What is the definition of ‘basis’ in tax terms?
The amount of a taxpayer’s investment in an asset or property for tax purposes.
The initial basis of property is usually its cost, the amount a business pays for the asset.
Which costs may be included in an asset’s cost basis?
- Sales or use tax on the purchase
- Freight to obtain the property, and any installation or testing costs
- Excise taxes
- Legal and accounting fees for obtaining property
- Legal fees for defending and perfecting a property’s title
- Revenue stamps and/or recording fees
- Real estate taxes (if assumed by the buyer)
- Settlement costs for the purchase of real estate
- The assumption of any liabilities on the property
What are the uniform capitalization rules (UNICAP)?
A set of tax regulations requiring businesses to capitalize certain direct and indirect costs associated with producing or acquiring certain property, including inventory.
How does an improvement affect the basis of a property?
An improvement increases the basis of the property by adding value to it.
What decreases the basis of a property?
- Deductions for amortization, depreciation, section 179 elections, and depletion
- Nontaxable corporate distributions
- Exclusion of subsidies for energy conservation measures
- Residential energy credits, vehicle credits, and the investment credit
- Certain canceled debt excluded from income
- Amounts received for easements
Which costs are not included in a property’s basis?
- Casualty insurance premiums
- Rent or utility costs related to occupancy before closing the sale
- Charges for acquiring a loan, such as mortgage insurance premiums, loan assumption fees, cost of a credit report, fees for appraisal reports, fees for refinancing a mortgage, and points
True or False:
The cost of repairs can be immediately deducted and do not have to be capitalized.
True
What do the IRS Tangible Property Regulations determine?
- They provide rules for deciding whether a taxpayer must capitalize costs as improvements to property or may expense them as repairs or maintenance.
- The regulations also define separate building systems—such as plumbing, HVAC, and electrical—as distinct components for determining if work is an improvement or a repair.
What determines whether a cost must be capitalized under the IRS’s final tangible property regulations?
If the cost involves the betterment, restoration, or adaptation of a property to a new or different use, it must be capitalized.
What is a ‘restoration’ according to IRS tangible property regulations?
Amounts paid to return a unit of property to its ordinarily efficient operating condition if it has deteriorated to a state of disrepair and is no longer functional for its intended use.
Example would be replacing all the wiring in a building’s electrical system after damage from a fire.
What is the De Minimis Expensing Safe Harbor Election for businesses with an applicable financial statement (AFS)?
Businesses with an AFS can deduct amounts paid for tangible property up to $5,000 per invoice or item, provided they have a written capitalization policy and attach an election statement to the return.
What is the De Minimis Expensing Safe Harbor Election for businesses without an applicable financial statement (AFS)?
Businesses without an AFS can deduct amounts up to $2,500 per invoice or item, provided they conform with the business’ accounting procedures and attach an election statement to the return.
What is the Small Taxpayer Safe Harbor for Real Property?
Small businesses with gross receipts of $10 million or less can expense as repairs, rather than capitalize, amounts up to the lesser of $10,000 or 2% of the unadjusted basis of a building’s property, if the unadjusted basis is $1 million or less.
What does the Routine Maintenance Safe Harbor allow?
It allows the deduction of routine maintenance costs required more than once within a ten-year period for buildings, or more than once within the applicable class life period for non-building properties.
Example would be replacing siding every 4 years.
Define ‘casualty’ in terms of business property losses.
Damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.
Casualty losses are generally deductible only in the tax year during which the casualty occurred.
If business property is stolen or completely destroyed, how is the deductible loss figured?
The deductible theft loss is the taxpayer’s adjusted basis in the property minus any scrap or remaining value and minus any insurance or other reimbursement received.
What should a business do if there is a reasonable expectation of reimbursement for a casualty loss?
If there is a reasonable expectation of reimbursement, the business cannot deduct the loss until the tax year in which it can reasonably expect no further reimbursement.
What constitutes a ‘total loss’ in business property?
It occurs when a business property is completely destroyed during a casualty event, and the loss is fully deductible without limitations, minus any insurance reimbursements.
How is a ‘partial loss’ calculated for business property?
The deductible loss is the decrease in fair market value of the property or the adjusted basis of the property, whichever is less, reduced by the amount of any insurance reimbursement.
What determines the basis of stocks, bonds, and other securities?
The purchase price plus any costs of purchase, such as commissions and recording or transfer fees.
How does a stock dividend affect the basis per share?
The shareholder’s total basis is unchanged but is spread over more shares, decreasing the basis per share.
What is the effect of a stock split on the basis per share?
A stock split increases the number of shares and decreases the value and the basis per share, while the total basis remains the same.
How is the basis determined for property received in exchange for services?
The fair market value (FMV) of the property is considered income and becomes the basis for that property.
What must an employee report when receiving property in lieu of wages?
The FMV of the property as taxable income.
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Essential Tax Law Figures for Businesses34
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Unit 1: Business Entities and Requirements72
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Unit 2: Accounting Periods and Methods65
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Unit 3: Business Income46
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Unit 4: Business Expenses64
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Unit 5: Employee Compensation and Fringe Benefits78
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Unit 6: Other Business Deductions and Credits72
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Unit 7: Basis of Business Assets31
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Unit 8: Depreciation and Amortization58
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Unit 9: Disposition of Business Assets58
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Unit 10: Partnerships in General43
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Unit 11: Partnership Distributions and Liquidations26
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Unit 12: C Corporations in General46
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Unit 13: Corporate Transactions29
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Unit 14: Corporate Distributions and Liquidations30
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Unit 15: S Corporations48
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Unit 16: Farming Business35
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Unit 17: Tax-Exempt Organizations39
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Unit 18: Retirement Plans for Businesses93
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Unit 19: Trusts and Estates47
