Chapter 9 - Acquisition of Property

Chapter 9 - Acquisition of Property - Chapter 9 Acquisition...

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Chapter 9 – Acquisition of Property I. Introduction a. Capital Expenditures: i. Extend significantly beyond the end of the accounting period in which the expenditure was made b. Property: i. Refers to long-lived assets that are owned by a taxpayer c. Capital Recovery Concept: i. Amount invested in an asset is recovered tax-free before the taxpayer realizes any taxable income from the property investment 1. Methods of recovery: a. Deducting a portion of the cost of the asset against income during the life of the asset (through depreciation deduction) b. Offsetting the invested amount against any amounts realized from the disposition of the asset at the end of its period of use ii. Amount of investment is the asset’s basis 1. Establishes the initial amount of capital investment that can be recovered tax-fee as a capital recovery 2. Determines the amount of any annual deductions allowed for depreciation, and it represents the amount of unrecovered capital for determining gain or loss upon the disposition of the asset II. Classes of Property a. Property is classified by both its use and its type i. Use determines whether deductions are allowed for current-year expenditures (repairs, maintenance) relating to the property and for capital recovery deductions for depreciation, depletion, or amortization 1. To take any deductions relating to property, the property must have a business purpose:
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a. Must be used in a trade or business or held for the production of income 2. Trade or Business, Production of Income, Personal Use are the three categories of the use of the property ii. Type of property also affects the deductions allowed during the period of the property used 1. Tangible Property: a. Any property that has physical existence i. Real Property: 1. Land and any structures permanently attached to land a. Referred to as real estate ii. Personal Property: 1. Any tangible property that is not real property a. Machinery, live stock, cars 2. Intangible Property: a. Lacks any physical characteristics and exists only because of economic rights the property possesses III. The Property Investment Cycle a. Generating income involves the acquisition and use of property to produce that income i. Businesses acquire factories, equipment, supplies, and so on to produce products that are sold to generate income b. Investment process begins with the acquisition of the property i. Initial Basis: 1. The cost of acquiring the asset and placing it into service c. Adjusted Basis: i. A taxpayer is allowed to recover the amount of capital invested in an asset tax-free
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1. Basis sets the limit on the maximum amount of capital that can be recovered tax-free a. As an asset is used to generate income, it may be necessary to adjust the initial basis to account for additional capital investments in the asset or for recoveries of capital investment i. Known as adjusted basis: 1. Equal to the initial basis, plus or minus the cumulative effects of the adjustments ii. Increases in Basis:
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Chapter 9 - Acquisition of Property - Chapter 9 Acquisition...

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