Tax Quiz 4 Chapters 10 & 11

•Depreciation Method -There are three acceptable methods for depreciating personal property. §200 percent_____ declining balance. §____percent declining balance. §______

(double) 150 Straight-line.

•Characterizing Gains on the Sale of Depreciable Property to Related Persons ________ -When a taxpayer sells property to a related person, and the property is depreciable to the buyer, the entire gain on the sale is characterized as ______ to the seller. -Seller is required to recognize ordinary income for ___________ the buyer will receive in the future.

(§1239) ordinary income depreciation deductions

Teton trades land worth 29500 (adjusted basis of 18000) for land in a different location that is also worth 29500. How much gain doe Teton recognize on the exchange? What is Teton's basis in the new land?

0 18000

Steve sold 1000 shares of Northeastern Corp. stock to Teton (a corporation) for 30000. Steve realized a 10000 loss but couldn't deduct it because Steve and Teton are related persons. A few years after Teton purchased the stock for Steve, Teton sells the stock to a unrelated third party. What gain or loss does Teton recognize when it sells the stock in three scenarios, 1. 37000. 3. 55000. 3. 25000.

1,2,3 1. amount realized 37,000, 55,000, 25,000 2. adjusted basis 30,000, 30,000, 30,000 3. realized gain(loss) 7,000, 25,000, (5,000) (1-2) 4. Benefit of Steve's (10000) disallowed loss (7000) (10000) 0 (loss benefit limited to realized gain) recognized gain (loss) 0, 15,000, (5,000) (3+4)

Suppose that Teton trades land with a value of 29,500 and an adjusted basis of 18,000 for land in a different location valued at 27,500. To equate the property exchanged, the other party also pays Teton 2,000. What gain or loss does Teton realize on the exchange and what gain or loss does Teton Recognize on the exchange? what is the character of Teton's 2000 gain?

1. amount realized from land 27500 2. amount realized from boot (cash) 2000 3. total amount realized 29500 (1+2) 4. adjusted basis 18000 5. gain realized 11500 (3-4) gain recognized 2000 (lessor of 2 or 5) 1231 gain

Assume that Teton claims bonus depreciation for the eligible personal property acquired Computers & information systems 3/3/2020, 920,000, 5 Delivery Truck 5/26/2020, 80,000, 5 Machinery 8/15/2020, 1,200,000, 7 Total 2,200,000 Assuming Teton elects no 179 expense what is Tetons bonus depreciation

1. qualified property 2,200,000 2. bonus depreciation rate 100% Bonus depreciation 2,200,000 (1*2)

•To stimulate the economy, policy makers occasionally implement bonus depreciation. •Percentage is 100 percent of qualified property placed in service between September 27, 2017, and December 31, 2022. -Qualified property must meet one of the following requirements: §Have a regular depreciation life of ________ or less, -_________ ______or §_______________________________ productions. •Bonus depreciation will be the primary way to depreciate qualified assets for most businesses. •Businesses may elect out of bonus depreciation.

20 years §Computer software, §Water utility property, Qualified film, television, and live theatrical

mid month depreciation for year of disposition = Assume that Teton sells its warehouse on march 5 2020 (the year after Teton buys it). What is Teton's depreciation for the warehouse in the year of disposition?

Full-year's depreciation * {(month in which asset was disposed of -.5)/12} 1. Determine full years depreciation 275,000*2.564% = 7051 2. 3 month sold -.5 = 2.5 3. 2.5/12 4. 7051 * (2.5/12) = 1469

•The initial basis of an asset depends on how the asset was acquired (e.g., purchase, gift, inherited, converted from personal use to business use). •For simplicity's sake, we'll assume assets were purchased and initial basis is amount realized. •Adjusted basis = ______________________________

Initial basis − Cost recovery allowed (or allowable).

Depreciation Recapture Long-Term Trade or business 1231 1231 assets consist of three types:

Pure 1231 Land (not depreciable) 1245 Personal property and intangibles 1250 Depreciable real property

•As a general rule, taxpayers that realize gains or losses must recognize those gains or losses. •___________gains or losses are the gains or losses that are reported on the taxpayer's tax return. •In certain circumstances, taxpayers may be allowed to defer or permanently exclude the gains from taxable income.

Recognized

•The ____ made many changes to the way taxpayers will recover the cost of their assets for the next several years. -The changes primarily affect the special rules for depreciating _________ (i.e., §179 expensing and bonus depreciation). -The special rules (and changes) are covered after the basic depreciation rules.

