4 In the years when because of the ceiling rule the book allocation of

4 in the years when because of the ceiling rule the

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4. In the years when, because of the ceiling rule, the book allocation of depreciation to the noncontributing partner differs from the tax allocation, a remedial allocation is necessary. Accordingly, a remedial allocation of tax depreciation (to equal book depreciation) must be made to the noncontributing partner and the contributing partner receives an offsetting allocation of ordinary income for each year. Problem 195:2 A contributes $100,000 cash to the AB partnership and B contributes a building with an adjusted basis of $50,000 and a fair market value of $100,000. Unless otherwise stated, apply the traditional method with respect to all contributed property. (a) If the building is depreciable, has a 10 year remaining recovery period, and is depreciated under the straight-line method, how much tax and book depreciation will be allocated to each partner? Tax depreciation: $5,000 Adjusted basis: $50,000 Percentage: 10% Book basis: $100,000 Book depreciation: $1,000 (10% x $100,000) (A and B each get $500)
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Under the traditional method: we allocate the book depreciation between A and B and give A tax depreciation equal to the book depreciation. By giving A the tax depreciation, we offset B’s built-in tax gain of $50. A B Tax Book Tax Book 1/1/20x1 100 100 50 100 Yr 1 depr (5) (5) 0 (5) 12/31/20x1 95 95 50 95 Yr 2 depr (5) (5) 0 (5) 12/31/20x2 90 90 50 90 . . . 12/31/20x0 50 50 50 50 (b) Same as (a) above, except that B’s basis in the building is $60,000? Tax depreciation: $6,000 (A gets 5k B gets 1k. After 10 years, A will get 50k dep and B will get 10k dep.) Adjusted basis: $60,000 Percentage: 10% Book basis: $100,000 Book depreciation: $10,000 (10% x $100,000) (A and B each get $5,000) A B Tax Book Tax Book 1/1/20x1 100 100 60 100 Yr 1 depr (5) (5) (1) (5) 12/31/20x1 95 95 59 95 Yr 2 depr (5) (5) (1) (5) 12/31/20x2 90 90 58 90 . . . 12/31/20x0 50 50 50 50 (c) Same as (a) above, except that B’s basis in the building is $40,000? Tax depreciation: $4,000 Adjusted basis: $40,000 Percentage: 10% Book basis: $100,000 Book depreciation: $1,000 (10% x $100,000) (A and B each get $500) A B Tax Book Tax Book
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1/1/20x1 100 100 40 100 Yr 1 depr (4) (5) 0 (5) 12/31/20x1 96 95 40 95 Yr 2 depr (4) (5) 0 (5) 12/31/20x2 92 90 40 90 . . . 12/31/20x0 60 50 40 50 THIS IS UNEQUAL DUE TO THE TRADITIONAL METHOD (We don’t have enough tax depreciation to allocate to A (i.e., to equal his book depreciation) because of the ceiling rule which says that you can’t allocate more tax depreciation to a noncontributing partner with respect to a particular §704(c) property than the partnership’s total tax depreciation with respect to that property.) Try the remedial method: We really have $60 of built-in gain. By allocating 5 to A each year, we deal with $50 of gain. We take care of the other $10 by allocating 1 to B each year. A B Tax Book Tax Book 1/1/20x1 100 100 40 100 Yr 1 depr (5) (5) +1 (5) 12/31/20x1 95 95 41 95 Yr 2 depr (5) (5) +1 (5) 12/31/20x2 90 90 42 90 . . . 12/31/20x0 50 50 50 50 (d) Same as (a) above, except that B’s basis in the building is $120,000? Tax depreciation: $12,000 Adjusted basis: $120,000 Percentage: 10% Book basis: $100,000 Book depreciation: $1,000 (10% x $100,000) (A and B each get $500) B will argue that he didn’t get enough depreciation because all he got was $50,000 before he contributed the building. Therefore, he should be allocated additional depreciation.
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  • Spring '14
  • JamesE.Maule
  • basis, Types of business entity, partner

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