R2 Flashcards
(24 cards)
Real property and Personal Property
Real: Land and all items permanently fixed to land (building, pavement)
Personal: All property not classified as real property
Purchasing Property
Holding period begins on date property is acquired
LT Gain: capital gain tax
ST Gain: ordinary income tax
Taxable transaction:
Basis = FMV
Nontaxable transaction:
Basis = NBV of asset given up in like kind exchange (no tax bc no gain)
Gifted Property
Donee = no tax
G/L Basis = rollover NBV
Exception: FMV @ gift date < Donor’s NVB
- Price > NBV: NBV
- Price < NBV: FMV
- Price between NBV and FMV: Price (No G/L)
Depreciation Basis: lesser of adjusted basis @ gift date OR FMV @ gift date
Inherited Property
Basis: FMV @ DOD
Alternative Valuation Date (AVD): FMV earlier of distribution of inheritance OR six months after death
Holding period: ALWAYS LT
Purchasing property for a business
If useful life is greater than 1 year: Capitalize
Improvements: Capitalize
Repair & Maintenance: Expense
Materials/ Supplies: Expensed when $200 or less OR consumed in 1 year or less
De Minimis Safe Harbor Rule
Businesses can follow a policy to immediately expense low-cost personal property
Taxpayer with AFS: deduct up to $5,000
Taxpayer without AFS: deduct up to $2,500
If the cost is MORE than this amount, entire cost is capitalized
Property converted form personal to business use
Depreciation Basis: lessor of original cost (adjusted for any improvements) or FMV @ date of conversion
G/L Basis: compare adjusted basis @ date of sale (OG cost - depreciation) and the sales price. If a loss, two steps:
(1) lessor of adjusted basis or FMV of property @ conversion date
(2) subtract any depreciation taken after the conversion
Intangible Property
Basis: cost or purchase price
R&D: capitalized immediately (5 years domestic, 15 years foreign), begins 1/2 way through year costs were paid/incurred, any remaining unamortized costs are added to patents basis
Loan Costs: Capitalized immediately
Patent and copyrights: Capitalized immediately
Over life of the patent, loan, etc.
Section 197 Purchased Intangibles
Intangible assets acquired in connection with purchase of an existing business
Portion of the lump-sum purchase price of the business’ assets is allocation to section 197
ALWAYS over 15 years regardless of life term
Organizational cost and start-up costs
Taxpayers can expense first $5,000 of business organization costs and first $5,000 of start up costs
$5,000 reduced dollar-for-dollar when total costs exceed $50,000
Remaining expenses are capitalized over 15 years starting month business began
Organizational costs: forming and organizing the business, legal fees, accounting fees, filing fees, organizational meetings (NOT adding equity to business)
Start-up costs: before business begin operations, cost to investigate and create the business
Amortization
Full-month convention in month of acquisition and disposition
Tax: typically 15 years (180 months)
GAAP: subject to impairment test, infinite live: no amortization, finite live: over life of asset
Capital asset vs noncapital assets
Capital: Assets held or used for investments or personal use (car, home furniture that’s personal)
Typically taxed as capital gains/ losses
Noncapital: assets that are held for sale to customers in ordinary course of business (inventory), AR from business. used in taxpayer’s trade or business
Typically taxed as ordinary income
Collectible and qualified small business tock (QSBS)
LT gain on sale of collectibles
QSBS: original issue C corporation stock held for more than 5 years
- C corps tax basis in assets cannot exceed $50 million
- Can exclude gain greater of $10 million or 10x taxpayer;s basis in the stock
- Gain in excess of excluded amount is taxed at 28%
Worthless stock and securities
Stock price that went down to zero
Treated as capital loss as if they were sold on the last day of the taxable year in which they become worthless
Short Sale
Stock that is valued high and believed to go down in the future
Sell now and buy later
Treated as capital gain or loss
Netting process for capital G/L
Net each individual group (ST, LT, 28%)
Offset smallest group with largest group (ST & 28%)
Offset remaining with LT
Nondeductible Capital Losses
W: Wash sale
R: Related Party Transactions
A: and
P: Personal losses
Wash Sale
Sold for loss, repurchased before or after sale date
Basis of new shares purchased = purchase price of the shares + disallowed loss on wash sale
Acquisition date of the repurchased security = original date of acquisition (extends holding period)
Modified Accelerated Cost Recovery System
MACRS: depreciation method for income tax purposes
Accelerated compared to straight line
5-Year: Automobile, Computer, Copier
7-Year: Furniture, Fixtures, Machinery, other Equipment
MACRS: Half-year vs Mid-Quarter Convention (Personal Property)
Half-year: 1/2 year of acquisition and 1/2 year disposition
Mid-quarter: If more than 40% is placed in service in the last quarter of the year, treat as having been placed in service midway thorough the quarter
MACRS: Residential vs Nonresidential (Real Property)
Residential: straight-line 27.5 years
Nonresidential: straight-line 39 years
Mid-Month convention
Section 179 Expense Deduction
Qualified real property improvements
ONLY NONRESIDENTIAL
Examples: roof, heating, ventilation, AC, fire protection, alarm, security system
Annual deduction (2025)
Max: $1,250,000
Purchased property exceeds $3,130,000, dollar-for-dollar phase out
Limited to taxable income
Cannot create or add onto a loss
Does not include: related party transactions
Bonus Depreciation
Additional deduction for qualified property placed into service (40% - 2025)
Must have a recovery period of 20 years or less
Does not include: related party transactions, gifts, inheritance, personal to business
Order of depreciation calculation: MACRS, Bonus, Section 179
- Section 179
- Bonus Depreciation
- MACRS Depreciation
