Taxation of Property Transactions - CPA Regulation (REG)
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A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
A taxpayer wants to deduct the cost of a seven-year asset placed in service this year. The cost qualifies for the Section 179 election to expense assets. Which of the following statements is most accurate regarding the immediate expensing of this asset versus the depreciation of this asset over seven years?
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The Section 179 election allows a taxpayer to deduct the entire cost of an asset (up to certain dollar thresholds) in place of depreciating the asset over its useful life. Since it is an alternative to depreciation in terms of when the depreciation costs are recognized (not the amount recognized), there is no difference in the amount that would be deductible depreciation expense over the life of the asset.
The Section 179 election allows a taxpayer to deduct the entire cost of an asset (up to certain dollar thresholds) in place of depreciating the asset over its useful life. Since it is an alternative to depreciation in terms of when the depreciation costs are recognized (not the amount recognized), there is no difference in the amount that would be deductible depreciation expense over the life of the asset.
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Gold Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
- Goodwill: $50,000
- Covenant not to compete: 13,000
For tax purposes, what amount of these purchased intangible assets should Gold amortize over the specific statutory cost recovery periods?
Gold Corp. purchased all the assets of a sole proprietorship, including the following intangible assets:
- Goodwill: $50,000
- Covenant not to compete: 13,000
For tax purposes, what amount of these purchased intangible assets should Gold amortize over the specific statutory cost recovery periods?
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All intangible assets (e.g., goodwill, licenses, franchises, trademarks) may be amortized on the straight-line basis over 15 years. This treatment differs from US GAAP, where indefinite-lived assets are not amortized, and definite-lived assets are amortized over their useful lives (which may vary between intangible assets).
All intangible assets (e.g., goodwill, licenses, franchises, trademarks) may be amortized on the straight-line basis over 15 years. This treatment differs from US GAAP, where indefinite-lived assets are not amortized, and definite-lived assets are amortized over their useful lives (which may vary between intangible assets).
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Under the MACRS method of depreciation for property placed in service after 1986:
Under the MACRS method of depreciation for property placed in service after 1986:
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Under the MACRS method for property places in service after 1986, salvage value is ignored for purposes of computing the deduction.
Under the MACRS method for property places in service after 1986, salvage value is ignored for purposes of computing the deduction.
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Of the following conditions, which must be satisfied for a taxpayer to expense in the year of purchase under IRC 179, the cost of new or used tangible depreciable personal property? A) The property must be purchased for use in the taxpayer’s active trade or business B) The property must be purchased from an unrelated party.
Of the following conditions, which must be satisfied for a taxpayer to expense in the year of purchase under IRC 179, the cost of new or used tangible depreciable personal property? A) The property must be purchased for use in the taxpayer’s active trade or business B) The property must be purchased from an unrelated party.
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To qualify for IRC 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business
To qualify for IRC 179, the property must be tangible personal property acquired by purchase from an unrelated party for use in the active conduct of a trade or business
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Per IRS tax or MACRS depreciation, is never used for calculation purposes.
Per IRS tax or MACRS depreciation, is never used for calculation purposes.
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Under MACRS depreciation, salvage value is never used. Straight-line may be used, and any sort of basis would be relevant.
Under MACRS depreciation, salvage value is never used. Straight-line may be used, and any sort of basis would be relevant.
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Marshall purchased a computer for $1,500 and a stereo system for $1,300. The computer is used solely for business and the stereo solely for personal entertainment. During the same year, Marshall experienced serious financial difficulty and sold the stereo for $300 and the computer for $1,000. What amount, if any, is Marshall entitled to deduct as a loss relating to the sale of the stereo and computer?
Marshall purchased a computer for $1,500 and a stereo system for $1,300. The computer is used solely for business and the stereo solely for personal entertainment. During the same year, Marshall experienced serious financial difficulty and sold the stereo for $300 and the computer for $1,000. What amount, if any, is Marshall entitled to deduct as a loss relating to the sale of the stereo and computer?
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A taxpayer may only deduct losses relating to business-use assets. Since the stereo was used solely for personal entertainment, loss recognition is not allowed for tax purposes. Only the $500 loss on the sale of the computer ($1,500 purchase price less the $1,000 sale price) would be deductible.
A taxpayer may only deduct losses relating to business-use assets. Since the stereo was used solely for personal entertainment, loss recognition is not allowed for tax purposes. Only the $500 loss on the sale of the computer ($1,500 purchase price less the $1,000 sale price) would be deductible.
