Tax Exam 2
Common rules of all systems 3
First-year depreciation is permitted only in the year the asset is placed in service.
Overall 50% limitation
For individuals, the general overall limitation applicable to public charities is 50% of the taxpayer's AGI for the year Any contributions in excess of the overall limitation may be carried forward and deducted in the subsequent five tax years Beginning on January 1, 2018, the limitation for cash contributions to a public charity increased to 60% of the taxpayers AGI
Gift tax paid equation
Gift tax paid * FMV at time of the gift - Donor's basis / Amount of the gift
Common Rules of all systems 2
No depreciation is permitted for land or other assets that have an indefinite life. Assets such as works of art are generally not depreciable
tax
is a mandatory assessment levied under the authority of a political entity for the purpose of raising revenue to the use for public or governmental purposes fees, assessments, or fines imposed for specific privileges or services are not deductible as taxes under Sec 164
capital asset
is all property held by a taxpayer, with the exceptions of inventory and accounts receivable
recovery basis doctrine
states that taxpayers are allowed to recover the basis of an asset without being taxed because such amounts are a return of capital that the taxpayer has invested in the property basis is recovered in the form of a deduction for depreciation, cost recovery, or a casualty loss
Congress initiated the original ACRS system to achieve
stimulus for private investment, improving business productivity, simplifying taxpayer compliance, and facilitating IRS administration of the tax law
Limitations on Luxury Automobiles
taxpayers are still allowed to fully depreciate luxury cars, but must depreciate them over longer than the normal five year recovery period Due to the ceiling limitation, taxpayers often do not elect Sec 179 expensing for passenger automobiles, electing it instead for other qualifying property
Medical expense bans
taxpayers cannot deduct amounts paid for "controlled substances such as marijuana" that arent legal under federal law even if the such substances are legalized by state law
40% rule prevents
taxpayers from using the half year convention and thereby obtaining one half years depreciation in the year of acquisition when a substantial portion of the assets are placed in service during the last quarter of the tax year
Medical expenses Sec 213
taxpayers may deduct medical expense only to the extent the expenses exceed 7.5% (increasing to 10% in 2019) of the taxpayers AGI
Netting Caualty Gains and Losses on Personal-Use property
that do not result from a federally declared disaster are deductible to the extent the taxpayer has personal casualty gains by the amount of non-federally declared disaster losses These gains and losses are not combined with casualty gains and losses on business and investment property the losses should be reduced by any insurance reimbursements and the $100 limitation, but not 10% of AGI floor If the gains exceed the losses for the year, all gains and losses are treated as capital gains and losses If the casualty losses on personal-use property exceed the casualty gains for the year the taxpayer must further reduce the net loss by 10% of AGI
Contribution of Long-Term Capital Gain Property
the amount of a donation of long term capital gain property is its FMV Regulation Sec 1.170A-1 (c) (2) defines a property's FMV as the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts
Certain Intangibles
the amount of the charitable contribution is the FMV of the property, reduced by the amount of long term capital gain that would have been recognized if the taxpayer had sold the property These intangibles include patents, trademarks, a trade name or secret, know-how, a purchased copyright, and certain software
Unrelated Use Property
the amount of the contribution deduction is equal to the property's FMV minus the capital gain that would be recognized if the property were sold at its FMV This amount is normally the property's adjusted basis taxpayer is responsible for proving that the property was not put to unrelated use taxpayer meets this burden of proof if, at the time of the contribution, the taxpayer reasonably anticipates that the property will not be put to unrelated use The immediate sale of the property by the charitable organization is a use unrelated to its tax-exempt purpose
MACRS 2
uses fewer depreciation methods, and the methods are built into the MACRS tables accelerated methods are not permissible for real property uses assumptions about when assets are either placed in service or disposed of rather than using actual dates. The applicable assumption is called convention
20% Limitation on Capital Gain Property Contributed to Private Nonoperating Foundations
1) 20% of the taxpayer's AGI 2) 30% of the taxpayer's AGI, reduced by any contributions of capital gain property donated to a public charity
Bonus Depreciation: Qualified property
1) MACRS property with a recovery period of 20 years or less 2) computer software 3) qualified improvement property
Trucks, Vans, and Suvs exemptions
1) exemption from the ceiling limitations for vehicles that clearly are not for personal use 2) higher ceiling limitation amounts for other light trucks and vans
Franchises, trademarks, and trade names
A franchise includes any agreement that gives one the right to distribute, sell, or provide goods, services, or facilities, within a specified area
Sec 179 limitation and special rules 4