TCJA personal property

•§1245 Property -___________ (e.g., machinery, equipment, and automobiles) and ___________ (e.g., patents, copyrights, and purchased goodwill) are §1245 property. -The amount of ordinary income (§1245 depreciation recapture) taxpayers recognize when they sell §1245 property is the lesser of: §Recognized ________________, or §Total _____________________________on the asset. -Any remaining gain is ____ -There is no depreciation recapture on assets sold at a ____

Tangible personal property amortizable intangible assets gain on the sale accumulated depreciation (or amortization) 1231 gain loss

•Once a business has determined the depreciation method and recovery periods, it must then determine the applicable depreciation _______ .•The depreciation convention specifies the portion of a ______depreciation the business can deduct for an asset in the year the asset is first placed in service and the year the asset is sold.

convention full-year's

•Depletion is the method taxpayers use to recover their capital investment in natural resources. •Depletion is a particularly significant deduction for businesses in the mining, oil and gas, and forestry industries. •Businesses compute annual depletion expense under both the ____ and________ methods and deduct the ______of the two.

cost percentage depletion larger

•The amount of percentage ___________ for a natural resource business activity is determined by multiplying the gross income from the resource extraction activity by a fixed percentage based on the type of natural resource.

depletion

•§1245 Property -When taxpayers sell or dispose of §1245 property, they encounter one of the following three scenarios of gain or loss: §Recognize a gain created solely through ______ §Recognize a gain created through both _______and actual ___________ §Recognize a _____

depreciation deductions. depreciation deductions asset appreciation. loss

•Patents and Copyrights -Manner of amortization depends on whether the business directly purchases the patent or copyright or whether it self-creates them. -Businesses _______ purchasing patents or copyrights amortize the cost over the remaining life of the patents or copyrights. -Businesses receiving "___________" patents or copyrights amortize the cost or basis of the self-created intangible assets over the shorter of the legal life or remaining useful life.

directly self-created

•Depreciation Recovery Period -For financial accounting purposes, an asset's recovery period (depreciable life) is based on its taxpayer-determined estimated _____ -For________ an asset's recovery period is predetermined by the IRS in Rev. Proc. 87-56, which helps taxpayers categorize each of their assets based upon the property's description. -Once the business has determined the appropriate categories for its assets, it can use the revenue procedure to identify the recovery period for all assets in a particular category.

useful life. tax purposes,

•Like-Kind Exchanges -Taxpayers exchanging property realize gains or losses, but they are in a different situation than taxpayers selling the same property for cash. -Taxpayers selling property for cash must immediately recognize gain on the sale, but taxpayers exchanging property for assets other than cash must defer recognizing gain or loss if they meet certain requirements. -For an exchange to qualify as a like-kind exchange for tax purposes, the transaction must meet the following three criteria: §Real property is exchanged _________ property. §Both the real property given up and the real property received in the exchange by the taxpayer are either "used in a __________" or are "held for __________ by the taxpayer. §The exchange must meet certain _____ restrictions.

"solely for like-kind" trade or business investment" time

•Gain created solely through cost recovery deductions. Teton sold machinery for 300,000. What are the amount and character of the gain Teton recognizes on the sale?

1. Amount realized 300,000 2. Original basis 610,000 3. Accumulated depreciation 381,342 4. adjusted basis 228,658 (2-3) 5. gain (loss) recognized (1-4) 6. ordinary income (1245 depreciation recapture) 71342 (lessor of 3 or 5) 1231 gain 0 (5-6)

•Gain due to both cost recovery deductions and asset appreciation. Teton sells the machinery for 620,000. What are the amount and character of the gain Teton would recognize on this sale?

1. Amount realized 620,000 2. Original basis 610,000 3. accumulated depreciation 381,342 4. adjusted basis 228658 (2-3) 5. gain (loss) recognized 391,342 (1-4) 6. ordinary income (1245 depreciation recapture) 381,342 (lessor of 3 or 5) 1231 gain 10,000 (5-6)

Teton wants to upgrade its old manufacturing machinery that is wearing out. On November 1 of the current year, Teton sells the machinery for $230,000 cash and marketable securities values at 70,500. Teton paid a broker 500 to find a buyer. What is Teton's amount realized on the sale of the machinery?

1. Cash received 230,000 2. marketable securities received 70,500 3. Broker commission paid (500) amount realized 300,000 (1+2+3)

Ken's cost basis in the gold is the 150,000 he paid for it. Based on a mining engineer's estimate that the gold deposit probably holds 1000 ounces of gold, Ken can determine his cost depletion. What is Ken's cost depletion for year 1 and year 2, assuming he extracts and sells 300 and 700 ounces of gold in year 1n and year 2, respectively?

1. Cost basis in gold 150,000 2. estimated ounces of gold 1000 3. per ounce cost depletion rate 150 (1/2) 4. year 1 ounces sold 300 5. year 1 cost depletion 45,000 (3*4) 6. basis remaining after year 1 depletion 105,000 (1-5) 7. year 2 ounces sold 700 8. year 2 cost depletion 105000 (7*3) Basis remaining after year 2 depletion 0 (6-8)

To determine its realized gain or loss on the sale, Teton must calculate the adjusted basis of the machinery it sold for 300,000. Teton originally purchased the machinery for 610,000 three years ago. For tax purposes, Teton depreciated the machinery using MACRS (seven-year recovery period, 200 percent declining balance method, and half-year convention).

