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REG Practice Questions: Basis for Assets Purchased for Use in a Business
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May 3, 2024
In this video, we walk through 5 REG CPA exam practice questions on calculating the basis for assets purchased for use in a trade or business. Link to the free study training webinar mentioned in the video: https://www.superfastcpa.com/strategic-study Timestamps: 00:00 Introduction 02:11 Question 1: Calculating Basis in a Commercial Property 04:09 Question 2: Calculate the Depreciable Basis of a Purchased Computer System 06:03 Question 3: Difference of a 179 Deduction vs MACRS Depreciation 11:01 Question 4: Calculate the Depreciable Basis of New Manufacturing Machinery and Shipping Charges 13:26 Question 5: Calculate the Depreciable Basis of New Office Building and Land
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Hi, I'm Nate with SuperfastCPA, and in today's video, we are going to cover calculating the
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basis of assets purchased to be used in a trade or business
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And we're going to do this in SuperfastCPA fashion, which of course is going straight
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into some practice questions. If this is the first thing you've come across from us, this is the basis of our study strategy
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which is using the MCQs as your primary learning tool. So instead of wasting a bunch of time confusing yourself with video lectures or reading the
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textbook when you have zero context about what's actually going to show up in the questions
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you can save yourself a ton of time per topic by just going into the practice questions
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and learning from the questions. So again, if you've never seen anything from us, the best place that you can start after
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you watch this video or pause this and go sign up for one of these is our free study
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training webinars. So we teach you how to study strategically on these free one hour webinars
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All right. So with that out of the way, we're going to go straight into these questions
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I guess one other thing in this free video, we'll have five questions that we cover
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And then in our members area, the full video is 10 questions
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So for all of these topics, these application type topics throughout the AICPA blueprints
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these free videos that are on YouTube and on our website, we cover five questions, but
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for every topic we have 10 questions. So the full video will be actually 10 questions
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All right. So getting started here. So Jessica purchased a commercial property with a cash payment of 80,000 and a loan of 120,000
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Additionally, she paid 500 for an environmental inspection as required by the lender and 300
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for a property survey. So what is Jessica's basis in the commercial property
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So pause the video. Don't just watch me go through this. Pause the video, reread this if you need to, and then press play when you're ready
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to see us go through the explanation. All right. So let's go through the explanation
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So the answer is D, 200,800. So let's see how we got here
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So Jessica's basis in the commercial property includes the cash payment, the loan, which
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is a debt that she's taken on as part of the acquisition and any additional costs directly
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associated with the purchase. The environmental inspection and property survey are direct costs of acquiring the property
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and therefore they're added to the basis. So now we're simply adding these things up, 80,000 plus 120,000, we're at 200,000
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So 200,800, which is done here. So the answer is D, 200,800
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So the key takeaway from this problem is that, of course, the cash paid, any consideration
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given for the acquisition. So in this case, it's the cash paid and then assuming a loan of 120,000
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So that totals 200,000. And then any other direct costs related to the acquisition would be included
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Now there are some things that might seem related that wouldn't be included, and we'll
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get to those as we keep going on these practice questions. So now let's go to the next question
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So in this question, Smithson Enterprises recently purchased a high-end computer system
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for 20,000 to use in its graphic design business. In addition to the purchase price, the company incurred 400 in shipping fees and 600 in installation costs
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The computer system is expected to be used 80% of the time for business purposes and
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20% for personal use. So what is the correct depreciable basis of the computer system for Smithson Enterprises
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All right. So again, pause the video, make your own attempt at this first
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All right. So let's see what the solution is. So the answer is C, 16,800
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So the depreciable basis for the business asset, again, is the total cost of acquiring
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the asset and preparing it for use. Now the wrinkle in this question is that it's only going to be used 80% of the time for
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business use. So you would first calculate what we did in problem one, which is the total basis
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Well, not the basis, the total acquisition cost. And then because it's only going to be used 80% of the time for business purposes, we
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would multiply this. Well, I guess first let's do step one. So the calculation of the basis would include the purchase price, the shipping fees, and
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the installation costs. So everything here, so we'd be at 21,000 and that's what we have here
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Since the computer system will be used 80% for business, the depreciable basis is 80
