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Property Tax
(R3 M1) (Capitalize or Expense (De Minimis Rule: allows…
Property Tax
(R3 M1)
PURCHASE
- Basis = cost + capital improvements - depreciation
(cost for repair and maintenance does not count)
- Holding Period = from purchase date
GIFT
- Basis =
If donor's adjusted base < FMV = donor's basis
If donor's adjusted base > FMV = FMV at the date of the gift
- Holding period =
If FMV > adjusted basis = donor's holding period
If FMV < adjusted basis = holding period starts on the gifted day
INHERITED
- Basis = FMV on the date of death
- Alternative Valuation Date: FMV on the earlier of
Date distributed, OR
Max 6 months after death
- Holding period = always long-term
Capitalize or Expense
De Minimis Rule: allows company to expense the amount right away instead of capitalize it and depreciate over time.
- The capitalization policy must be a written accounting policy for non-tax purpose that treats as an expense in the financial statement
- If written, not exceed $5,000 per asset allowed
- If not written, not exceed $2,500 per asset allowed
Safe Harbor: allows taxpayer to expense routine maintenance that taxpayer reasonably expects to occur more than once during the class life of the asset
Qualifying small taxpayers:
- Annual gross receipts of $10 m or less for 3 years
- Unadjusted does not exceed $1 m (building)
Qualifying small taxpayers can expense amount that do not exceed the lesser of:
- 2% of unadjusted basis, OR
- $10,000
Gains and Losses
(R3 M3)
Capital Assets:
- Personal automobile of individual taxpayer
- Furniture
- Stocks & securities
- Personal property not used in trade or business
- Real property not used in trade or business
- Interest in a partnership
- Goodwill of a corporation
- Copy rights, literary, musical, or artistic composition that have been purchased
- Other assets held for investments
Individual Capital Gain and Loss:
Net capital gains:
- Taxed at rate: long-term 28%, 25%, 15%
- Short-term: taxed at the ordinary income rate
Net capital losses:
- $3,000 max deduction (excess amount cannot be carried back, carry forward forever
- A personal bad debt becomes short-term when worthless
- Worthless stock & security can be deducted when the stock is totally worthless = 0
Corporation Capital Gain and Loss:
Net capital gains:
- 1231, use against capital losses
Net capital losses:
- Carry back 3 years, carry forward 5 years
- Only allowed to be used/ offset capital gains
Section 1231:
- 1231 assets are personal or real property held over 12 months & used for trade or business
- Equals the capital gain
Section 1245:
- For machine & equipment
- Is the recapture of all accumulated depreciation
- Choose the lesser of the depreciation or the gain realized
Section 1250:
- For real property
- Recaptures only that portion of depreciation taken on real property that is in excess of straight line
For corporations:
- The total amount of the taxable recapture on real property as ordinary income under section 291 is 20% of the lesser of (1) the recognized gain, or (2) the accumulated straight-line depreciation
For individuals:
- When an individual has sold a section 1250 asset at a gain and included the gain with other section 1231 gains, an amount is equal to the lesser of: (1) the recognized gain on the sale, or (2) the straight-line accumulated depreciation on section 1250 asset is taxed at a max rate of 25%
Installment Sale:
- Gross profit = Sale - COGS
- Gross profit % = Gross profit / sales price
- Gain recognized (taxable income) = cash collections (excluding interests) * gross profit %
- All depreciation recaptured shall be reported in income in the year of sale
- Recognize entire loss in year 1
-
Cost Recovery
(R3 M5)
Depreciation:
- Half-year convention: 1/2 in year you buy it, 1/2 in year you sell it
- Mid-quarter convention: If bottom heavy with 40% in last quarter
MACRS:
- 5-year property: includes automobiles, light trucks, computers, typewriters, copiers, duplicating equipment...
- For real property: Residential (27.5 SL); Nonresidencial (39 SL); Mid-month conversion: 1/2 is taken in the month the property is placed in service
Amortization:
- SL 15 years = 180 months
- Research expenses = 60 months
Depletion:
- Cost Depletion:
- Deduction = depletion unit rate * # of unit sold
- Calculations must be redo every year
- Percentage Depletion:
- The depletion is limited to 50% of taxable income from the well or mine
Section 179:
- The property must be purchased in an active trade or business
- The property must not be purchased from a related party
- Can immediate expense machine & equipment cost: limit: $510,000 for new or used personal property
- The max amount is reduced dollar for dollar by the amount of property placed in service during the taxable year that exceeds $ 2,030,000
- SUV may be expensed $25,000
Bonus Depreciation:
Asset
(Section 179)
(Bonus)
(Regular)
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