1. Initial basis 610,000 2. year 1 (87,169) 3. year 2 (149389) 4. year 3 (106689) 5. year 4 (38095) 6. accumulated depreciation (381,342) (2+3+4+5) adjusted basis 228658 (1+6)

Tetons 2020 asset acquisitions Computers and information systems, 920,000 March 3rd Delivery Truck, 80000, May 26th Machinery 1,200,000 August 15th Total 2,200,000 Assume Teton is eligible for and elects to immediately deduct 800,000 of 179 expense against the basis of the machinery acquired in 2020. (Note that Teton could have elected to deduct up to 1,040,000) What is the amount of Tetons current year depreciation deduction including regular MACRS depreciation and the 179 expense on machinery (assuming the half year convection applies)

1. Machinery 1,200,000 2. 179 expense 800,000 3. remaining basis in machinery 400,000 (1-2) 4. MACRS depreciation rate for 7 year machinery 14.29% 5 MACRS depreciation expense on machinery 57160 (3*4) Total depreciation expense on machinery 857,160 (2+5)

Assume that Teton sells all of its office furniture in 2020 (the year after it buys it) what is Tetons depreciation for the office furniture in the year of disposition (2020)? Assume that Teton sold all of its office furniture in year 1 (the year it bought it and placed it in service). How much depreciation expense can Teton deduct for the office furniture in year 1? Acquired Disposed

1. Office furniture 20,000, original basis 2. Deprecation percentage 24.49% 7 year property year 2 3. full year of depreciation 4898 (1*2) 4. half-year convention percentage 50% depreciation limit in year of disposal Depreciation in year of disposal 2449 (3*4) 0. no deprecation for acquired and disposed in the same tax year Built in tables not built in

Assume that Teton depreciates its personal property under the mid quarter convention and that it sells its office furniture in the third quarter of 2020. The office furniture (20000 original basis) was placed into service during the 1st quarter of 2019 and has a 7 year recovery period. What is Tetons 2020 depreciation for the office furniture?

1. Original basis 20000 2. 2020 depreciation percentage 21.43%, mid-quarter 1st quarter able 7 year property year 2 3. Full-years depreciation 4286 (1*2) 4. Percentage of full years depreciation in year of disposition if mid-quarter convention applies 62.5% Depreciation in year of disposition 2679 (3*4)

Ken determined his cost depletion expense for the gold. However because he is allowed to deduct the greater of cost or percentage depletion each year, he set out to determine his percentage depletion for year 2. Assuming that Ken has gross (taxable) income from the gold mining activity before depletion expense of 200,000 (50,000) 600,000 (450,000) and 600,000 (500,000) in year 1,2,3 what is his percentage depletion expense for each of these three years?

1. Taxable income from activity (before depletion expense 50,000, 450,000, 500,000 2. Gross income 200,000, 600,000, 600,000 3. Parentage 15%, 15%, 15% 4. percentage depletion expense before limit 30,000, 90,000, 90,000 (2*3) 5. 50% of taxable income limitation 25,000, 225,000, 250,000 (1*50%) Allowable percentage depletion 25,000, 90,000, 90,000 (lessor of 4 or 5)

•Assets sold at a loss. Teton sells the machinery for 180,000. What are the amount and character of the gain or loss Teton would recognize on this sale?

1. amount realized 180,000 2. initial basis 610,000 3. accumulated depreciation 381,342 4. adjusted basis 228658 (2-3) 5. gain (loss) recognized (48,658) (1-4) 6. ordinary income 1245 depreciation recapture 0 (lesser of 3 or 5 limited to 0) 1231 (loss) (48658) (5-6)

Suppose that Teton was organized as a C corporation and that, it sold its existing warehouse. Teton sold the warehouse for 350,000 it initially purchased the warehouse for 275,000. and it has deducted 15000 of straight line depreciation deductions as of the date of sale. What is Teton's recognized gain on the sale and what is the character if its gain on the sale?

1. amount realized 350000 2. initial basis 275000 3. accumulated depreciation 15000 4. adjusted basis 260000 (2-3) 5. gain (loss) recognized 90000 (1-4) 6. lesser of accumulated depreciation or recognized gain 15000 (lesser of 3 or 5) 7. 291 recapture (ordinary income) 3000 (20%*6) 1231 gain 87000 (5-7)

Teton exchanged land with a value of 29,500 and an adjusted basis of 18000 for land valued at 27,500 and 2000 cash. Teton recognized 2000 gain on the exchange. What is Teton's basis in the new land received from the dealer?

