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REG > REG: Chapter 7 > Flashcards

REG: Chapter 7 Flashcards

1
Q

Basis

What is included when calculating the basis of property?

A
  • The original cost
  • Expenses paid in order to acquire the property (i.e. title insurance, attorney fees)
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2
Q

Basis

How is the basis calculated when the property is a gift?

A

Is the FMV received is greater than the adjusted basis?
Yes: Donor’s Adjusted Basis
No: FMV at the time of giving

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3
Q

Basis

How is a gain or loss calculated when a gifted property is sold?

A

Gain = Seller’s Price - Donor’s Adjusted Basis
Loss = Seller’s Price - FMV at the Date of Gift

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4
Q

Basis

How is the gift amount subject to tax determined?

A

The amount is the FMV of the gift over the tax exclusion

Example
* The gift = 24,000
* The exclusion = 18,000
* Amount subject to tax is $6,000 (24,000 - 18,000)

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5
Q

Basis

How is the adjusted gift tax calculated?

A
  • The annual exclusion for the gift tax is $18,000 per person
  • The calculation
    [(FMV - Adjusted Basis)/(FMV - Annual Exclusion)] x Gift Tax Paid
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6
Q

Basis

What is an example of the basis calculation for gift property?

A

FMV = $60,000
Adjusted Basis = $20,000
Gift Tax Paid = $8,600

[(60,000 - 20,000)/(60,000 - 18,000)] x $8,600
= (40,000/42,000) x 8,600
= 8,190

Adjusted Basis + Adjusted Gift Tax
$20,000 + $8,000 = $28,190

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7
Q

Basis

What is the basis when property is exchanged for services?

A
  • The basis is the FMV of the property
  • The basis is included in gross income
  • The receipt of the services will be the FMV of the property
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8
Q

Basis

How is the basis calculated when the property is inherited?

A

Basis on Inherited Property
* No alternative Valuation Date: Basis is the FMV at the Time of Death
* Alternative Valuation Date Elected: Basis is the FMV of property 6 months after the date of death

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9
Q

Basis

What is the Uniform Capitalization Rules of Code 263A?

A

Uniform Capitalizaton Rules apply to companies that have an average gross income of $29,000,000 for the past three years
* Large Manufacturers
* Retailers
* Wholesalers of Inventory

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10
Q

Basis

What costs are included under the Uniform Capitalization Rules?

A
  • Direct costs (i.e. engineering costs)
  • Indirect costs related to inventory
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11
Q

Basis

What is the residual method under 1060?

A

The purchase price is allocated based on the FMV of all assets

  • Cash and Cash Equivalents
  • Near-Cash Items (i.e. U.S securities, marketable securities, CD, foreign currencies)
  • Accounts Receivable, Mortgages, Credit Care Receivables
  • Inventory
  • Property held for sale in the ordinary course of business
  • Other assets
  • Sec. 197 Intangibles (Except Goodwill and Going Concern Value)
  • Goodwill and going concern value
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12
Q

Basis

What components reduce the basis of property?

A
  • Depreciation (either allowed or allowable)
  • Return of Capital
  • Any excess amount of return to capital if the basis has been reduced to zero
  • Loss of Inventory
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13
Q

Basis

How is the basis calculated when personal property is converted for business use?

A

The depreciation is lesser than the
* FMV of the property at conversion date, or
* Adjusted basis of conversion

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14
Q

Basis

What the calculation to determine the adjusted basis of property at conversion?

A

Beginning Basis + Permanent Improvements - Casualty Loss Deduction

Any casualty claims will be allowed only if they are in a federally declared disaster area

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15
Q

Basis

What is depreciable basis?

A
  • Depreciable basis is transferred basis adjusted for gift taxes paid
  • When converted from personal to business use, it is the lesser of FMV on the date of conversion or the transferor’s adjusted basis
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16
Q

Basis

How is a loan expense calculated under Sec. 162?

A

The calcuation is Interest Expense + Other Fees

The interest expense includes
* The interest for the current year
* Any prepayment penalties
* The amortization of the origination fee (The total amortization fee / # of years for the loan)

Other fees are amortized based on the # of years for the loan
* Mortgage Commission
* Abstract Fees
* Recording Fees

17
Q

Basis

What is a wash sale?

A
  • The same securities are purchase 30 days after being sold at a loss
  • No loss is recognized from the first sale
  • If the same shares are later sold at a gain, then the gain would be (Sales Price - Repurchase cost - Loss from first sale)
18
Q

Basis

How is a wash sale calculated when all of the shares are repurchased?