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Parallel Corporation’s building was destroyed as a result of a hurricane. The fair market value of the building at the time of the hurricane was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows ($400,000 for the building, $100,000 for lost profits during rebuilding). Parallel does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Parallel?
Parallel Corporation’s building was destroyed as a result of a hurricane. The fair market value of the building at the time of the hurricane was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows ($400,000 for the building, $100,000 for lost profits during rebuilding). Parallel does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Parallel?
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In determining gains or losses from involuntary conversions, only the basis of the property involuntarily lost is considered in addition to the boot received. Here, since the adjusted basis was $350,000 and $400,000 of the insurance proceeds were for the building, Parallel would recognize a taxable gain of $50,000 (since they do not defer gains for involuntary conversions). The additional $100,000 for lost profits is also taxable, since it relates to profits the company would have otherwise earned in the tax year. The total taxable amount is $150,000 ($50,000 + $100,000).
In determining gains or losses from involuntary conversions, only the basis of the property involuntarily lost is considered in addition to the boot received. Here, since the adjusted basis was $350,000 and $400,000 of the insurance proceeds were for the building, Parallel would recognize a taxable gain of $50,000 (since they do not defer gains for involuntary conversions). The additional $100,000 for lost profits is also taxable, since it relates to profits the company would have otherwise earned in the tax year. The total taxable amount is $150,000 ($50,000 + $100,000).
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Veronica, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Veronica received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Veronica elected to recognize the minimum gain possible. What is Veronica’s basis in the new Warehouse?
Veronica, Inc.’s warehouse (with an adjusted tax basis of $75,000) was destroyed by fire. The following year, Veronica received insurance proceeds of $195,000 and acquired a new warehouse for $167,000. Veronica elected to recognize the minimum gain possible. What is Veronica’s basis in the new Warehouse?
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For an involuntary conversion, when a company reinvests insurance proceeds into an asset that would replace the property lost, the basis of the new property equals that of the adjusted basis of the lost property (here, $75,000). A gain would be recognized for the proceeds not invested, while there would be a deferred gain not yet recognized for the new asset’s cost above the basis of the lost property.
For an involuntary conversion, when a company reinvests insurance proceeds into an asset that would replace the property lost, the basis of the new property equals that of the adjusted basis of the lost property (here, $75,000). A gain would be recognized for the proceeds not invested, while there would be a deferred gain not yet recognized for the new asset’s cost above the basis of the lost property.
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How should insurance deductibles and payouts be treated for proceeds on a warehouse destroyed by a fire?
How should insurance deductibles and payouts be treated for proceeds on a warehouse destroyed by a fire?
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Proceeds that cover the cost of the warehouse’s adjusted basis will not be taxed as a gain as the proceeds are for the destroyed asset.
Proceeds that cover the cost of the warehouse’s adjusted basis will not be taxed as a gain as the proceeds are for the destroyed asset.
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A married couple abandoned their principal residence in March. They had purchased the home five years ago for $350,000. The home had a current FMV of $300,000. What is the maximum loss if any that they are allowed to deduct on the current year’s tax return for the abandoned property?
A married couple abandoned their principal residence in March. They had purchased the home five years ago for $350,000. The home had a current FMV of $300,000. What is the maximum loss if any that they are allowed to deduct on the current year’s tax return for the abandoned property?
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No deduction is allowed for the loss on disposal of a personal use asset.
No deduction is allowed for the loss on disposal of a personal use asset.
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would not be included in the calculation of realized gain or loss by a taxpayer on the transaction between one piece of real estate for another.
would not be included in the calculation of realized gain or loss by a taxpayer on the transaction between one piece of real estate for another.
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In calculating the gain or loss realized during a like-kind transaction, the FMV of property given up would not be relevant in the calculation.
In calculating the gain or loss realized during a like-kind transaction, the FMV of property given up would not be relevant in the calculation.
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A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?
A taxpayer owned land with a basis of $120,000, subject to a mortgage of $75,000. The taxpayer exchanged the land held for another parcel of land with a fair market value of $200,000 plus cash of $35,000, and the taxpayer was relieved of the mortgage on the relinquished land. The transaction qualified for like-kind exchange treatment. What amount of taxable gain will be recognized on the taxpayer's tax return for this exchange?
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The taxpayer’s realized gain is $190,000 ($200,000 FMV of building + $35,000 cash + $75,000 mortgage relief - $120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the $110,000 of boot.
The taxpayer’s realized gain is $190,000 ($200,000 FMV of building + $35,000 cash + $75,000 mortgage relief - $120,000 basis in property exchanged). Total boot received is $110,000 ($35,000 cash + $75,000 mortgage relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($190,000) or the boot received ($110,000), and here the lesser is the $110,000 of boot.