1. amount realized from land 27,500 2. amount realized from boot (cash) 2000 3. Total amount realized 29500 (1+2) 4. adjusted basis of land 18000 5. gain realized 11500 (3-4) 6. gain recognized 2000 (lessor of 2 or 5) 7. deferred gain 9500 (5-6) adjusted basis in new land 18000 (1-7)

Suppose Teton is formed as a corporation and Steve is its Sole shareholder. Teton is looking to make some long term investments to fund its anticipated purchase of a new manufacturing facility. Steve currently owns 1000 shares of stock in his previous company, Northeaster Corp., which he intends to sell in the near future. Steve initially paid $40 a share for the stock, but the stock is currently valued at $30 a share. While Steve believes the stock has good long term protentional, he need cash now to purchase a personal residence in Cody, Wyoming. Steve believes selling the shares to Teton makes good sense because he can deduct the loss and save taxes now and Teton can benefit from the expected long-term appreciation of the stock. If Steve sells 1000 shares of Northwestern Corp. stock to Teton for $30 per share, what amount of loss will he realize and what amount of loss will he recognize for tax purposes?

1. amount realized on sale 30000 (1000*30) 2. adjusted basis in stock 40000 (1000*40) 3. loss realized on sale 10000 (1-2) loss recognized on sale 0 (losses on sales to related persons are disallowed. Steve owns more than 50%)

Suppose Teton is a corporation and it wants to maximize its first year organizational expenditure deduction. Teton incurred 53,000 of organizational expenditures in year 1. How much of the organizational expenditures can Teton immediately deduct in year 1?

1. maximum immediate expense 5000 2. total organizational expenditures 53000 3. Phase out threshold 50000 4. immediate expense phase out 3000 (2-3) 5. allowable immediate expense 2000 (1-4) but not below 0 Remaining organizational expenditures 51000 (2-5)

Assume that in addition to the assets Teton purchases in 2020 it also purchased a new digital camera for 4000 that its employees use for business on weekdays. On weekends, Steve uses the camera for his photography hobby. Because the camera is listed property, Teton must assess the business use percentage to properly calculate its deductible depreciation for the camera. Assuming that Teton determines the business use percentage to be 75% what is Teton's depreciation deduction on the camera for the year (ignoring bonus depreciation and 179 expensing)

1. original basis of camera 4000 2. MACRS depreciation rate 20% (5 year property year 1 half year convention) 3. full MACRS depreciation expense 800 (1*2) 4. business use percentage 75% Depreciation deduction for the year 600 (3*4)

Lets assume that during 2020 Teton placed into service 2,400,000 of machinery (up from 1,200,000) 920,000 of computers, and an 80,000 delivery truck for a total of 3,400,000 tangible personal property placed in service for the year. What is Teton's maximum 179 expense after applying the phase-out limitation?

1. property placed in service in 2020 3,400,000 2. Threshold for 179 phase out 2,590,000 (2020 amount) 3. Phase out of maximum 179 expense 810,000 (1-2) 4. maximum 179 expense before phase out 1,040,000 Maximum 179 expense after phase out 230,000 (4-3)

Suppose that Teton decides to sell five acres of land adjacent to the warehouse for 100,000. The basis for the land is 37500. Teton agrees to sell the property for four equal payments of 25000 - one now in year one and the other three on Jan 1 of the next three years plus interest. What amount of gain does Teton realize on the sale and what amount of gain does it recognize in year one?

1. sales price 100000 2. adjusted basis 37500 3. gross profit 62500 (1-2) realized gain 4. contract price 100000 (1-assumed liabilities) 5. gross profit percentage 62.5% (3/4) 6. payment received in year one 25000 gain recognized in year 1 5625. (5*6) 1231 gain

Suppose that Teton is organized as a C corporation and Steve is the sole shareholder. Steve sells equipment that he was using for personal purposes to Teton for 90000(he originally purchased the equipment for 80,000). The equipment was a capital asset to Steve because he had been using it for personal purposes (he did not depreciate it). What are the amount and character of the gain Steve would recognize on the sale?

10000 ordinary income (amount realized 90000-80000 adjusted basis). related persons, depreciable asset to Teton 1239.

-§1239 related person rules include an individual and his or her controlled (more than ____ percent owned) corporation or partnership or a taxpayer and any trust in which the taxpayer (or spouse) is a _____ -Also includes two corporations that are members of the same controlled group, a corporation and a partnership if the same person owns more than 50 percent of both entities, two S corporations controlled by the same person, and an S corporation and a C corporation controlled by the same person.

50 beneficiary.

Suppose that Teton began business in year 1 and that it recognized a 7000 net 1231 loss in year 1. Assume that the current year is year 6 and that Teton reports a net 1231 gain of 25,000 for the year. Teton did not recognize and 1231 gains or losses in years 2-5. For year 6, what would be the ultimate character of the 25,000 net 1231 gain? Assume the same facts above, except that Teton also recognized a 2000 net 1231 loss in year 5. For year 6, what would be the ultimate character of the 25,000 net 1231 gain?

7000 ordinary income and 18000 long term capital gain. 9000 ordinary income and 16000 long-term capital gain

•Gain or (loss) realized = ___________ We learned that Teton sold machinery for a total amount realized of 300,000 and we learned that its basis in the machinery was 228,658. What is Teton's realized gain or loss on the sale of the machinery?

Amount realized − Adjusted basis. 1. amount realized 300,000 2. adjusted basis (228,658) Gain realized 71342 (1+2)

Based on his computations of cost depletion and percentage depletion, Ken was able to determine his deductible depletion expense. Using the cost and percentage depletion computations what is Ken's deductible depletion expense for years 1,2, and 3?