A second limitation on the total sec 179 deduction is that it cannot exceed the taxpayer's taxable income from the trade or business. Any acquisition cost that cannot be deducted because of the limitation based on taxable income is carried forward for an unlimited number of years and is added to the other amounts eligible for the Sec. 179 deduction in the future year. Such carryover amount will be subject to the taxable income limitation in the carryover year
Sudden, Unexpected, or Unusual Events
A sudden event is one that is swift, not gradual or progressive An unexpected event is one that is ordinarily unanticipated and not intended An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity Damage sustained as the result of an accident in an automobile race was held to be nondeductible because accidents occur often and are not unusual events in automobile races
Figuring Gain or Loss
Amount Realized (FMV) - Adjusted Basis (unrecovered cost) -------------------- Realized Gain/Loss
30% limitation does not apply
Capital gain property donated to a public charity that does not put the property to its related use. In such cases the amount of the contribution is reduced by the capital gain that would be recognized if the property were sold The taxpayer elects to reduce the amount of the charitable contribution deduction by the capital gain that the taxpayer would recognize if he or she sold the property
30% Limitation
Contributions of capital gain property to public charities are generally valued at the property's FMV but the deduction may not exceed an overall limit of 30% of AGI instead of a 50% limit
Applying the Deduction Limitations
Contributions subject only to the 50% of AGI limitation are accounted for before the contributions subject to the 30% of AGI limitation The deduction limit is applied differently where there are aggregate cash contributions subject to the 60% rule. When applying the 30 and 50% limits for a tax year, limit is reduced by the aggregate cash contributions allowed under the 60% limit for the year
Limitation Applicable to Corporations
Corporate charitable deductions may not exceed 10% of the corporations taxable income for the year This amount is computed without regard to the dividends-received deduction, net operating loss or capital loss carrybacks, or any deduction for the charitable contribution itself Excess contributions may be carried forward for five years and are deductible only if the current-year contributions are less than the current year's 10% limitation
Common Rules of All Systems (MACRS, ACRS, etc.)
Depreciation may be claimed only on property used in a trade or business or for the production of income. Personal-use assets, such as personal use automobile or the taxpayers personal residence are not depreciable
3 Categories of deductible capital expenditures for medical care
Expenditures that relate only to the sick or handicapped person, not to the permanent improvement or betterment of the taxpayer's property Expenditures that permanently improve or better the taxpayer's residence for the purpose of providing medical care Expenditures to remove structural barriers in the home of a physically disabled individual
General Rule
If a taxpayer contributes ordinary income property to a charitable organization, the deduction is equal to the property's FMV minus the amount of gain that would be recognized if the taxpayer had sold the property at its FMV on the date of the contribution In most cases this deduction is equal to the property's adjusted basis This rule applies regardless of the type of charitable organization to which the property is donated
Property received as a gift: after 1921
If the FMV is equal to or greater than the donor's basis, the donee's basis is the same as the donor's basis for all purposes FMV is less than the donor's basis, the donee has a dual basis for the property, that is, a basis for loss and a basis for gain If the donee later transfers the property at a loss, the donee's basis is the property's FMV at the time of the gift if the donee transfers the property at a gain, the donee's basis is the same as the donor's basis (basis for gain)
Timing of the Payment
If the obligation is charged on a credit card, payment is deemed to have been made on the date of the charge, not on the later date when the taxpayer pays the credit card balance If prepaid the deduction is deferred until the year the taxpayer receives the care unless there is a legal obligation to prepay or unless the prepayment is a requirement for the receipt of the medical care
Costs of Living in Institutions
If the principle reason for the taxpayers presence in an institution is the need for and availability of the medical costs of meals, lodging, and other services necessary for furnishing the medical care is not the principal reason for the taxpayer's presence in the institution, the institutional expenses are not deductible Only specific medical expenses, such as doctor bills, prescription drugs, etc. are eligible for deduction
Sec 179 limitation and special rule 3
If the total cost of qualified property placed into service during the year is more than 2,500,000, the 1 million ceiling is reduced on a dollar-for-dollar basis by the excess amount. Thus, no deduction is permitted for the 2018 tax year if 3. 5 million or more of Sec 179 property is placed in service. No carryovers of Sec 179 depreciation under this provision are permitted. However, the portion of cost not expensed remains in the property's basis subject to MACRS depreciation
Net Long term capital Gain
If the total long term capital gain for the tax year exceed the total long term capital losses for that year
property's adjusted basis
Initial basis + Capital additions - Capital recoveries = Adjusted basis
Capitalization of Interest
