1. ©2015, College for Financial Planning, all rights reserved. Session 6 Basis and Cost Recovery Deductions CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning

2. Session Details Module3 Chapter(s)1 - 5 LOs3-1 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

3. Types of Property 6-3 Realty Land, anything permanently affixed or attached to the land, and certain items that cannot easily be removed Personalty (sometimes known as “personal property”) Any type of property that is not realty, including such items as automobiles, jewelry, clothing, equipment, and furniture

4. Types of Property 6-4 Tangible Property Property that has physical existence and can be touched and felt Intangible Property Property, such as a leasehold interest in real estate or a stock certificate, that has no physical existence of its own, but represents the evidence of ownership or value

5. Types of Property 6-5 Trade or Business Property used on a regular and continuous basis in the taxpayer’s trade, business, or occupation to produce income Production of Income Property that does not require a significant amount of the taxpayer’s time or attention

6. Types of Property 6-6 Inventory Property held for resale in the normal course of a trade or business Personal Use (NOT the same as personal property) Property held for the taxpayer’s personal pleasure or enjoyment

7. Tax Basis 6-7 Purchased Property Original costs plus acquisition costs and cost of subsequent capital improvements, less amount of cost recovery deduction claimed Inherited Property Generally, equal to fair market value (FMV) on decedent’s death, or FMV on alternate valuation date (six months after decedent’s death) if so elected

8. Tax Basis 6-8 Property Acquired by Gift Donor’s basis, unless fair market value (FMV) of property on date gifted is lower than donor’s basis: - If eventually sold for less than FMV on date received, basis becomes FMV on date of gift - If eventually sold for more than donor’s basis, basis becomes donor’s cost - If eventually sold for value between FMV on date received and donor’s basis, taxpayer reports neither gain nor loss -Tacking of holding period if donor’s basis used

9. Treatment of Certain Costs Acquisition costs o Capitalized—adds to basis Repairs o Deductible in business or rental setting o Before property placed in service = Improvements Improvements o Capitalized 6-9

10. 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 o Residential realty—27½ year life o Nonresidential realty—39 year life 6-10

11. Section 179 Expense Election Election to immediately expense Up to $25,000 (for 2015) 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 6-11

12. 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

13. 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.$8,989 b.$9,489 c.$15,000 d.$15,500 6-13

14. 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

15. 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.$450 b.$900 c.$1,800 6-15

16. 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.$750 b.$800 c.$1,500 d.$1,600 6-16

17. 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.$6,000 b.$13,000 c.$25,000 d.$128,000 6-17

18. ©2015, College for Financial Planning, all rights reserved. Session 6 End of Slides CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Income Tax Planning