Cost depletion 45,000, 105,000, 0 Percentage depletion 25,000, 90,000 90,000 allowable expense 45,000, 105,000, 90,000 (greater of 1 or 2)

•§1231 Assets -___________________________ used in a trade or business held for more than one year. -When a taxpayer sells a §1231 asset, they recognize a §1231 gain or loss. When a taxpayer sells multiple §1231 assets during the year, they ___________the gains and losses together. §If the taxpayer recognizes a net §1231 gain, the net gain is treated as a ________________ §If the taxpayer recognizes a net §1231 loss, the net loss is treated as an __________ -§1231 gains on individual depreciable assets may be recharacterized as ___________ under the _________________________

Depreciable assets and land combine or "net" long-term capital gain. ordinary loss. ordinary income depreciation recapture rules.

•Cost recovery methods. -_____ - Method of deducting the cost of tangible personal and real property (other than land) over time. -______ - Method of deducting the cost of intangible property over time. -_____ - Method of deducting the cost of natural resources over time.

Depreciation Amortization Depletion

•Related-Person________ Rules -Tax laws essentially treat related persons as though they are the same taxpayer. -Related persons are defined in ____ and include certain family members, related corporations, and other entities. -Losses on sales to related persons are not deductible by the seller. -Related persons may deduct the previously disallowed loss to the extent of the gain on the future sale to an unrelated third person.

Loss Disallowance §267

Personal Property Summary Asset, Date Acquired, Quarter Acquired, Cost Basis, Recovery Period Office Furniture, 2/3/19, 1st, 20,000, 7 Machinery, 7/22/19, 3rd, 620,000, 7 Delivery Truck, 8/17/19. 3rd, 25,000, 5 Total 655,000 Teton is using the 200 percent declining balance method and half-year convention to compute depreciation expense on its 2019 personal property additions. What is Teton's 2019 depreciation expense for these assets?

Office Furniture 20,000*14.29% = 2858 Machinery 610,000*14.29% = 87,169 Delivery Truck 25,000 *20% = 5,000 Total 95,027

•Depreciation conventions. -Half-year convention. §_____________depreciation is allowed in first and last year of an asset's life. §IRS depreciation tables automatically account for the half-year convention in year of purchase and disposition. §If an asset is disposed of before it is fully depreciated, only ______ of the table's applicable depreciation percentage is allowed in the year of disposition. -Mid-Quarter Convention §Becomes largely irrelevant post-TCJA because businesses can use either §179 or 100 percent bonus depreciation to recover the cost in full in the year of ______ §Applicable when more than ____ percent of qualified property is placed in service in the ____ quarter of the business's tax year. §Separate tables include rates.

One-half of a full year's one-half acquisition. 40 last

•Organizational Expenditures and Start-up Costs -______________include expenditures to form and organize a business in the form of a corporation or a partnership and are incurred prior to the starting of business. -The costs of selling or marketing stock do not qualify as organizational expenditures and cannot be ________ -Businesses may immediately expense up to ___of organizational expenditures but must phase out the immediate expense amount dollar-for-dollar for expenditures exceeding ____ -Organizational expenditures that are not immediately expensed are amortized using the _____ method over a recovery period of _____

Organizational expenditures amortized. 5000 50000 straight-line 15 years.

Assume that on January 30 2020 Teton acquires a competitor assets for 350,000. Of the 350,00 purchase price, 125,000 is allocated to tangible assets and 225,000 is allocated to 197 intangible assets (patent 25,000, goodwill 150,000, and a customer list with a three year life 50,000) for each of the first three years Teton would deduct one fifteenth of the basis of each asset as amortization expense. What is Teton's accumulated amortization and remaining basis in each of these 179 intangibles after three years

Patent, goodwill, customer list basis, 25000, 150000, 50000 accumulated amortization (3/15 of original basis) (5000) (30000) (10000) Remaining basis 20000, 120000, 40000

•Definition of Like-Kind Property -________ used in a trade or business or held for investment is considered like-kind with other real property used in a trade or business or held for investment §Real property held for ____is ineligible for like-kind treatment. §Property located inside the United States and real property located outside the United States are not like-kind.

Real Property sale

•§1250 Depreciation Recapture for _________ -Depreciable real property (such as an office building or a warehouse) sold at a gain is potentially subject to a different type of recapture called §1250 depreciation recapture. -Because of recent tax law changes, §1250 recapture generally does not apply. -However, a modified version of the recapture rules called ___ depreciation recapture applies to __ corporations but not to other types of taxpayers. §Under §291, C corporations selling depreciable real property recapture, as ordinary income, ___ percent of the lesser of the ______ or the _________

Real Property §291 C 20 recognized gain accumulated depreciation.

Assume that Teton holds the tangible property it acquired and placed in service in 2019 until the assets are fully depreciated. Using the IRS-provided tables how would Teton determine its depreciation expense for 2019 through 2026?

