Unit 7. Basis of Business Assets

Question 1

Basis of business assets

Answer 1

the amount of a taxpayer´s investment in assets for tax purposes

Question 2

What if a business cannot determine the basis of an assets

Answer 2

IRS will deem it to be zero

Question 3

Inicial basis

Answer 3

usually its cost
both accrual and cash basis businesses can deduct them in the year the charge is incurred

can include the following:
sales or use tax
freight
installation and testing cost
excise tax
legal and accounting fee to obtain the property
legal fees for the defending or perfecting of the title
revenue stamps
recording fees
real estate taxes
settlement costs for the purchase
any liabilities on the property
(interests are not included)

Question 4

Adjusted basis

Answer 4

certain events can lead to increase or decrease of the basis

Question 5

What cannot be included into real property?

Answer 5

casualty insurance premiums
rent or utility cost before closing the sale
charges to acquire a loan
prepaid interest

Question 6

is assumed mortgage included in basis

Answer 6

yes

Question 7

do Demolition Costs increase the basis

Answer 7

yes

Question 8

Can any of rehabilitation costs decrease the basis?

Answer 8

Yes. rebates, rehabilitation credits, deductions for amortization and depreciation, certain canceled debt, subsidies for energy renovation measures

Question 9

What are repairs and if they are deductible?

Answer 9

Fixes that keep the property in working condition. They are deductible and do not add value.

Question 10

What about Improvements?

Answer 10

They cannot be expensed immediately. They add value because extend its useful life. Therefore they are capitalized and depreciated

betterment
restoration (if before it is no longer functional)
adaptation to a new use

Costs should be evaluated for a specific building system (9 - plumbing, heating, air conditioning and so on) and not for the building as a whole. Therefore they can be more significant and thus depreciable.

Question 11

Safe Harbor Rules - Election #1 (for businesses with an applicable financial statement)

Answer 11

deduction of repairs less than 5K per invoice or item

But to use t his safe harbor a business should attach an election statement to the return

Question 12

Safe Harbor Rules - Election #2 (for businesses with no applicable financial statement)

Answer 12

2500 per invoice or item can be deducted. But to use t his safe harbor a business should attach an election statement to the return

Question 13

Small taxpayer Safe Harbor

Answer 13

If gross sales < 10 million, then expense repairs up to 10,000 or 2% of the unadjusted basis of property as long as it is <1 million or less. Done on Schedule E

The election is irrevocable

Question 14

Routine Maintenance Safe Harbor

Answer 14

Required more than once within 10 year period for buildings and more than once within the applicable class life for non-building properties (pallet of copy paper)

Question 15

Material and Supplies

Answer 15

up to $200
spare parts
12 month property
consumables

Question 16

What is casualty?

Answer 16

Damage, destruction, loss of the property that results from a sudden, unexpected, unusual event

Question 17

Deductible loss that is stolen or completely destroyed (formula):

Answer 17

Adjusted basis in the property - Any scrap or remaining value - any insurance or other reimbursement received

Deductible losses reported on Form 4684

Question 18

What form to declare casualties and theft?

Answer 18

Form 4684

Question 19

How personal casualty losses are treated

Answer 19

they are deductible only in a federally declared disaster area

Question 20

How to calculate business casualty loss?

Answer 20

Adjusted basis - Salvage value (остаточная стоимость) - insurance proceeds)

If business has an insurance it MUST claim it otherwise it will not be able to deduct the loss

Question 21

Basis Other that Cost

Answer 21

Property received for services
property in lieu of wages
Bargain purchases