Unit 5

Question 1

Purchase Basis

Answer 1

1. Cost plus expenses of sale, such as sales tax and commissions.
2. For assets used in a business, the original or cost basis is the full “in-service” cost.
3. In-service cost may include freight, sales tax, installation charges, and other related expenses.

Question 2

Inherited Basis

Answer 2

Fair Market Value (FMV) on the date of death or alternate valuation date.

Question 3

Personal Use Conversion (basis)

Answer 3

Take the lesser value between the cost and the Fair Market Value (FMV) at the time of conversion.

Question 4

Gifts Basis Rule

Answer 4

• If the Fair Market Value (FMV) at the time of the gift is greater than the donor’s basis, the donee adopts the donor’s basis.
• The donee also adopts the donor’s holding period.

Question 5

Amortization is:

Answer 5

Amortization is the process of spreading out the cost of intangible assets over time. For example, start-up costs, organizational expenses, and certain other intangible assets are amortized over a 15-year period. This also applies to assets like goodwill, copyrights, patents, trademarks, trade names, customer lists, and certain types of software acquired when buying a business.

Question 6

What are some things you would amortize

Answer 6

start-up costs, organizational expenses, and certain other intangible assets, goodwill, copyrights, patents, trademarks, trade names, customer lists, and certain types of software acquired when buying a business.

Question 7

Accretion

Answer 7

the increase in the value of a bond that was bought at a discount compared to its par value.

Question 8

When you buy a discounted bond

Answer 8

its eventual maturity value will be more than what you paid for it (accretion). Even though you don’t receive any payments until maturity, the growth in value is still taxable each year. This taxable growth increases your basis, or the amount you’ve invested, in the bond. An example of this is zero coupon bonds or stripped U.S. Treasury securities (STRIPS).

Question 9

Nontaxable transactions

Answer 9

When partners or shareholders contribute property in exchange for ownership in a partnership or corporation (where they own at least 80%), it’s considered a nontaxable transaction. In such cases, the person receiving the ownership interest assumes the same basis in the property as the person who made the contribution.

Question 10

Nontaxable Transactions for Property Contributions

Answer 10

When partners or shareholders swap property for ownership in a partnership or corporation (where they own at least 80%), it’s not taxed. The person who gets the ownership shares takes on the same value as the person who gave the property.

Question 11

When partners or shareholders swap property for ownership in a partnership or corporation (where they own at least 80%), is it taxed?

Answer 11

No

Question 12

A full step-up only applies to property transferred from a

Answer 12

taxable estate

Question 13

The step-up value is based on

Answer 13

the property’s fair market value at the date of death or an alternate valuation date.

Question 14

Step-Up Basis for Property from Taxable Estates

Answer 14

A FULL step-up applies ONLY to property from a TAXABLE ESTATE. It doesn’t apply to property from lifetime gifts or inherited through other means. The step-up value is based on the property’s fair market value at the date of death or an alternate valuation date.

Question 15

When property is jointly owned by a deceased person and another what property is included in the deceased’s estate?

Answer 15

The full value is typically included in the deceased’s estate unless proven otherwise by the estate administrator.

Question 16

In community property states, what happens to the basis of property acquired jointly by spouses if at least half its value is included in the estate of the deceased spouse?

Answer 16

The surviving spouse receives a full step-up in basis on the entire property.