Interest on debt paid or incurred during the production period to finance production expenditures incurred to construct , build, install, manufacture, develop, or improve real or tangible personal property must be capitalized The real or tangible personal property must have "a long useful life, an estimated production period exceeding two years or an estimated production period exceeding one year and a cost exceeding 1,000,000 Property has a long useful life if it is real property or property with a class life of at least 20 years
Certain types of property are excluded from MACRS depreciation
Property depreciated under a method not expressed in terms of years, such as units of production method, where the taxpayer elects to not depreciate the property under MACRS Intangible assets, such as goodwill or copyrights Films, videotapes, or sound recordings
MACRS: 20 years
Property with a class life of 25 or more years, including property such as utilities and sewers
MACRS: 3 years
Property with a class life of 4 years or less. This category includes property such as tractor units, race horses over 12 years old, and special tools
MACRS: 10 year
Property with a class life of more than 16 years, but less than 20 years. This category includes property such as barges, vessels, and petroleum and food processing equipment
MACRS: 15 year
Property with a class life of more than 20 years but less than 25 years. This category includes property such as billboards, service station buildings, and land improvements
MACRS: 5 year
Property with a class life of more than 4 years but less than 10 years. This category includes property such as automobiles, light and heavy duty general purpose trucks, computers, and research and experimental (R&E) equipment
Common rules of all systems 4
Regardless of the depreciation system, consistency is required. Taxpayers must consistently use the method selected in the year the asset was placed in service unless the IRS allows a change of accounting method
Real Property: Classification and Recovery Rates
Residential rental property: 27.5 years Nonresidential real property: 39 years Straight line depreciation must be used and is reflected in the tables A mid month convention is used in the year of acquisition and in the year of disposition Capital improvements are depreciated over the full MACRS recovery period of the improvement not over the remaining life or recovery period of the building
Casualty and Theft Losses
Sec 165 individuals may deduct a casualty or theft loss on personal-use property as an itemized deduction on Schedule A of Form 1040 if it is attributable to a federally declared disaster
Research and Experimental Expenditures
Section 174 was enacted to clarify the income tax treatment of R&E expenditures Expense in the year paid or incurred Defer and amortize the costs as a ratable deduction over a period of 60 months or more beginning with the month in which benefits are first realized Capitalize and write off the cost only when the research project is abandoned or is worthless Most taxpayers elect to expense the R&E expenditures because they prefer the immediate tax benefit The deferral and amortization method is desirable if the taxpayer is currently in a low tax rate situation or expects initial NOLs during a start up period If the deferral and amortization method is used, the amortization period of 60 or more months commences with the month in which the benefits from the expenditures are first realized Tangible asset cost. These expenditures must be capitalized and depreciated under the MACRS rules Operating costs after the well is producing. These expenditures are deductible under Sec 162 as ordinary and necessary business expenses
Deductible taxes Sec 164
State, local, and foreign real property taxes State and local personal property taxes if based on value State, local, and foreign income, war profits, and excess profits taxes The GST (Generation Skipping Transfer Tax) imposed on income distributions Other state, local, and foreign taxes that are paid or incurred in either a trade or business or an income producing activity Generally taxpayers cannot deduct state and local sales taxes unless they make an election to deduct their state and local sales taxes instead of deducting their state and local income taxes. They make this election annually
Recapture of Excess Cost Recovery Deductions
Taxpayers are subject to depreciation recapture on listed property if MACRS rules were used originally and the property's business-use percentage decreases to 50% or less in a subsequent year Depreciation deductions for all years are recomputed using ADS The excess depreciation deducted including any Sec 179 expense and bonus depreciation is recaptured and bonus depreciation, is recaptured as ordinary income by including it in the taxpayer's gross income in the year the business-use percentage first falls 50% or below in a subsequent year
Medical Insurance Reimbursements
Taxpayers may only deduct unreimbursed medical expenditures receives a reimbursement in a year subsequent to the year of payment, the taxpayer must include the reimbursement in gross income in the year of receipt to the extent that the taxpayer derived a tax benefit from the deduction in the previous year If the taxpayer did not take a deduction in the prior year the taxpayer doesnt need to report the reimbursement as income the taxpayer must report as income the lesser of the amount of the reimbursement or the amount the medical expenses reduced the taxable income in the prior year
Property placed in service after December 31, 1980 and before January 1, 1987
Taxpayers must use the Accelerated Cost Recovery System (ACRS)
Property placed in service after December 31, 1986
Taxpayers must use the Modified Accelerated Cost Recovery System (MACRS)
Property placed in service prior to 1981
Taxpayers must use the rules contained in Sec. 167. These rules basically follow financial accounting principles