Recovery Period, Year, 7 year office furniture, 7 year machinery, 5 year delivery truck, yearly total 1,2019,2858,87169,5000,95027 2,2020,4898,149389,8000,162287 3,2021,3498,106689,4800,114987 4,2022,2498,76189,2880,81567 5,2023,1786,54473,2880,59139 6,2024,1784,554412,1440,57636 7,2025,1786,54473,0,56259 8,2026,892,27206,0,28098 Accumulated depreciation, 20,000, 610,000, 25,000, 655,000

Assume the machinery Teton place in service was place in service on November 1,2019 rather than July 22nd. What is Tetons 2019 depreciation for its personal property additions.

The mid quarter convention applies because more than 40% of the assets were placed in service during the last quarter (610,000/655000) = 93%. Office Furniture 7 year, February 3rd, 1st, 20000, 25% = 5000 Delivery truck 5 year, August 17, 3rd, 25000, 15% = 3750 Machinery 7 year November 1, 4th, 610000, 3.57%, 21777 Total = 30527

Tetons cost basis in the warehouse it purchases on May 1 2019 is 275,000. What is Tetons 2019 and 2020 depreciation on its warehouse? What would be Tetons 2019 and 2020 depreciation expense if instead of a warehouse the building was an apartment building that it rented to Tetons employees

Warehouse, Method, Recovery Period, Date placed in service, basis, Rate, Depreciation (1*2) 2019, SL, 39, 5/1/2019, 275,000, 1.605%, = 4414 2020, SL, 39, 5/1/2019, 275000, 2.564% = 7051 2019, SL, 27.5 years, 5/1/2019, 275000, 2.273% = 6251 2020, SL, 27.5 years, 5/1/2019, 275000, 3.636% = 9,999

•No matter how a taxpayer disposes of an asset, every asset disposition triggers a realization event for tax purposes. •To calculate the amount of gain or loss a taxpayer realizes when they sell assets, they must determine the amount realized on the sale and the _____ of each asset they are selling. •The amount realized by a taxpayer from the sale or other disposition of an asset is everything of value received from the buyer less any ________ -Although taxpayers typically receive cash when they sell property, they may also accept marketable securities, notes receivable, similar assets, or any combination of these items as payment. -______ = Cash received + Fair market value of other property + Buyer's assumption of liabilities − Seller's expenses

adjusted basis selling costs. Amount realized

•Businesses recover cost of intangible assets through ________ •Intangible assets in the form of capitalized expenditures, such as capitalized research and experimentation (R&E) costs or covenants, do not have physical characteristics. •An intangible asset can be placed in one of four general categories: -§197 purchased intangibles. -Organizational expenditures and start-up costs. -Research and experimentation costs. -Patents and copyrights.

amortization.

•When taxpayers exchanging property meet the like-kind exchange requirements, they do not recognize gain or loss on the exchange, and they establish an exchanged basis in the like-kind property they receive equal to the property they give up. •Sometimes the value of the like-kind property the taxpayer transfers differs from the property received. In this case, the party transferring the lower value property includes additional non-like-kind property to equate the values. This non-like-kind property is known as --- •When boot is received as part of a like-kind transaction, the taxpayer is required to recognize --- to the extent of boot received. •As a practical matter, this means the taxpayer's recognized gain is the lesser of the gain realized or boot received.

boot. gain

•Under _______, taxpayers must estimate or determine the number of recoverable units or reserves that remain at the beginning of the year and allocate a pro rata share of the property's adjusted basis to each unit. •To determine the cost depletion amount, taxpayers then multiply the per-unit basis amount by the number of units sold during the year.

cost depletion

Personal Property comprises tangible assets such as automobiles, equipment, and machinery Real property comprises buildings and land (although land is nondepreciable) intangible assets are nonphysical assets such as goodwill and patents Natural resources are commodities that are considered valuable in their natural form such as oil, coal, timber, and gold

depreciation depreciation amortization depletion

•Research and Experimentation Expenditures -To stay competitive, businesses often invest in activities that will generate innovative products or significantly improve their current products or processes. -Businesses may immediately ____ these costs, or they may elect to capitalize and amortize these costs using the straight-line method over a period of not less than _______, beginning in the month benefits are first derived from the research. -If a business elects to capitalize and amortize the costs, it must stop amortizing the costs if and when the business receives a ________relating to the expenditures. -When the business obtains a patent, it adds any remaining basis in the costs to the basis of the patent and amortizes that basis over the patent's life.

expense 60 months patent

Like kind basis calculation simplified method Method under 1031(d)

fair market value of like kind property received - deferred gain, or + deferred loss = basis of like-kind property received adjusted basis of like-kind property surrendered + adjusted basis of boot given + gain recognized - fair market value of boot received - loss recognize = basis of like-kind property received