A
  • No loss is recognized repurchased
  • If the taxpayer later sells the repurchased shares, the gain is calculated as

Sale price from 2nd purchase
(Cost of shares sold)
(Basis due to loss)

19
Q

Basis

How is a wash sale calculated when fewer shares are repurchased?

A
  • Taxpayer recognizes a loss for the portion of the shares not repurchased
  • If the taxpayer later sells the repurchased shares, the gain is calculated as

Sale price from 2nd purchase
(Cost of shares sold)
(Basis adjustment due to loss)

20
Q

Depreciation and Amortization

How is the depreciable basis calculated for the MACRS Computation?

A

Original Cost
(Sec. 179 Deduction)

21
Q

Depreciation and Amortization

What is the MACRS depreciation for property

A
  • Straight Line Depreciation is used
  • Salvage Value is ignored
  • Land is not included in the basis of depreciation
  • Residential: 27 1/2 Years, mid-month convention
  • Non-Residential: 39 Years
  • Mid-month convention is used is used in the 1st and final years
22
Q

Depreciation and Amortization

When is the 150% declining balance method used in MACRS depreciation?

A

15 and 20-year property

23
Q

Depreciation and Amortization

What is the mid-year convention?

A
  • Mid-year convention is used for personal property
  • Asset is treated as if it was placed into service at the midpoint of the year instead of when it was actually placed into service
24
Q

Depreciation and Amortization

What is the mid-month convention?

A
  • The mid-month convention is used for real property
  • Asset is treated as if it was placed into service at the midpoint of the month instead of the month when it was actually placed into service
25
Q

Depreciation and Amortization

What is the mid-quarter convention?

A
  • The mid-quarter convention must be used when more than 40% of tangible property is placed into service during the last 3 months of the tax year
  • The 1st year depreciation is calculated by multiplying the full amount by the percentages when it was placed into service
    1st Quarter: 87.5%
    2nd Quarter: 62.5%
    3rd Quarter: 37.5%
    4th Quarter: 12.5%
26
Q

Depreciation and Amortization

When is the Half-Year Convention Used?

A

The assets are combined

27
Q

Depreciation and Amortization

When is the 200% declining balance method used in MACRS depreciation?

A

Recovery periods of 3, 5, 7 and 10 Years

28
Q

Depreciation and Amortization

What is the recovery for personal property

A

Using 200% Declining Balance Depreciation
* Special Tools: 3 years
* Computers, office machinery, cars, trucks, equipment: 5 years
* Most machinery, office furniture and equipment and other property: 7 years
* Water Vessels: 10 years

Using 150% Declining Balance Depreciation
* Data Communication Plants: 15 years
* Utilities (i.e. municipal sewers): 20 years

29
Q

Depreciation and Amortization

How is depreciation calculated when no class life is assigned to an asset?

A
  • Straight-line depreciation method
  • No salvage Value
  • Life of the asset is 12 years
30
Q

Depreciation and Amortization

What is bonus depreciation?

A
  • This is a first-year bonus of 80% of qualified property that is acquired and in service before January 1, 2024
  • The bonus depreciation applies to the taxpayer’s first use
  • Property used for utility companies or real property trade or business does not qualify
  • Certain properties with longer production periods will have 100% bonus depreciation if placed between 9/28/17 - 12/31/23
31
Q

Depreciation and Amortization

What is the bonus depreciation phase-out?

A
  • Property Placed Between
    12/31/23 - 1/1/25: 60%
    12/31/24 - 1/1/26: 40%
    12/31/25 - 1/1/27: 20%
  • If the properties have longer production periods, the dates are increased by 1 year (i.e. 12/31/24 - 1/1/26)
32
Q

Depreciation and Amortization

What is the bonus depreciation phase-out if the properties have longer production periods?

A
  • The dates are increased by 1 year
  • Property Placed Between
    12/31/24 - 1/1/26: 60%
    12/31/25 - 1/1/27: 40%
    12/31/28 - 1/1/29: 20%
33
Q

Depreciation and Amortization

What is the MACRS depreciation for intangible assets?

A

The amortization period of intangible assets is 180 months or 15 years

Assets included as intangible
* Convenants not to compete
* Customer lists
* Trademarks
* Trade names
* Goodwill

34
Q

Depreciation and Amortization

How is the Sec. 179 deduction calculated:

A

The Sec. 179 Deduction can be greater than the taxable income

Maximum Deduction: 1,220,000
Phase-Out Threshold: $3,050,000
No deduction if purchase cost is $4.27 million

Maximum deduction - (Purchase Price - Phase Out)

The basis does not include any asset that was previously held by the taxpayer (i.e. money received for a trade-in)

REG (15 decks)

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