©2015, College for Financial Planning, all rights reserved.

Session 6Basis and Cost Recovery Deductions

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Session Details

Module 3

Chapter(s)

1 - 5

LOs 3-1 Identify the type of property in a situation.

3-2 Analyze a situation to determine the correct treatment for property-related expenditures.

3-3 Analyze a situation to calculate the adjusted basis of property.

3-4 Analyze a situation to calculate the cost recovery deductions over the recovery period.

3-5 Analyze a situation to calculate the election or deduction amount under Section 179. 6-2

Types of Property

6-3

Types of Property

6-4

Types of Property

6-5

Types of Property

6-6

Tax Basis

6-7

Tax Basis

6-8

Treatment of Certain Costs

• Acquisition costso Capitalized—adds to basis

• Repairso Deductible in business or rental settingo Before property placed in service =

Improvements

• Improvementso Capitalized

6-9

Cost Recovery: MACRSDefinedRecover cost of wasting asset over time period approximating asset’s useful lifePersonalty• MACRS table (200% DB w/ ½ year

convention)• Straight-line option for personalty• Section 179 expense election

Realty• Straight-line mandatory for real estate

o Residential realty—27½ year life o Nonresidential realty—39 year life

6-10

Section 179 Expense Election• Election to immediately expense• Up to $25,000 (for 2015) of qualifying

propertyQualifying property• Tangible• Personalty• For use in active conduct of a trade or

businessLimitations• Phaseout for qualifying property placed in

service over $200,000• Taxable income limitation

6-11

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?a. The improvements and repairs must be

capitalized.b. The improvements must be capitalized; the

repairs are currently deductible.c. The improvements are currently deductible;

the repairs must be capitalized.d. The improvements and repairs are currently

deductible.6-12

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?a. $8,989b. $9,489c. $15,000d. $15,500

6-13

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? a. $3 b. $10 c. $12

6-14

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? a. $450b. $900c. $1,800

6-15

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?a. $750b. $800c. $1,500d. $1,600

6-16

Review Question 6

In 2015, Kevin Allen purchased various items of depreciable tangible personal property with a total cost of $128,000 for use in his sole proprietorship. 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 2015?a. $6,000b. $13,000c. $25,000d. $128,000

6-17

©2015, College for Financial Planning, all rights reserved.

Session 6End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning