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Gain a comprehensive and practical understanding of the various complex tax laws dealing with property transactions from acquisition to disposition. This course provides a thorough analysis of the rules dealing with depreciation, amortization, like-kind exchanges, involuntary conversions and sale of property. It also covers a host of important property related timing issues and planning opportunities that can lead to significant tax savings. This is a course that you will regularly refer back to once you return to the office.
Prerequisite: Familiarity with federal tax issues for property transactions
753580
Chapter 0 - Overview
Course Objectives
• Determine the tax basis of tangible and intangible business assets.
• Calculate allowable cost recovery deductions.
• Understand the tax consequences of property dispositions.
• Utilize tax deferral provisions for involuntary conversions and like-kind exchanges.
Introduction
This course explores the tax life cycle of business assets, from acquisition, through usage, to disposition. Every business requires an investment of resources to generate earnings. Often that investment takes the form of tangible or intangible assets used in the production of inventory, the provision of services, or in support of business personnel performing revenue-generating activities. An investment in business property must generate a positive rate of return in order for the business to succeed. The tax treatment of that investment impacts tax costs and benefits, related cash inflows and outflows, and ultimately the after-tax return on investment.
Effective planning for capital investments must consider related tax consequences. In particular, the timing of deductions for capital expenditures will impact the timing of related tax benefits. In general, the faster an expenditure can be deducted the more valuable the resulting tax savings. Thus, provisions allowing immediate expensing of costs that would otherwise be capitalized and recovered over time are valuable planning options. When expenditures must be capitalized, the period of time over which they can be recovered must be carefully scrutinized. Assets eligible for depreciation, depletion, or amortization produce tax savings over their statutory recovery lives using prescribed methods. The longer the required recovery period, the less value is obtained from the related tax deductions. Any cost not recovered over time as the asset is used will be recovered upon a taxable disposition.
Organization
This course covers existing tax law for property transactions impacting the current tax year. Of course, business assets are often held for many years. In this case, the tax treatment of an asset may depend both on current law and on provisions in effect in the past when the asset was acquired. The course provides this historical perspective as needed, to address current tax computations relevant to assets acquired in the past and used on an ongoing basis. The course materials typically begin with a discussion of general rules, followed by an explanation of the more important exceptions to the general rule, applicable to a broad group of taxpayers. Exceptions that apply only in rare circumstances, or to a very limited set of taxpayers, are not addressed in detail. Important planning opportunities are highlighted throughout the chapters. The course material is illustrated with many examples, some of which are very simple, others more complex as needed to address difficult topics. Each chapter ends with discussion questions to test understanding of the concepts covered in the course.
The course is organized in the following chapters.
• Chapter 1 - Tax Basis of Property Acquisitions. This chapter details the elements of tax basis of business property. It describes the calculation of initial tax basis, whether acquired by purchase individually or as part of an ongoing business, nontaxable exchange, or through self-construction. It also addresses the tax treatment of ongoing expenditures to maintain assets and their classification as either deductible repairs or capitalizable improvements.
• Chapter 2 - Depreciation of Tangible Business Property: General Rules. The cost of tangible business property is often recovered via depreciation. This chapter reviews the general rules for calculating depreciation under the Modified Accelerated Cost Recovery System (MACRS).
• Chapter 3 - Depreciation of Tangible Business Property: Special Rules. While the MACRS system determines the depreciation of most tangible business property, other approaches are required or permitted. This chapter reviews the availability of the Section 179 deduction and first-year bonus depreciation, both of which accelerate deductibility of the cost of qualified property into the year placed in service. The chapter also describes the calculation of depreciation under the Alternative Depreciation System (ADS), the calculation of depreciation for the Alternative Minimum Tax (AMT) and the calculation of depreciation for Earnings and Profits (E&P) purposes.
• Chapter 4 - Amortization and Depletion. The cost of intangible assets is recovered via amortization, where permitted. This chapter reviews the determination of capitalized cost for both self-created and purchased intangibles, and describes the allowance of amortization under Section 197 and other provisions. The chapter also describes the costs associated with mineral properties that are properly recovered through depletion and the calculation of both cost and percentage depletion.
• Chapter 5 - Dispositions of Business Property: Calculation and Character of Gain or Loss. This chapter addresses the final step in the property life cycle - disposition. It describes the calculation of gain or loss realized on property transactions, as well as the timing of when such realized gain or loss is recognized. Once recognized, the character of gain or loss is critical to its ultimate impact on taxable income. The chapter defines capital, ordinary, and Section 1231 assets, as well as the characterization of depreciation recapture. The Section 1231 year-end netting rules are applied to reclassify Section 1231 net gain or loss as either capital or ordinary. Finally, the chapter describes both the limitations on deductibility of net capital losses and the preferential tax rates on net capital gains available to individual taxpayers.
• Chapter 6 - Dispositions of Business Property: Depreciation Recapture. This chapter further examines the impact of depreciation recapture on the character of gains on the sale of Section 1231 assets. It defines Section 1245 property, Section 1250 property, the calculation of recaptured ordinary income on both types of property, and the special recapture provisions of Section 291 applicable only to corporate taxpayers. Finally, the chapter addresses the recapture issues associated with nontaxable exchange transactions.
• Chapter 7 - Dispositions of Business Property: Like-kind Exchanges and Involuntary Conversions. The final chapter of the course addresses two common deferral provisions affecting property disposed of through either a like-kind exchange or an involuntary conversion. Like-kind exchange transactions result in deferral of realized gain or loss on a qualifying exchange. An involuntary conversion resulting in a loss does not require deferral and the loss is currently recognized. However, if the involuntary conversion produces a gain, the taxpayer can elect to defer that gain by reinvesting the proceeds of the conversion in similar property. The chapter describes the requirements for and planning opportunities association with both transactions.
Chapter 1 - Tax Basis of Property Acquisitions
Learning Objectives
• Calculate the initial tax basis and adjusted tax basis of business property.
• Allocate purchase price in a lump-sum purchase of business assets.
• Determine the tax basis of self-constructed assets.
• Distinguish between deductible repairs and capitalized improvements.
Introduction
This chapter discusses fundamental concepts related to the tax basis of assets used in business activities. Tax basis is an important measure of the taxpayer's investment in business property. It controls the ability to deduct such investment, through allowable cost recovery deductions. Tax basis also impacts the calculation of taxable gain or deductible loss on disposition of assets. Thus, the tax life cycle of business property depends on identification of tax basis.
We will first consider the initial tax basis of property at the time of acquisition. Initial tax basis often depends on the manner in which the property was acquired. For example, property acquired in a taxable purchase transaction will have different basis issues than property acquired as part of a nontaxable exchange transaction. Special tax rules apply in determining the tax basis of selfconstructed assets. Allocation rules must be considered when a group of assets are acquired as part of a lump sum purchase of a business. This chapter addresses basis issues for each of these situations.
For property acquired in a taxable purchase, initial tax basis is often referred to as cost basis. This chapter details the elements of such costs. Which acquisition-related costs are included in initial tax basis? Which costs are not part of tax basis, and may produce immediate tax deductions? In particular, how are debt financing, acquisition expenses, and installation costs treated for tax purposes?
When property is acquired as part of a nontaxable exchange, carryover or substituted basis rules typically apply. While this chapter does not address in detail all of the opportunities for and tax consequences of such transactions, it describes in general the critical elements impacting the calculation of carryover or substituted basis for property acquired in a nontaxable exchange. Finally, the chapter concludes by reviewing the calculation of adjusted tax basis of business property, taking into account initial basis, capitalized improvements, and allowable cost recovery deductions.
753580
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