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of the total cost. So you'd take the 21,000 total cost, times it by 80% of the business use, and you get
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16,800. So that is the correct answer. All right, let's go to the next question
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So in this question, we have John Smith has recently purchased a piece of equipment for
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his business at a cost of 70,000. The equipment is classified as a seven-year property for depreciation purposes
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He's considering the section 179 election to expense the entire cost in the current year
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Assuming the equipment qualifies for the section 179 deduction, and there are no limits on
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the deduction due to business income, which of the following statements is most accurate
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regarding the tax implications of expensing the asset immediately under section 179, as
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opposed to depreciating the asset over the standard seven-year MACRS schedule? So that's somewhat of an elaborate, confusing sounding question
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So again, the actual question is, which of the following statements is most accurate
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regarding the tax implications of either expensing the asset immediately under 179, as opposed
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to depreciating the asset normally using a seven-year MACRS schedule? So let's read through these
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So we're looking for which is the most accurate. So A, the total depreciation deduction over the life of the asset will be greater if the
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asset is expensed immediately under section 179. So the total depreciation deduction will be greater
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So that doesn't sound right because the total depreciation 20 years from now will have been
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the same, whether it was 179 or done under MACRS. It's just the total depreciation amount
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Really that's saying the total depreciable basis. It's not different based on whether it's done through 179 or MACRS
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Okay, B, expensing the asset immediately will lead to a lower net present value of tax deductions
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compared to depreciation over seven years. That sounds like that's actually the opposite of what is true
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Expensing the asset immediately under 179 would lead to a higher net present value
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Just a higher tax deduction is what you want to know. So that's not correct
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There will be a greater tax deduction in the first year if the asset is expensed immediately. Okay
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That's sounding right so far, but the total amount deductible over the life of the asset
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remains the same. That also sounds correct. So, so far leaning towards C. Choosing to depreciate the asset will result in a quicker
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recovery of the assets cost. And again, that's backwards. You recover the assets cost quicker by expensing the entire thing through 179 versus seven
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year MACRS. So let's see what the answer is. Pretty sure it's C. Okay
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Answer C, there will be a greater tax deduction in the first year if the asset is expensed
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immediately, but the total amount deductible over the life of the asset remains the same
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Both of those things are true. So bit of a explanation of 179 in general, section 179 allows businesses to deduct the
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full cost of qualifying property in the year it's placed in service rather than taking
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depreciation deductions over the assets useful life. This can provide a substantial tax benefit in the year of purchase by reducing taxable income
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However, it's important to understand that the total amount deductible does not change
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only the timing of the deduction. So that's kind of the crux of this question is that part right here
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When an asset is expensed immediately under section 179, the business can deduct the entire
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cost in the year of the purchase. If the business ops for depreciating the asset over its useful life, the total deductions
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over the seven-year period will equal the cost of the asset. So that's just explaining the general idea behind depreciation. Okay
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So let's go on to the, well, I guess it's useful to read these why it's incorrect
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A is incorrect because the total deductible amount, or in other words, the depreciable
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basis of the asset is the same, whether it's done through 179 or seven years through Macker's
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Choice B is incorrect because expensing the asset immediately generally results in a
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higher net present value of tax deductions. In other words, a higher tax deduction as the deduction now is worth more than the same
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amount deducted in the future. And choice D is incorrect just because it was explained backwards
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Section 179 results in a quicker recovery since the entire cost is deducted in the year
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of purchase. All right. Let's go to the next question. All right
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Question four, Quinn, an entrepreneur acquired machinery for use in her new manufacturing business
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The expenses related to the acquisition of the machinery are as follows
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Purchase price, 75,000 shipping charges of 1500 setup costs of 2000 sales tax of 6,000
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training staff on the equipment, 1200. What is the depreciable basis of the machinery
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So pause the video before we start going through the explanation and make your own attempt
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at this based on what we've learned from the previous questions. As a side note, since I can't resist pointing this out, when you're doing this question
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by question, like using the MCQs as a learning tool, if you're doing this correctly, you're
