CPA - REG - Depreciation and Property Tax (ch 6 & 7)

Maximum section 179 expense deduction for 2020

$1,040,000

Dawson, Inc.'s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Dawson received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Dawson elected to recognize the minimum gain possible. 1. What gain does Dawson recognize this year? 2. What is Dawson's basis in the new warehouse?

$195k Insurance proceeds received Less $75k basis = $120k total gain $167k reinvested Less $75k basis = 92k gain deferral $120k total gain Less $92k gain deferral = $28k recognized now (1.) 2. When destroyed property is replaced with similar property under the IRC §1033 involuntary conversion rules, gain on the proceeds received and reinvested in the new property is deferred and the basis for new property will be the same as the basis for the destroyed property. Dawson's basis will be $75k.

On 1/2/x1, Bates Corp purchased and placed into service seven-year MACRS tangible property costing $100k. Bates sold the property on 7/31/x3 for $102k after taking $47,525 in depreciation. What amount of the gain is ordinary, and what amount is capital?

7-year property is 1245 property and subject to depreciation recapture. $102k Sales Price Less: $52,475 BV ($100k - $47,525) = $49,525 Total gain Less: $47,525 Ordinary (full amount of depreciation, ordinary gain since it was deducted as ordinary expense) = $2k capital gain

Benefits of 1231 assets

- Gain = capital (preferential tax rates; Schedule D Form 8949) - Loss = ordinary (offset against ordinary income; Form 4797) 1231 assets are L/T business assets, held MORE THAN one year. 1231 gains seem to be the residual of the recapture rules. Depreciation recapture is ordinary rates, but 1231 gains are capital (20%).

Bonus depreciation is available for...

- Qualified new or used assets (tangible section 1245 property with a MACRS life of 20 years or less) in the year placed into service. Note: Taxpayers must opt out of bonus depreciation.

100% bonus depreciation will be reduced in...

100% bonus depreciation is available through 2022. Each year thereafter, the allowance is reduced by 20%.

Capital tax rate for collectibles

28%

Assets with MACRS depreciation of: - 3 years - 5 years - 7 years

Assets with MACRS depreciation of: - 3 years: small tools, off-the-shelf software - 5 years: autos, I/S & computer hardware, most farm equipment - 7 years: equipment, F&F

Section 1250 Assets

Depreciable real property - All depreciable real property that is not a Section 1245 asset. Includes buildings and structural components. All section 1250 property is section 1231 property.

Form 4562

Depreciation and Amortization

Non-business bad debt write-offs are ___ (S/T or L/T) ___ (ordinary or capital) losses.

Non-business bad debt write-offs are always S/T capital losses.

Section 1250 Depreciation Recapture

For section 1250 assets (buildings, real property) that is sold at a gain: - If the asset was held for one year or less, additional depreciation is all of the depreciation that was taken (ordinary). - If the asset was held for over one year, the excess of depreciation taken over SL depreciation (benefit, see below) is an ordinary gain, and any excess is taxed at 25% LTCG rate. L/T example: $450k Total depreciation taken Less: $410k SL depreciation (would have been) $40k = Benefit to taxpayer. Tax @ ordinary tax rates. $200k total gain Less: $40k ordinary gain = $160k capital gain (taxed as LTCG, 25% tax rate)

Dual basis rules

GIFTS of appreciated property (basis $10, FMV $30): Carryover basis, carryover holding period. * Gifts of depreciated property (basis $30, FMV $10): Use dual basis rules. We don't know what value to use until the asset is sold. - If sold for less than the new FMV ($10), like $8, then use lower FMV of $10 = $2 loss. This might be either S/T or L/T, depending on the FMV date. - If you sell it for more than old basis ($30), like $33, then use $30 basis = $3 gain. L/T b/c inherited property w/ c/o basis. - If you sell it for an amount between $10 and $30, NO GAIN, NO LOSS. Might be S/T or L/T. AICPA LOVES to test this. Remember that the amount that is used as the basis is the amount that is closer to the selling price.

Property Eligible for the 179 Expense Deduction

Generally new or used tangible personal property purchased for use in a trade or business. - 3-, 5-, and 7-year property (1245 property) - Off-the-shelf computer software - Qualified real property (includes roofs, heating, AC, fire protection and alarms, security systems) - Qualified improvement property (interior improvements, not additions like elevators or square footage additions) - Not generally allowed on intangibles - Heavy SUVs up to $25,900 Property must not be purchased from related party. NOT allowed if a net loss exists.

Mid-quarter convention

If more than 40% of depreciable personal property acquired during the tax period is acquired during the 4th quarter, the entity is required to apply the mid-quarter convention, under which each acquisition is depreciated from the middle of the fiscal quarter in which it was acquired.

Section 197 assets

Intangibles. Qualifying intangibles include franchises, TMs, customer-based intangibles, and acquired (but not self-created) goodwill, covenants not to compete, patents, and copyrights. SL amortization over 15 years. Remember... start-up and organizational costs are expensed up to $5k, any costs over $50k reduce the $5k dollar-for-dollar... remaining is capitalized and amortized over 15 years. This is why.

Sales of assets to related parties: Who qualifies as a related party?

Losses are N/D. Gains are taxable. This is section 267. Relatives via direct lineage, but NOT uncles, aunts, nephews, cousins, or in-laws. Basically, not branched-off relatives of my parents... If I sell to a related party (parents, children, siblings, spouse, direct ascendants), then DUAL BASIS RULES apply. Also applies to equal partners. There is a TBS on this.

Capital assets

Nonbusiness assets, whether S/T or L/T, that do not qualify as ordinary or 1231 assets. - Investment assets - Personal use assets - Goodwill - Nonbusiness bad debt write-offs (always S/T capital losses) Not capital assets: copyrights, literary, musical or artistic compositions; treasury stock (not an asset; contra-equity)

Depreciation recapture is taxed at ___ rates.