Depreciating Mixed-Use Automobiles
Taxpayers who use passenger automobiles less than 100% for business must compute the regular MACRS depreciation amount, identify the ceiling amount and then reduce each one by the percentage of personal use the taxpayer's basis in the automobile will decrease by the lesser of the unreduced amounts even though that was not the amount allowed as a deduction
Sec 179 limitations and special rules 2
The Sec 179 tax benefits are recaptured if the property is no longer predominantly used in a tade or business at any time. In the year of recapture, the taxpayer must include in gross income the amount previously expensed reduced by the amount of depreciation that would have been allowed for the period the property was held for business use
Qualifying Organization Sec 170
The US, District of Columbia, a state or possession of the United States or a political subdivision of a state or possession A corporation, trust, community chest, fund or foundation created or organized under the laws of the United States, a state, possession, or District of Columbia A post or organization of war veterans A domestic fraternal society, order, or association Certain cemetery companies
Measuring the Loss
The amount of the loss may not include any reduction in the FMV of the taxpayer's surrounding but undamaged property the cost of protecting property to prevent damage form a casualty is not a deductible loss If the property involved in the casualty is only partially destroyed, the amount of the loss is the lesser of the reduction in the property's FMV or the taxpayer's adjusted basis in the property
Common rules of all systems
The basis of property being depreciated must be reduced by the amount of depreciation that is allowable for each taxable year. An important aspect of depreciation is determining the amount of depreciation that is allowed and allowable. The depreciation allowed is the actual depreciation claimed by the taxpayer for a particular taxable year. Allowable depreciation is the amount of depreciation to be claimed under the tax law by using the slowest possible method. If a taxpayer does not take any depreciation during a particular year, the basis of property must be reduced by the amount of depreciation that should have been taken during the year
Property Received from a decedent
The basis of property received from a decedent who died in year other than 2010 is the FMV of the property at the datae of the decedent's death or an alternate valuation date (AVD) The AVD is generally six months after the date of death AVD is elected, the basis for all of the assets in the estate is their FMV on that date unless the property is distributed by the estate to the heirs or is sold before the AVD If the AVD is used the property distributed or sold after the date of the decedent's death and before the AVD has a basis equal to its FMV on the date of the distribution or the date of disposal An estate tax return must be filed if an individual dies in 2018 and the gross estate plus any previous taxable gifts exceeds $11.18 million
Sec 197 Intangibles
The deduction is calculated using straight line amortization over a 15 year (180 month) period beginning with the month of acquisition; any salvage is disregarded
Children of Divorced
The parent taking the medical expense deduction doesn't need to be the parent who may claim dependency
Sec 179 limitations and special rules
The property must be purchased for use in an active trade or business (more than 50% business-use) as distinguished from property that is acquired for the production of income Qualified property is generally tangible personal property The property cannot be acquired from a related party under Sec 267 or by gift or inheritance
Identification Problems
The regulations require the taxpayer to adequately identify the particular stock sold or exchanged Many investors allow brokers to hold their stock in street name and thus do not make a physical transfer of securities If the stock sold or exchanged is not adequately identified, the first-in, first-out (FIFO) method must be used to identify the stock
Theft Defined
The treasury Regulations state that to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery IRS has also stated that black-mail, extortion, and kidnapping for ransom may also constitute theft
Pledges made by the Accrual Method Corporation
These accrual method corporations may elect to claim a charitable deduction for the year in which the corporation makes a pledge to make a contribution as long as the actual contribution is made by the fifteenth day of the third month following the close of the year in which the pledge is made
Covenant not to compete
This is an agreement between the buyer and seller of a business that the seller will not compete with the buyer for a specified period of time and or within a specified geographic area. Its cost is amortized over 15 years even if its term is for a shorter length of time
Qualifying Organization
To deduct a contribution for federal income tax purposes a taxpayer must make the contribution to or for the use of a qualified organization Contribution made directly to individuals, even though the individuals may be needy are generally not deductible
Trucks, Vans, and Suvs
To prevent taxpayers from deduction the entire cost of a SUV in the year of purchase, the tax law limits Sec 179 expensing to 25,000 for a SUV with a GVWR exceeding more than 6,000 pounds that is placed into service in 2018 To qualify for the truck and van depreciation deduction, a vehicle must be a passenger vehicle built on a truck chassis with an unloaded gross weight of over 6,000 pounds
Contribution to a Private Nonoperating Foundation