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In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
In a “like-kind” exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
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To qualify for like-kind exchange treatment, both properties must be real property for business or investment. Only the rental real estate meets this criteria.
To qualify for like-kind exchange treatment, both properties must be real property for business or investment. Only the rental real estate meets this criteria.
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Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus $1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize?
Savage exchanged business-use real property having an original cost of $100,000 and accumulated depreciation of $30,000 for business-use real property owned by Cantor having a fair market value of $80,000 plus $1,000 cash. Cantor assumed a $2,000 outstanding debt on the real property. What taxable gain should Savage recognize?
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Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash + $2,000 debt relief - $70,000 basis in property exchanged). Total boot received is $3,000 ($1,000 cash + $2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the $3,000 of boot.
Savage’s realized gain is $13,000 ($80,000 FMV of property + $1,000 cash + $2,000 debt relief - $70,000 basis in property exchanged). Total boot received is $3,000 ($1,000 cash + $2,000 debt relief). In like-kind exchange transactions where boot is received, the gain recognized is the lesser of the realized gain ($13,000) or the boot received ($3,000), and here the lesser is the $3,000 of boot.
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In a like kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
In a like kind exchange of an investment asset for a similar asset that will also be held as an investment, no taxable gain or loss will be recognized on the transaction if both assets consist of:
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No taxable gain or loss will be recognized on a like kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like kind exchange.
No taxable gain or loss will be recognized on a like kind exchange if both assets are real estate property. Rental real estate located in different states qualifies for a like kind exchange.
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An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?
An individual entered into several exchanges during the current tax year. Which of the following exchanges is classified as like kind?
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Real property exchanged for other real property will be classified as a like kind exchange.
Real property exchanged for other real property will be classified as a like kind exchange.
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If both assets in a like-kind exchange transaction are , no taxable gain or loss will be recognized.
If both assets in a like-kind exchange transaction are , no taxable gain or loss will be recognized.
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Real estate qualifies as an asset for a like-kind exchange. Thus, no taxable gain or loss will be recognized.
Real estate qualifies as an asset for a like-kind exchange. Thus, no taxable gain or loss will be recognized.
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Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Acre recognize from this transaction?
Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Acre recognize from this transaction?
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When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $10,000 here (10% of the $100,000 authorized stock). The stock received is treated as ordinary income.
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $10,000 here (10% of the $100,000 authorized stock). The stock received is treated as ordinary income.
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Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Craft recognize from this transaction?
Acre, Boss, and Craft organized Plumb Corp. with authorized voting common stock of $100,000. Acre received 10% of the capital stock in payment for the organizational services she rendered for the benefit of the newly formed corporation. Acre did not contribute property to Plumb and was under no obligation to be paid by Boss or Craft. Boss and Craft transferred property in exchange for stock as follows:
What amount of gain did Craft recognize from this transaction?
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When a corporation is formed (or when ownership changes) through the contribution of property, the transaction will result in no recognized gain if:
- Those contributing property will own at least 80% of the voting stock and at least 80% of nonvoting stock; and
- The property is exchanged solely for stock (e.g., no cash is transferred to those contributing property)
In this case, Boss and Craft both contributed property and together will have 90% ownership of all stock. Since they only received stock in exchange for the property, neither Boss nor Craft will recognize a gain.
When a corporation is formed (or when ownership changes) through the contribution of property, the transaction will result in no recognized gain if:
- Those contributing property will own at least 80% of the voting stock and at least 80% of nonvoting stock; and
- The property is exchanged solely for stock (e.g., no cash is transferred to those contributing property)
In this case, Boss and Craft both contributed property and together will have 90% ownership of all stock. Since they only received stock in exchange for the property, neither Boss nor Craft will recognize a gain.
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Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
Clint, Darren, and Ellen form a corporation. Clint exchanges $25,000 of accounting fees for 30 shares of stock. Darren exchanges equipment with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Ellen exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize?
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When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.
When shares of stock are received in exchange for services, the recipient’s basis in the stock is the FMV of the shares, or $25,000 for Clint as ordinary income. Owners who contribute property (here, Darren) will not recognize a gain if they will own more than 80% of the corporation’s stock; that threshold is not met here (Darren will only own 60%), and so income is recognized for the difference between the shareholder’s basis in the property ($10,000) and the property’s FMV ($100,000), or $90,000. No gain or income is recognized when cash is exchanged for stock.
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