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really understanding question one. It won't teach you everything you need to know about the entire topic, obviously, but
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you just learn what makes that question work. Like what is being tested in that question
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And then as you go on to similar questions, they will just build on each other to the
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point where now granted this topic isn't very difficult. This is like fairly easy, straightforward stuff
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But the point is after a few questions, if you're doing this correctly, you should be
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able to start getting pretty close to answering the remaining questions. And after five or six questions, you should be able to start getting some questions right
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Each question is just a building block in your understanding of this topic
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All right, so let's reveal the solution. So the solution is B, 84,500
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Again, the depreciable basis of an asset includes all costs necessary to acquire the asset and
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prepare it for use. So those included the purchase price, the shipping charges, the setup costs, the sales tax
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Now the training cost of 1,200, while it is related, it is not included in the depreciable basis
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It's an operational expense. That's just a training expense. So it's not part of the depreciable basis
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So we're including these, what, four things, one, two, three, four. So the purchase price, shipping charges, setup costs, and sales tax for a total of 84,500
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All right, let's go on to the next question. So question five, Eagle LLC initiated operations by constructing an office building for its
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business activities at a total construction cost of 200,000 on a parcel of land that it
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bought for 80,000. During the same year, the land's fair market value was assessed at 100,000
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Eagle LLC also incurred 10,000 in property taxes. What is the total depreciable basis of Eagle LLC's business property
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So there's a key thing in here that you should know from accounting basics back in your bachelor's degree
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So part of this question is irrelevant, I would say. So anyways, make your attempt at this, and then we'll go into the solution
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All right. So the solution is 200,000. The depreciable basis for a business property includes the costs that are capitalized and
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related to the construction of the building. Land is not a depreciable asset, so it's not included in the depreciable basis
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I just wanted to jump down here. The purchase cost of the land is 80,000, and the fact that it changes in value, none of
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that's relevant to calculating the depreciable basis of the business property. So the construction cost of the structure is 200,000, so that's obviously included
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The property taxes of 10,000 are an expense. They are not a capital improvement
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So that's another wrinkle to know. Okay. So the property taxes, unlike the sales tax, so it didn't mention sales tax in this problem
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It didn't mention sales tax like it did in the previous problems. Now as we went through those and you saw that the sales tax is included in the depreciable
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basis, you might have assumed that the property taxes were. The property taxes are not
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So they're an expense, not a capital improvement, and they're therefore not added to the depreciable
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basis of the building. So the correct depreciable basis is just the 200,000
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So again, in this question, it didn't give us stuff like, let's say like a title inspection
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or attorney's cost to acquire or build the building or fees paid to some architectural
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survey, like direct costs related to the acquisition of the building. It didn't really give us any of those in this question, or again, the sales tax as part
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of the purchase. That would be included, but for our purposes here in this question, the only thing that
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it mentioned that is actually goes to the depreciable basis of the building is the $200,000
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construction costs. Now that could have included several of those things I just mentioned, but the point is
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the land is not included and the property taxes are not included
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Sales tax would be included. So the correct answer is the 200,000. Okay
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So those were the five questions for this free YouTube version of this video
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And again, the best place that you can start if you want more info on our study strategies
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which your success on the CPA exams is 100% about the effectiveness of your daily study process
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And again, that's what we cover. We teach you the six key ingredients to every successful study process in these free trainings
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So this is the link you can type it into your address bar, or just this same link will be
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down in the description of this video. And again, we will have the remaining five questions inside our members area because
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we cover 10 questions per representative task from the AACPA blueprints. So I hope you found these five questions helpful
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If you did like the video, if you have any questions about anything, put it down in the
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comments and thanks for watching. And again, if you have not, the best place you can start as far as our study strategies
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and improving your own study process is one of these free trainings
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So thanks for watching and we'll see you on the next video
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