a private nonoperating foundation is an organization that does not receive funding from the general public distribute funds to various charitable organizations that actually perform the charitable services The amount of the contribution of long-term capital gain property to a private nonoperating foundation is the property's FMV, reduced by the capital gain that would be recognized if the property were sold at its FMV on the date of the contribution This means that generally the deductible amount of the contribution is the lesser of the property's adjusted basis or its FMV
Transportation Essential: Medical care
actual cost of the use of an automobile, for 2018 the IRS allows a deduction of 18 cents for each mile that the automobile is driven fro medical expenses may also deduct tolls and parking certain courts have held that cost of meals and lodging while en route to a medical facility is part of deductible travel costs incurred for medical purposes may deduct 50% of the cost of meals Sec 213 d 2 limits the potential deduction for the cost of lodging to $50 per night deduct another $50 if the person cant live alone
Bonus Depreciation
allows the taxpayer to deduct a percentage of the property's cost in the year is is place into service Under Sec 179 expensing there is not a maximum dollar amount of bonus depreciation the taxpayer may claim Congress allowed 100% bonus depreciation for property acquired and placed into service from September 28, 2017 through September 31, 2022, with the percentage decreasing by 20 percentage points each year after 2022 automatically deductible for both the regular income tax and the alternative minimum tax (AMT)
Application Carryovers
any contributions that exceed the 60% limitation may be carried over and deducted in the subsequent five years These carryovers are subject to the limitations that apply in subsequent years In the carryover year, a deduction may be taken for the excess contribution to the extent that the 50% limitation of the subsequent year exceeds the amount of property donated during the subsequent year subject to the 50% limitation Excess contributions of property subject to the 30 or 20% limitations may also carry over to the subsequent five years
Capital additions
are expenditures that add to the value or prolong the life of property or adapt the property to a new or different use increase the basis
Identifiable Event
because the event that causes the loss must be identifiable, the act of losing or misplacing property is generally not considered a casualty However, an accidental loss of property can qualify as a deductible casualty if the loss is the result of an identifiable event
Medical expenses
comprise one category of deductible personal expenditures, are deductible because Congress felt that excessive medical expenses might ultimately affect a taxpayer ability to pay his or her federal income tax
Conversion of Personal Use property
converted to business-use or held for the production of income the property's basis for depreciation purposes is the lesser of its adjusted basis or its fair market value determined as of the conversion date This lower of cost or market rule prevents taxpayers from depreciating the portion of the cost that represents a nondeductible loss on a personal-use asset
Medical procedures: Body related Sec 213
cosmetic surgery or any other similar procedure does not qualify as a medical expense unless such surgery or any other similar procedure does not qualify as a medical expense unless it fixes a defect
Medical expense deduction Sec 213
defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease the purpose of affecting any structure or function of the body Transportation primarily for and essential to the first two items listed above Qualified long-term care services Insurance covering all of the items listed above
Classification and Disposition of Intangible Assets
disposition is given Sec 1231 treatment if the intangible asset is held for more than one year Loss on disposition of a Sec 197 intangible asset, however, is not deductible if other intangibles acquired in the same acquisition of a trade or business are retained The bases of the retained Sec 197 intangibles are increased by the disallowed loss
MACRS
does not consider salvage value in the computation of the depreciation amount uses specific asset classes. Both tangible personal property and real property must be placed into specific asset classes, based on the type of property . Asset classes refer to the number of years over which the asset must be depreciated
Donation of Inventory by a Corporation
donations to certain public charities provides a larger charitable contribution deduction than the adjusted basis of the property C corporations may also take an enhanced charitable contribution deduction for donating scientific equipment constructed by the taxpayer and donated to a college, university, or qualified research organization for use in research, experimentation, or research training in the physical or biological sciences The amount of the enhanced charitable contribution is the property's FMV, reduced by 50% of the ordinary income that the corporation would have recognized if it had sold the property at its FMV the amount of the contribution cannot exceed twice the basis of the property
itemized deductions
from AGI include medical expenses, taxes interest, and charitable contributions
amount realized
from a sale or other disposition of property is the sum of any money received, the FMV of all other property received and any debt assumed by the buyer
recognized gain or loss
represents the difference between the amount realized and the adjusted basis when a sale or exchange occurs
Additional Computations for Leased Vehicles
