The basis of purchased assets is historical cost. The basis rules for other acquisitions depend on whether the transaction was taxable or not. For taxable transactions there is usually a step-up in basis to fair market value. For non-taxable transactions, there is usually a carryover basis. Conversion of assets from personal use gets the lesser of the two values. The specific rules are as follows: Acquisition Type Rules Purchase The initial basis is historical cost plus all costs incurred to get the asset to its destination and in working order. Conversion from The depreciable basis would be the lesser of the fair personal use market value of the asset on the date of conversion or the adjusted basis of the transferor. Non-taxable The is a carryover basis of the transferor since there is no recognition of gain or loss on the transfer exchange (not a taxable transaction). Gift The basis is generally a carryover basis, because these transactions usually aren’t taxable. If gift tax is paid, the basis may be increased by a portion of the gift tax paid. Inheritance The basis is the fair market value on the date of death or the alternate valuation date six months later (if elected by the estate). The fair market value is used because the transfer arises from a taxable transaction. [LO 1] Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis. Additional expenses, including sales tax, shipping, installation costs, and the like are capitalized into an asset’s basis because all costs required to place an asset into service are required to be included into its basis. That is, without these costs, the taxpayer would not be able to place in service or use the asset in a business. [LO 1] Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement oil changes, and a transmission overhaul. Which of these expenditures may be deducted currently and which must be capitalized? Explain. An expense that extends the useful life of an asset will be capitalized as a new asset—depreciated over the same MACRS recovery period of the original asset rather than the remaining life of the existing asset. Alternatively, expenses that constitute routine maintenance should be expensed immediately. An engine overhaul is likely to be a capitalized
The basis of purchased assets is historical cost. The basis rules for other acquisitions depend on whether the transaction was taxable or not. For taxable transactions there is usually a step-up in basis to fair market value. For non-taxable transactions, there is usually a carryover basis. Conversion of assets from personal use gets the lesser of the two values. The specific rules are as follows: Acquisition Type Rules Purchase The initial basis is historical cost plus all costs incurred to get the asset to its destination and in working order. Conversion from personal use The depreciable basis would be the lesser of the fair market value of the asset on the date of conversion or the adjusted basis of the transferor. Non-taxable exchange The is a carryover basis of the transferor since there is no recognition of gain or loss on the transfer (not a taxable transaction). Gift The basis is generally a carryover basis, because these transactions usually aren’t taxable. If gift tax is paid, the basis may be increased by a portion of the gift tax paid. Inheritance The basis is the fair market value on the date of death or the alternate valuation date six months later (if elected by the estate). The fair market value is used because the transfer arises from a taxable transaction. [LO 1] Explain why the expenses incurred to get an asset in place and operable should be included in the asset’s basis. Additional expenses, including sales tax, shipping, installation costs, and the like are capitalized into an asset’s basis because all costs required to place an asset into service are required to be included into its basis. That is, without these costs, the taxpayer would not be able to place in service or use the asset in a business. [LO 1] Graber Corporation runs a long-haul trucking business. Graber incurs the following expenses: replacement oil changes, and a transmission overhaul. Which of these expenditures may be deducted currently and which must be capitalized? Explain. An expense that extends the useful life of an asset will be capitalized as a new asset—depreciated over the same MACRS recovery period of the original asset rather than the remaining life of the existing asset. Alternatively, expenses that constitute routine maintenance should be expensed immediately. An engine overhaul is likely to be a capitalized
Downloadable-Solution-Manual-for-Taxation-of-Business-Entities-6th-Edition-Spilker-1.docx