years are not below $10 million. The building is a qualifying building because the unadjusted basis is below $1 million. But that is not relevant because the taxpayer is not a qualifying small taxpayer. Therefore, the only safe harbor for Davis is the routine small maintenance, and the facts tell us that the improvements do not qualify. Consequently, Davis may not deduct any of these amounts under the safe harbor rules in Year 4. (Note: Because Davis will not qualify under the safe harbor rules, the normal rules will apply. Therefore, the costs must be capitalized if they result in a betterment, adaptation, or restoration of the unit of property [UOP].)
Choice “b” is incorrect. $500 is one of the maximum de minimis amounts for acquisitions and materials and supplies. It does not apply to improvements to a unit of property (UOP).
Choice “a” is incorrect. $5,000 is one of the maximum de minimis amounts for acquisitions and materials and supplies. It does not apply to improvements to a unit of property (UOP).
Choice “d” is incorrect. $9,250 would be correct if the safe harbor rules applied. However, they do not apply per the explanation for choice “c”.