if a taxpayer leases an automobile or light truck or van for business purposes, the deduction for rental payments is reduced to reflect the luxury auto depreciation limits imposed on purchased vehicles The leasing restriction is accomplished by requiring taxpayers to reduce their deduction by an inclusion amount obtained from an IRS table This amount is based on the automobiles FMV and the tax year in which the lease commences and is prorated for the percentage of business use and number of days used during the year
Personal-Use Assets
if a taxpayer owns a duplex and uses one unit as a residence, only the unit that is rented to tenants qualifies for depreciation
Capitalization versus expense
if an expenditure either improves the efficiency of an asset or extends the life of an asset beyond the end year, the expenditure should generally be capitalized
Appraisal
if it is difficult or impossible to obtain, the taxpayer may use the cost of the repairs instead Must meet: The repairs will bring the property back to its condition immediately before the casualty The cost of the repairs is not excessive The repairs do not move than repair the damage incurred in the casualty The repairs do not increase the value of the property over its value immediately before the casualty The taxpayer compares each property's basis with the reduction in the FMV of that property, rather than aggregating the basis and FMV amounts for all the properties destroyed in the casualty If certain requirements are met taxpayers may defer or exclude the recognition of these gains
Year of Disposition
if property is disposed of during any year in which the half-year convention is applicable, the depreciation for the year of disposition will be one-half of the amount computed by using the table percentages
Mid Quarter convention
if the aggregate basis of all personal property placed in service during the last three months of the year exceed 40% of the cost of all personal property placed in service during the tax year The 40% test is applied after reducing the property's basis by Sec 179 expensing if elected but not by bonus depreciation if claimed Property placed in service and disposed of during the same tax year is not into account for purposes of the mid-quarter test, nor is property expensed under sec 179
Effect of Gift Tax on Basis
if the donor pays a gift tax on the transfer of property, the donee's basis may be increased For taxable gifts after 1976, the increase in the donee's basis is equal to a pro rata portion of the gift tax attributable to the unrealized appreciation in the property
Care: Sec 213 (d) (11)
if the long term care service is not deductible unless the spouse or relative is a licensed professional to be able to provide this care services provided by a corporation or partnership in which the person owns over 50% are also not deductible
Net short term capital loss
if the short term capital loss exceeds total short term capital loss first to offset against any net long term capital gains
Straight Line Election Under MACRS
if the straight-line election is made, the taxpayer must use either the same depreciation period or an extended period based on the alternative depreciation system
Net long term capital losses
if the total long term capital losses for the tax year exceed total long term capital gains for the year
Net short-term Capital Gain
if total short term capital gain for the tax year exceed total STCLs for that year
Nondeductible expenses
include expenditures for nonprescription medicines, drugs, vitamins, and other types of health foods that improve the individual's general health
Medical expenditures: Body related
include payments for services affecting any function or structure of the body, even though no specific illness or disease exists
Ordinary income property
includes any property that would result in the recognition of income taxed at ordinary income rates if the taxpayer sold the property includes inventory, works of art or manuscripts created by the taxpayer, capital assets that have been held for one year or less, and Sec 1231 property to the extent a sale would result in the recognition of ordinary income due to depreciation recapture
Listed Property Rules
includes automobiles and property generally used for purposes of entertainment, recreation, or amusement If a listed property's business use is greater than 50% of its total use, the taxpayer may elect Sec 179 expensing for the business portion and may use regular MACRS tables for the remaining business portion of the assets cost less than 50% the taxpayer must not elect Sec 179 expensing must use ADS
Capital Expenditures for Medical Care
incurred for personal medical purposes are not depreciable or amortizable to qualify as a deduction the taxpayer must incur the expenditure as a medical necessity for primary use by the individual in need of medical treatment
3 categories for expenses
incurred in a trade or business incurred for the production of income (an investment activity) certain specified personal expenses
Qualified Improvement Property
is any improvement to an interior portion of nonresidential real property if the improvement is placed into service after the date the real property was placed into service Building enlargements, elevators, escalators, or a building's internal structure framework are not considered
Personal-use property
is any property, tangible or intangible, real or personal, that is used by the taxpayer for his own personal use rather than in a trade or business or for the production of income
Nonresidential real property
is any real property other than residential rental property
Personal property
is any tangible property that is not real property, and includes items such as equipment, vehicles, furniture, etc.