ORDINARY. Therefore, it reduces the capital gain.

Section 179 phase out

Phase out begins at $2,590,000. That is, the $1,040,000 limit is reduced $1 for every $1 spent over $2,590,000 on Section 179 property. Thus, the election is not available if such purchases exceed $3,630,000. General rule: $1m allowed, $2.5m - $3.5m phaseout. The above is indexed for inflation.

Installment sale

Profit $70k Divided by total contract price $100k = Gross profit % 70% 70% of each payment is income. If we got $10k in 2020, then 10% of this, or $7k, is taxable income. Gains realized on a property sale to a family member (ancestor, lineal descendants, spouses, siblings) may be recognized over multiple tax years upon electing to use the installment sale method. However, if the acquiring family member subsequently sells the property within two years of the installment sale, the original selling family member must recognize any remaining gain in that tax year!

Section 1231 Depreciation Recapture

Property used in a trade or business (section 1231 property) is subject to this rule. Gains are to be reported as ordinary income to the extent of prior depreciation. This means ordinary income is recaptured for the lesser of the gain, or prior depreciation.

Section 1245 Assets

Real property...generally 3-, 5-, or 7-year, which is subject to depreciation. Remember: 12_45 is missing a "3". All 1245 property is 1231 property, as is 1250 property. 1. Tangible and Intangible Personal Property which has been subject to the depreciation allowance 2. Nonresidential real property placed into service between 1981 and 1986

Like-Kind Exchange

See Excel line 699. An investor can exchange real estate for real estate, like an apartment house for an office building. Being a like-kind Exchange qualifies the sale for tax deferral (so gain is not recognized). Any additional cash or personal property received with the property is boot and is taxable. Forgiven loans qualify as boot (net debt relief). Gain is lesser of: 1. FV of boot received, net debt relief, and other unlike property received, or 2. Realized gain. TCJA limited assets to real property for 2018 and beyond. Business property (delivery trucks, equipment, etc.) no longer qualify. 1031 does not apply to real property held for sale, only L/T property. Losses are N/D. Replacement property must be ID'ed w/in 45 days, and constructively acquired w/in 180 days of the "sale."

Wash sale

Selling a security at a loss and, within 30 days before or after, purchasing the same or a substantially identical security. 1. The loss is disallowed (ex: loss on sale of 500 units, then repurchased 250 units: the loss on sale of 250/500 units [50% of total loss] is disallowed) 2. The disallowed loss is also added to the new basis

Section 1033 Involuntary Conversion

Taxpayer realizes a gain from involuntary conversion. Gain may be deferred from 12/31 of the year in which the taxpayer RECEIVES THE CASH, to the end of: - 2 years: Destruction or theft of property resulting in insurance recovery - 3 years: Gov't condemnation or eminent domain award - 4 years: Conversion in connection w/ federally-declared disaster (ex: Thomas Fire - have until 2021 if cash received 2017)

Mary gives Joanne a gift of land worth $80,000. The land's original cost to Mary was $30,000. As a result of the transfer, Mary paid a gift tax of $12,000. What is Joanne's basis in the land? Assume an annual gift exclusion of $15,000.

The basis in the land would be carryover basis, plus gift tax paid as a result of the appreciation in value. The land appreciated $50k, divided by ($80 FMV less annual gift tax exclusion of $15k) = 76.9%, times the tax paid of $12k = $9,228. Total = $30k + $9,228 = $39,228. This means that the amount of tax paid attributable to the increase in basis in proportion to the FMV (less annual gift tax exclusion) is added to basis.

Section 291 Depreciation Recapture

The ordinary gain = 20% times LESSER of AD (accum deprec) or gain. Any remaining gain is a section 1231 gain (capital gain). This applies for section 1250 assets (office buildings, etc.) 291 APPLIES TO CORPORATIONS.

The uncollectibility of a personal loan represents a nonbusiness bad debt, which is treated as a ___ (S/T or L/T) capital loss.

The uncollectibility of a personal loan represents a nonbusiness bad debt, which is treated as a short-term capital loss regardless of the holding period. Partial losses related to bona fide BUSINESS debt are recognized the year incurred; however, partial losses related to bona fide nonbusiness debt are not allowed. Bona fide nonbusiness debt is treated as a loss only the year it becomes wholly worthless (ie, 0% of principal is collectible).

UNICAP Rules

Uniform capitalization rules. The uniform capitalization rules (UNICAP) apply to three types of property: 1. Real or tangible property produced by the taxpayer for use in his business; 2. Real or tangible personal property produced by the taxpayer for sale to customers; 3. Real or tangible personal property acquired by the taxpayer for sale if the taxpayer's average gross receipts for the past 3 years were more than $10 million annually. Under the uniform capitalization rules, direct materials, direct labor, and applicable indirect costs must be capitalized. This includes repackaging costs and offsite storage costs, security, recruiting, payroll, preproduction costs, such as design, bidding, and purchasing expenses; production costs, such as direct materials, direct labor, other direct production costs, and indirect production costs; and presale costs, such as storage, handling, and some excise taxes.

Section 1245 Depreciation Recapture

When a Section 1245 asset is sold at a gain, a portion of the gain is recaptured as ordinary income. This reclassification is required to offset the depreciation deductions taken during the asset's life. When Section 1245 property is sold at a gain, capture the lesser of the following as ordinary income: 1. The recognized gain, or 2. The previously-allowed depreciation Any remaining gain exceeding the recapture amount results from the property's appreciated FMV (above the original cost) and is treated as a Section 1231 long-term capital gain.