•§1231 Look-Back Rule -A nondepreciation recapture rule. -Affects the character but not the amount of gains on which a taxpayer is taxed. -When a taxpayer recognizes a net §1231 gain for the year, they must "look back" to the ____ period preceding the current year to determine whether they recognized any nonrecaptured net §1231 losses, which are losses that were deducted as ordinary losses that have not caused subsequent §1231 gains to be recharacterized as ordinary income.

five-year

•Since 1986, businesses calculate their tax depreciation using the Modified Accelerated Cost Recovery System (MACRS). •To compute MACRS depreciation for an asset, the following need to be known: -Asset's___________ -_____it was placed in service. -Applicable depreciation _______ -Asset's _____ (or depreciable "life"). -Applicable depreciation _____ (used to compute the amount of depreciation deductible in the year of ______ and the year of _____). •The method, recovery period, and convention vary based on whether the asset is_____ property or_____ property.

initial basis. Date method. recovery period convention acquisition disposition personal real

•Capital Assets -Assets held for___________ for the production of income or for __________ -Qualification as capital asset depends on the purpose for which taxpayer uses the asset. -Both individual and corporate taxpayers generally prefer capital gains to ordinary income because certain capital gains are taxed at preferential (lower) tax rates.

investment personal use.

Sometimes taxpayers may involuntarily dispose of property due to property being partially or wholly destroyed by natural disaster or accident, stolen, condemned, or seized via eminent domain. This is called an __________ _______- occur when taxpayers receive a direct property replacement for the involuntarily converted property. Gain is deferred and the basis of property directly converted is carried over from the old property to the new property. ________ occur when taxpayers receive money for the involuntarily converted property through insurance reimbursement or other type of settlement. Taxpayers may elect to either recognize or defer gains. Gains can be deferred if taxpayer acquires a qualified replacement property within the prescribed time limit, which is generally two years (three years in the case of condemnation) after the close of the tax year in which they receive the proceeds.

involuntary conversion. Direct conversions Indirect conversions

•For depreciable purposes, real property is classified as _______________________ •Land is_____________ •____________ consists of dwelling units such as houses, condominiums, and apartment complexes. •______________ consists of all other buildings (e.g., office buildings, manufacturing facilities, shopping malls, etc.). •If a building is substantially improved at some point after the initial purchase, the building addition is treated as a ____ with the same ________ as the original building. •An important area of tax practice related to real property is____________, which is dividing the cost of the building into the building itself and the building components (tangible personal property associated with the building such as electrical and plumbing fixtures that have a shorter recovery period).

land, residential rental property, and nonresidential property. nondepreciable. Residential rental property Nonresidential property new asset recovery period cost segregation

•Business assets that tend to be used for both business and personal purposes are referred to as__________ (e.g., automobiles, planes, laptop computers, etc.). •Depreciation is limited to the portion of the asset used for business purposes. §If the business-use percentage exceeds ____ percent, the deductible depreciation if the full annual depreciation multiplied by the business-use percentage for the year. §If business-use percentage is ____ percent or less, the business must compute depreciation for the asset using the MACRS straight-line method over the MACRS ADS (alternative depreciation system) recover period.

listed property 50 50

•Once taxpayers determine the amount and character of gain or loss they recognize on each §1231 asset they sell during the year, they still have to determine whether the gains or losses will be treated as ordinary or capital. •After recharacterizing §1231 gain as ordinary income under the §1245 and §291 depreciation recapture rules and the §1239 recharacterization rules, the remaining §1231 gains and losses are ______ •Recall that a portion of the §1231 gain may include recaptured ____gains that are taxed at a maximum of ___percent. When netting the §1231 losses against §1231 gains, the losses first offset regular §1231 gains before offsetting _________gains.

netted together. §1250 25 unrecaptured §1250

Cost Recovery •Most businesses make a significant investment in property, plant, and equipment that is expected to provide benefits over a number of years. •For both financial accounting and generally for tax accounting purposes, businesses must capitalize the cost of assets with a useful life of more than ___year on the balance sheet, rather than expense the cost immediately. •The method of cost recovery depends on the nature of the underlying asset. Methods are depreciation, amortization, or depletion. •Businesses use these methods to recover cost of assets due to wear, tear, and obsolescence.

one

•In order to determine how a recognized gain or loss affects a taxpayer's income tax liability, the taxpayer must determine the character or type of gain or loss recognized. •Ultimately, every gain or loss is characterized as either____ or _______(_____or ______ gains or losses). •The character of a gain or loss is important because ordinary income is generally taxed at ordinary rates while ordinary loss is fully deductible against _________. On the other hand, capital gains may be taxed at preferential (lower) rates while deductions for capital losses are subject to certain __________

ordinary capital long-term short-term ordinary income restrictions.

•Although Congress intended for businesses to receive favorable treatment on economic appreciation of §1231 assets, it did not intend for this favorable treatment to apply to gains that were created artificially through depreciation deductions that offset ___________ •When applied, it recharacterizes the gain on the sale of a §1231 asset from §1231 gain into ordinary income. •Does not affect §1231 _________

ordinary income. losses.