medical expense deduction
is available only for expenditures paid for medical care
Real property (real estate or realty)
is defined as land or any structure permanently attached to the land, such as buildings
Long term care
is defined as medical services required by a chronically ill individual which are provided under a prescribed plan of care
half year convention
is generally required for all tangible personal property. It assumes that all asset acquisitions or dispositions are made at the midpoint of the tax year
Casualty loss
is one that occurs in an identifiable event that is sudden, unexpected, or unusual Beginning January 1, 2018 the deduction for personal casualty and theft losses is limited to those losses incurred in a "federally-declared disaster
capital gain property
is property held over one year, on which the taxpayer would recognize a long-term capital gain if the taxpayer sold it at its FMV on the date of the contribution If a capital loss or a short term capital gain would be recognized on the sale of the capital asset, the property is considered to be ordinary income property for purposes of calculating the amount of the charitable contribution deduction
Alternative Depreciation System
is required for certain property and is also allowed for other depreciable assets if the taxpayer so elects all 5 year property may be made on an individual property basis principal type of property that is required is tangible property used predominantly outside the US recovery periods are generally longer under MACRS required the use of the straight line method with a half year, mid-quarter, or mid-month convention shifts some depreciation deductions from the current year to future years when the taxpayer expects them to save greater taxes also used to compute earnings and profits for a corporation and a variation applies to compute depreciation for property placed into service after 1986 but before 1999 for alternative minimum tax purposes for individuals
Cost Depletion Method
is similar to the units of production method of depreciation The adjusted basis of the asset is divided by the estimated recoverable units to arrive at a per unit depletion cost If the original estimate of recoverable units is subsequently determined to be incorrect the per unit cost depletion rate must be revised and used on a prospective basis to determine cost depletion in future year s
chronically ill
is someone who, for a period of at least 90 days, cannot perform at least two daily living tasks such as eating, toileting, bathing, or dressing
Costs
is the amount of paid for the property in cash or the FMV of other Any costs of acquiring the property and preparing the property for use are included in the cost of the property
Goodwill
is the value of a trade or business that is attributable to the exception of continued customer patronage, whether due to the name or reputation of the trade or business or to any other factor
Cost depletion method/ percentage depletion method
is used in any year is the one that results in the largest deduction
adjusted net capital gain
is when NCG has been determined, a portion or all of NCG rates of 0, 15%, or 20%
Capital losses
is when one exchanges the capital asset for an amount less than its adjusted basis most cases one year period
mid-month convention
it assumes that all asset acquisitions or dispositions are made at the midpoint of the month in which the transactions occurs
Qualified Long-term Care
long-term care as medical expenses subject to the 7.5% of AGI limitation
Limitations on Personal-Use Property
losses sustained in each separate casualty must be reduced by $100 the total amount of all net casualty losses for personal-use property is reduced by 10% of the taxpayers AGI for the year For property destroyed in the same casualty, only $100 is deducted from all the properties many taxpayers do not receive a tax deduction if the taxpayers insurance covers the property, the taxpayer cannot take a casualty loss deduction unless he or she timely files an insurance claim for the loss only relates to the portion of the loss covered by the insurance
Intangible drilling and development costs (IDCs)
may either be deducted as an expense or capitalized IDCs apply only to oil, gas, and geothermal wells and basically include all expenditures, other than the acquisition costs of the underlying property, that are incurred for the drilling and preparation of wells for a well that is nonproductive an ordinary loss is allowed for any IDC costs that have been capitalized and not recovered through depletion generally preferable to expense the IDCs if the percentag depletion is expected to be more than the cost depletion and is used to compute the depletion allowance
Section 179 Expensing Election
may elect to expense up to 1 million of the acquisition cost as an ordinary deduction in the year the property is placed in service The immediate expensing is not generally applicable to real estate The election is made on an annual basis and the taxpayer must select the assets to which the deduction applies MACRS rules apply to any amount of an asset's cost not expensed under Sec.179 or claimed as bonus depreciation
post-1986 MACRS rule
more closely follow the concept of economic useful life and therefore MACRS rules refer to depreciation rather than cost recovery
Adjusted Basis
most property is acquired by purchase and therefore its initial basis is the cost of the property if property is acquired from a decent its basis to the estate or heir is its FMV either at the date of death or if the alternate valuation date is elected, six months from the date of death
Community Property
one-half of the property is included in the decedent's gross estate and its basis to the surviving spouse is it FMV Surviving spouses one half share of the property is also adjusted to FMV
Diagnosis, Cure, Mitigation, Treatment, or Prevention of Disease
other expenses should be "confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness Unless they are for a routine physical or dental examinations, the expenditures must be for the purpose of curing a specific ailment rather than related to the general health of an individual
Lower Rates for ANCG
preferential rate is zero for taxpayers filing a joint return (surviving spouse) taxable income to or less than 77,200 taxable income is more than 77,200 but no more than 479,000, the preferential rate is 15% preferential rate becomes 20% when taxable income exceeds 479,000
Residential rental property
