REG: Chapter 7 Flashcards
Basis
What is included when calculating the basis of property?
- The original cost
- Expenses paid in order to acquire the property (i.e. title insurance, attorney fees)
Basis
How is the basis calculated when the property is a gift?
Is the FMV received is greater than the adjusted basis?
Yes: Donor’s Adjusted Basis
No: FMV at the time of giving
Basis
How is a gain or loss calculated when a gifted property is sold?
Gain = Seller’s Price - Donor’s Adjusted Basis
Loss = Seller’s Price - FMV at the Date of Gift
Basis
How is the gift amount subject to tax determined?
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)
Basis
How is the adjusted gift tax calculated?
- The annual exclusion for the gift tax is $18,000 per person
- The calculation
[(FMV - Adjusted Basis)/(FMV - Annual Exclusion)] x Gift Tax Paid
Basis
What is an example of the basis calculation for gift property?
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
Basis
What is the basis when property is exchanged for services?
- 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
Basis
How is the basis calculated when the property is inherited?
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
Basis
What is the Uniform Capitalization Rules of Code 263A?
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
Basis
What costs are included under the Uniform Capitalization Rules?
- Direct costs (i.e. engineering costs)
- Indirect costs related to inventory
Basis
What is the residual method under 1060?
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
Basis
What components reduce the basis of property?
- 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
Basis
How is the basis calculated when personal property is converted for business use?
The depreciation is lesser than the
* FMV of the property at conversion date, or
* Adjusted basis of conversion
Basis
What the calculation to determine the adjusted basis of property at conversion?
Beginning Basis + Permanent Improvements - Casualty Loss Deduction
Any casualty claims will be allowed only if they are in a federally declared disaster area
Basis
What is depreciable basis?
- 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
Basis
How is a loan expense calculated under Sec. 162?
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
Basis
What is a wash sale?
- 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)
Basis
How is a wash sale calculated when all of the shares are repurchased?
- 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)
Basis
How is a wash sale calculated when fewer shares are repurchased?
- 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)
Depreciation and Amortization
How is the depreciable basis calculated for the MACRS Computation?
Original Cost
(Sec. 179 Deduction)
Depreciation and Amortization
What is the MACRS depreciation for property
- 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
Depreciation and Amortization
When is the 150% declining balance method used in MACRS depreciation?
15 and 20-year property
Depreciation and Amortization
What is the mid-year convention?
- 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
Depreciation and Amortization
What is the mid-month convention?
- 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
Depreciation and Amortization
What is the mid-quarter convention?
- 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%
Depreciation and Amortization
When is the Half-Year Convention Used?
The assets are combined
Depreciation and Amortization
When is the 200% declining balance method used in MACRS depreciation?
Recovery periods of 3, 5, 7 and 10 Years
Depreciation and Amortization
What is the recovery for personal property
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
Depreciation and Amortization
How is depreciation calculated when no class life is assigned to an asset?
- Straight-line depreciation method
- No salvage Value
- Life of the asset is 12 years
Depreciation and Amortization
What is bonus depreciation?
- 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
Depreciation and Amortization
What is the bonus depreciation phase-out?
- 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)
Depreciation and Amortization
What is the bonus depreciation phase-out if the properties have longer production periods?
- 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%
Depreciation and Amortization
What is the MACRS depreciation for intangible assets?
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
Depreciation and Amortization
How is the Sec. 179 deduction calculated:
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)