•Organizational Expenditures and Start-up Costs -Start-up costs are costs businesses incur to start up a business. -The rules for immediately expensing and amortizing start-up costs are the same as those for ___________________

organizational expenditures.

•Computation depends on the type of §1231 assets the taxpayer is selling (i.e., _____________ •Changes only the character but not the ____ of gain that taxpayers recognize when they sell a depreciable asset.

personal or real property). amount

•The maximum amount of §179 expense a business may elect to claim for the year is subject to a _____limitation. •Businesses must reduce the $1,040,000 maximum available expense dollar-for-dollar for the amount of qualified property placed in service during 2020 over a $2,590,000 threshold. •A business's deductible §179 expense is limited to the taxpayer's business income after deducting all expenses, so it cannot create or extend a __________

phase-out net operating loss.

•Basis for cost recovery. -Businesses may begin recouping the cost of purchased business assets once they begin using the asset in their business (i.e., _________ -The amount of an asset's cost that has yet to be recovered through cost recovery deductions is called the asset's _______________ -An asset's adjusted tax basis can be computed by subtracting the __________________________

place it in service). adjusted basis or tax basis. accumulated depreciation (or amortization or depletion) from the asset's initial or historical basis.

•§197 Intangibles -When a business purchases the assets of another business for a ______________, the business must determine the initial basis of each of the assets it acquired in the transaction. -A substantial portion of the assets acquired may not appear on the balance sheet and exist in the form of intangible assets (e.g., customer lists, patents, trademarks, trade names, goodwill, going-concern value, covenants not to compete, etc.). These are referred to as §197 intangibles. -According to §197, these assets have a recovery period of ______________, regardless of their actual life. -Full-month convention allows taxpayers to deduct an entire month's worth of amortization for the month of purchase and all subsequent months in the year.

single purchase price 180 months (15 years)

•All real property is depreciated for tax purposes using the _______method and the __________ which allows the owner of the real property to expense one-half of a month's depreciation for the month in which the property was placed in service and in the month of the year the property is sold.

straight-line mid-month convention,

•Personal Property Depreciation -Includes all ____ property such as computers, automobiles, furniture, machinery, and equipment, other than real property. -Note that personal property and personal-use property (used for personal purposes) are not the same.

tangible

•Timing Requirements for a Like-Kind Exchange -Like-kind property exchanges may involve___________ §Taxpayers transfer the like-kind property to an intermediary who sells the property and uses the proceeds to acquire the new property for the taxpayer. This can cause delays. -In these deferred like-kind exchanges (Starker exchanges): §Taxpayers must ___ replacement like-kind property within ___ days of giving up their property. §Like-kind property must be ____ within ____ days of when the taxpayer transfers property in a like-kind exchange.

third-party intermediaries. identify 45 received 180

•Ordinary Assets -Assets created or used in a taxpayer's_____________ -Business assets held for less than a __________ -Examples include inventory, accounts receivable, and machinery and equipment used less than one year. -If taxpayers sell ordinary assets at a gain, they recognize an ordinary gain that is taxed at _______________ -If taxpayers sell ordinary assets at a loss, they deduct the loss against other ___________

trade or business. year. ordinary rates. ordinary income.

•Under certain tax provisions, taxpayers defer or delay recognizing a gain or loss until a subsequent period. •Congress allows taxpayers to defer recognizing gains in certain types of exchanges because the exchange itself does not provide the taxpayers with the _______(i.e., cash) to pay taxes on the realized gain. •Also, taxpayers are sometimes in the same economic position before and after an exchange (e.g., owning _______ property).

wherewithal similar

•Taxpayers could obtain significant tax benefits by discovering a way to have all §1231 gains treated as long-term capital gains and all §1231 losses as ordinary losses. •The annual netting process makes this impossible, but taxpayers that own multiple §1231 assets could sell the §1231 loss assets at the end of ___ and the §1231 gain assets at the beginning of ____ •The taxpayer benefits from this strategy in three ways: ____ ---- -Favorably characterizing the gains and losses due to the ____________ •The §____________limits this strategy.

year 1 year 2. -Accelerating losses. -Deferring gains. §1231 netting process. 1231 look-back rule

•Policy makers created ___ as an incentive to help small businesses purchasing qualified property. •This incentive is commonly referred to as the §179 expense or immediate expensing election. •Under §179, businesses may elect to immediately expense up to $1,040,000 in qualified property placed in service during 2020. •Businesses may also elect to deduct less than the maximum. •To reflect this immediate depreciation, they must reduce the basis of the asset or assets before they compute_____ depreciation.

§179 MACRS

____________ -Sale of property where the seller receives the sales proceeds over a period of time (i.e., in multiple tax years). -Must recognize a portion of gain on each installment payment received. §Taxpayer calculates the gross profit percentage by dividing the gross profit by the contract price and then multiplies the gross profit percentage by the amount of the payment received. -Inventory, marketable securities, and depreciation recapture cannot be accounted for under installment sale rules. -Does not apply to __________

•Installment Sales losses.