property from which at least 80% of the gross rental income is rental income from dwelling units. Dwelling units include houses, apartments, and manufactured homes that are used for residential purposes but not hotels, motels, or other establishments for transient use
Measuring the Loss business or investment
property is totally destroyed in a casualty, the amount of the loss is the taxpayer's adjusted basis in the property, even if it is greater than the property's FMV. However if personal-use property is totally destroyed, the amount of the loss is limited to the lesser of the reduction in the property's FMV or the property's adjusted basis
MACRS: 7 years
property with a class life of 10 years or more but less than 16 years. This category includes property such as office furniture and equipment, horses, single-purpose agricultural or horticultural structures and property with no class life and not classified elsewhere. Most types of machinery are included in this class
Capital recoveries
reduce the adjusted basis most common form of capital recoveries is the deduction for depreciation or cost recovery 100% expensing is available for many assets placed in service after September 27, 2017 and before January 1, 2024
Intangible property
refers to property that does not have physical substance, such as goodwill, patents, and stocks and bonds
Tangible property
refers to property that has physical substance, such as land, buildings, natural resources, equipment, etc. cost is systematically written off through depletion or depreciation
realized gain or loss
the amount realized from the sale or exchange of property is compared with adjusted basis of that property A gain is realized when the amount realized is greater than the basis, and a loss is realized when the amount realized is less than the basis of the property
patents
the cost of an internally-created patent or copyright is depreciated under Sec 167 using the straight line method over its useful life
Depletion methods
the person who typically has an economic interest in the property is the owner of the natural resource Depletion may be claimed by the persons who either own the natural resource property or retain a royalty interest
Fair market value
the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell If a buyer assumes the seller's liability when determining the amount realized
Medical Insurance Premiums
the tax law allows a deduction for the medical care portion of the premium only if the cost of each type of insurance is either separately stated in the contract or furnished to the policyholder by the insurance company in a separate statement pays premium attributable to an individual or group medical insurance plan, the payments are deductible as medical expenses, which are itemized deductions in most cases Self-employed individuals may deduct 100% of these amounts as deductions for AGI
Uniform Capitalization Rules
the tax law now mandates one set of capitalization rules applicable to all taxpayers and all types of activities also affect property other than inventory if the property is used in a taxpayer's trade or business or in an activity engaged in for profit Taxes paid or accrued in connection with the acquisition of property are included as part of the cost of the acquired property Taxes paid or accrued in connection with the disposition of property reduce the amount realized on the disposition
Bonus depreciation 100%
the taxpayer can deduct all of the property's cost using Sec 179 expensing and/or depreciation, leaving no cost for which to claim MACRS depreciation. If the bonus depreciation rate is less than 100%, this ordering is important because it affects the cost for which the taxpayer claims MACRS depreciation
Bonus Depreciation Sec 179
the taxpayer claims Sec 179 expensing first the taxpayer claims MACRS depreciation for any cost remaining after Sec 179 expensing and bonus depreciation the taxpayer claims MACRS depreciation for any cost remaining after Sec 179 expensing and bonus depreciation, using the MACRS rule for such remaining cost
Type of property Contributed
the taxpayer is required to maintain a record of the contribution such as a bank record or a written communication from the donee
Case of noncash property, the amount of the donation depends
the type of property donated the type of qualifying organization to whom the property is given a gift of property that consists of less than the donor's entire interest in the property is not usually considered a contribution of property
Qualified Individuals
to deduct medical expenses, taxpayers must pay the expenses on behalf of themselves, their spouses, or their dependents
Percentage Depletion Method
to encourage persons to invest and/or operate in an industry that is both capital intensive and high risk but is also vital to our national interests has not been available to large oil and gas producers since 1974 but it is still available to small oil and gas producers and royalty owners under a specific exemption in the law the depletion amount may not exceed 50% of the taxable income from the property before depletion is deducted
Sec 164 nontax items
vehicle registration and inspection fees registration tags for pets toll charges for highways and bridges Parking meter charges Charges for sewer, water, and other services Special assessments against real estate for items such as sidewalks, lighting, and streets
Congress's primary objective in 1981
was to allow businesses and investors to recover the cost of capitalized expenditures over a period of time that is substantially shorter than the property's economic useful life
Contribution Services
when a taxpayer renders services to a qualified charitable organization, the taxpayer may only deduct the unreimbursed expenses incurred incident to rendering the services These items include out-of-pocket expenses, transporation expenses, the cost of lodging and 50% of the cost of meals while away from home, and the cost of a uniform that is required to be worn in performing the donated services but is not suitable for general wear The out-of-pocket expenses are deductible only if the taxpayer who actually renders the services to the charity is the person who incurs these out-of-pocket expenses the actual costs of operating an automobile while performing the donated services, the law permits a deduction of 14 cents per mile
net capital gains
which is defined as the excess of net long-term gain over net short term capital loss can be taxed at 0, 15%, 20%, 25% or 28% first determine all STCGs, STCLs, LTCGs, LTCLs
