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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning. Session 6 Basis and Cost Recovery Deductions. Session Details. Types of Property. Types of Property. Types of Property. Types of Property. Tax Basis. Tax Basis. Treatment of certain costs.
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CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 6Basis and Cost Recovery Deductions
Treatment of certain costs • Acquisition costs • Capitalized—adds to basis • Repairs • Deductible in business or rental setting • Before property placed in service = Improvements • Improvements • Capitalized
Cost Recovery: MACRS Defined Recover cost of wasting asset over time period approximating asset’s useful life Personalty • MACRS table (200% DB w/ ½ year convention) • Straight-line option for personalty • Section 179 expense election Realty • Straight-line mandatory for real estate • Residential realty—27 ½ year life • Nonresidential realty—39 year life
Section 179 Expense Election • Election to immediately expense • Up to $25,000 (for 2014) of qualifying property Qualifying property • Tangible • Personalty • For use in active conduct of a trade or business Limitations • Phaseout for qualifying property placed in service over $200,000 • Taxable income limitation
Review Question 1 Don Reeves purchased a small duplex for use as a rental property. After the property was placed in service, he made some improvements; and later in the year, he made some repairs to the property. Which one of the following statements is correct regarding treatment of the expenditures? • The improvements and repairs must be capitalized. • The improvements must be capitalized; the repairs are currently deductible. • The improvements are currently deductible; the repairs must be capitalized. • The improvements and repairs are currently deductible.
Review Question 2 Two years ago, Jeff Walker purchased new office equipment for use in his hardware business. The cost of the equipment was $15,000, and freight and installation costs totaled $500. He received a first-year cost recovery deduction of $2,215 and a second-year cost recovery deduction of $3,796. What is Jeff’s adjusted basis in the equipment? • $8,989 • $9,489 • $15,000 • $15,500
Review Question 3 Two years ago, Sam Jones received a gift of 100 shares of common stock from his parents. The fair market value of the stock on the date of the gift was $10 per share. His parents had purchased the stock four years earlier at $3 per share. Sam sold this stock for $12 per share last week. What was Sam’s per share basis in the stock when it was sold? • $3 • $10 • $12
Review Question 4 Mary purchased a used pickup truck at a cost of $4,200 with sales taxes of $300, to use in her delivery business. She purchased the pickup (5-year property) and placed it in service on January 1 of the current year. Using MACRS, what is the first-year cost recovery deduction that Mary can claim? • $450 • $900 • $1,800
Review Question 5 Bill purchased an automobile at a cost of $7,500 to use in his pizza delivery business. He also paid $500 in sales taxes on the vehicle. He purchased the automobile (5-year property) and placed it in service on March 1 of the current tax year. Using the straight-line method available as an option under MACRS, what is the first-year cost recovery deduction that Bill can claim? • $750 • $800 • $1,500 • $1,600
Review Question 6 In 2014, Kevin Allen purchased various items of depreciable tangible personal property with a total cost of $128,000 for use in his business. Kevin has taxable income (without regard to the Section 179 deduction) of $6,000 from his business. He also has wages from a part-time job of $7,000. What is the maximum Section 179 expense deduction that Kevin may claim in 2014? • $6,000 • $13,000 • $25,000 • $128,000
CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning Session 6End of Slides