R2 M1 - Basis & Holding Period Of Assets Flashcards
(8 cards)
As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf does not have an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis safe harbor rule, how much can Wolf deduct for tax purposes in Year 3?
A. $0 B. $4,000 C. $7,500 D. $12,000
Explanation
Choice “A” is correct. The de minimis safe harbor rule will apply, because Wolf has a written policy to expense certain property as of the beginning of the year. Because it does not have an applicable financial statement (AFS), the de minimis rule allows the company to expense items costing up to $2,500 each. These three items cost $4,000 each, which is in excess of $2,500 each. Therefore, none of these costs can be expensed under the de minimis rule.
Choice “B” is incorrect. $4,000 would be the deductible cost per item if the company had an applicable financial statement (AFS).
Choice “C” is incorrect. $2,500 is the maximum cost of an item that can be expensed, because the company does not have an applicable financial statement (AFS). $7,500 would only be correct if the company did not have an applicable financial statement, and the cost of each item did not exceed $2,500.
Choice “D” is incorrect. $12,000 is the full amount of the three items purchased.
Luisa Gomez is starting a lawncare business and is converting her personal use riding lawn mower to business use. The mower cost $2,500 when she purchased it two years ago, and it is now worth $1,500. What is Luisa’s tax basis for depreciation for the mower?
A. $0 B. $1,000 C. $1,500 D. $2,500
Luisa Gomez converted her personal use riding lawn mower to business use when she started her lawncare business. The mower cost $2,500, and it was worth $1,500 on the date of conversion. After taking $500 in depreciation deductions, Luisa sold the mower for $800. What is Luisa’s tax basis in the mower for purposes of calculating gain or loss?
A. $1,000 B. $1,500 C. $2,000 D. $2,500
Explanation
Choice “A” is correct. The $800 sales price is less than the $2,000 adjusted basis at the date of the sale ($2,500 original cost basis – $500 accumulated depreciation), so the property is sold at a loss. The tax basis for determining a loss on the sale of property converted from personal to business use is the lesser of the $2,500 original cost basis or the $1,500 fair market value (FMV) at the date of conversion, reduced by the $500 in depreciation deductions taken after conversion. $1,500 lower FMV at conversion – $500 accumulated depreciation = $1,000 tax basis for calculating the loss on the sale of the mower.
Question
Which of the following statements is not correct?
A. The basis of property acquired from a decedent is always the FMV on the date of death. B. If an asset is acquired by gift and the FMV on the date of gift is lower than the donor’s carryover basis, the recipient’s basis cannot be determined until the asset is disposed of. C. The general rule for the basis of property acquired by gift is a carryover of basis from the donor. D. The basis of an asset that is purchased must be adjusted for depreciation allowable.
Explanation
Choice “A” is correct. Although this is the general rule, it is not always true. If the alternate valuation date is elected, the basis may be something different from the FMV on the date of death.
Choice “B” is incorrect. If an asset is acquired by gift and the FMV on the date of gift is lower than the donor’s carryover basis, the recipient’s basis cannot be determined until the asset is disposed of.
Choice “C” is incorrect. The general rule for the basis of property acquired by gift is a carryover of basis from the donor.
Choice “D” is incorrect. The basis of an asset that is purchased must be adjusted for depreciation allowable.
Explanation
Choice “C” is correct. In a multiple support agreement, all must be qualifying relatives who together contribute more than 50% of the support of the dependent. In addition, a contributor must have provided more than 10% of the individual’s support to claim the individual as a dependent.
Choice “A” is incorrect. Michelle is not able to take the exemption and Brian is able to take the exemption.
Choice “B” is incorrect. Michelle must contribute more than 10%. This answer also does not take into account Brian or John, both of whom are qualifying relatives and are able to take the dependency exemption.
Choice “D” is incorrect. Michelle is not able to take the exemption as she did not contribute more than 10% of Freda’s support.
