Unit 7: Basis of Business Assets

Question 1

An assets cost basis also may include amounts paid for the following items:

Answer 1

• Sales or use tax on the purchase
• Freight to obtain the property
• Installation and testing costs
• Excise taxes
• Legal and accounting fees for obtaining property
• Legal fees for defending and perfecting a property’s title
• Revenue stamps
• Recording fees
• Real estate taxes (if assumed by the buyer)
• Settle,emt costs for the purchase of real estate
• The assumption of any liabilities on the property

Question 2

The following settlement fees and closing costs cannot be included in the basis of a property:

Answer 2

• Casualty insurance premiums
• Rent or utility costs related to occupancy of the property before closing the sale
• Any charges for acquiring a loan, such as mortgage insurance premiums, loan assumption fees, cost of a credit report, fees for appraisal reports, fees for refinancing a mortgage, and points
• Points are prepaid interest on a loan and are generally deducted as interest over the life of the loan.

Question 3

If a taxpayer builds property or has assets built, the costs of construction are included in the basis. In addition to the cost of land, these may include other costs, such as;

Answer 3

• Construction labor and materials
• Architect’s fees
• Building permit charges and inspection costs
• Payments to contractors
• Rental of construction equipment
• Employee wages paid for the construction work
• The cost of building supplies and materials used in the construction.

Question 4

Items that reduce a property’s basis include the following:

Answer 4

• Deductions for amortization, depreciation, section 179, and depletion
• Nontaxable corporate distributions
• Exclusion of subsidies for energy conservation measures
• Residential energy credits, vehicle credits, and the Investment credit
• Certain canceled debt excluded from income
• Amount received for easements

Question 5

“improvement” is classified as a cost involving:

Answer 5

• The betterment of property
• The restoration or property
• The adaptation of a property to a new or different use

Question 6

De Minimis Expensing Safe Harbor Election #1

Answer 6

Businesses with an applicable financial statement (AFS) may use the safe harbor to deduct amounts paid for tangible property up to $5,000 per invoice or item. The business must have a written capitalization policy or procedure that provides for expensing items.

Question 7

De Minimis Expensing Safe Harbor Election #2

Answer 7

If the business does not have qualifying financial statements, it may be permitted to deduct items tat cost up to $2,500 per invoice or per item, provided it conforms with the business accounting procedures. A business that elects to use the safe harbor will need to attach an election statement to the return.

Question 8

Small Taxpayer Safe Harbor for Real Property:

Answer 8

Taxpayers with gross receipts of $10 million or less can expense as repairs, rather than capitalize as improvements, amounts up to the lesser of $10,000 or 20% of the unadjusted basis of building property, as long as the unadjusted basis is $1 million or less.

Taxpayers that qualify to use this safe harbor may currently deduct on Schedule E all the annual expenses for repairs, maintenance, and other costs for a building, including rentals

This is an annual election taxpayers must make on their tax returns. Once made, the election is irrevocable.

Question 9

Routine Maintenace Safe Harbor:

Answer 9

This allows for the deduction of routine maintenance costs that are required more than once within a ten-year period for buildings, or more than once within the applicable class life period for non-building properties.

Question 10

De minimis election for materials and supplies:

Answer 10

In addition to the safe harbor rules listed, materials and supplies may be deducted in the year the item is used or consumed in the business. No statement is required for the election.

Question 11

“Material Supplies” are classified as:

Answer 11

• $200 Property: Any unit of property that costs $200 or less
• 12-Month Property: Any unit of property that has a useful life of 12 months or less
• Acquired ComponentsL This includes things like spare parts, air filters, or other components acquired to maintain or repair a unit of property
• Incidental materials and supplies: Items that are not part of the inventory, used in the business, and generally not tracked
• Consumables: Costs of fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months or less, beginning when used in operations.

Question 12

If an entity has business property that is stolen or completely destroyed, the deductible loss is figured as follows:

Answer 12

Taxpayers’s adjusted basis - Any scrap or remaining value - Any insurance or other reimbursement received

Question 13

4684

Answer 13

Used to report deductible losses related to business and income-producing property from theft of destruction.

Question 14

Basis: Property Received for Services:

Answer 14

If a taxpayer receives property for his services, he must include the property FMV in income. The amount included in income is the taxpayer’s basis in the property.

Question 15

Basis: Property in Lieu of Wages

Answer 15

When a property is transferred in lieu of wages, the employer is entitled to deduct the property’s FMV at the time of the transfer, and the same amount is taxable compensation for the employee. A gain or loss is realized if there is a difference between the FMV and the adjusted basis of the property.

Question 16

Basis: Bargain Purchases:

Answer 16

A bargain purchase is a purchase of an item for less than its FMV. If, as compensation for services, a taxpayer buys goods or other property at less than the FMV, the difference between the purchase price and the property’s FMV must be included in his income. His basis in the property is its fair market value.