CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A client, Mr. Henderson, purchased a new machine for his manufacturing business on July 1, 2023, for $150,000. He paid $10,000 for sales tax and $5,000 for installation and testing. The machine has an estimated useful life of 10 years. What is the depreciable basis of this machine?
- A$160,000
- B$165,000
- C$150,000
- D$155,000
Show answer & explanationAnswer & explanation
Correct answer: B. $165,000
The depreciable basis of an asset includes its purchase price plus all costs necessary to get the asset ready for its intended use, such as sales tax, shipping, and installation costs. In this case, the sum is $150,000 + $10,000 + $5,000 = $165,000.
Why the other options are wrong
- A. This includes the purchase price and sales tax, but omits installation costs.
- C. This only includes the purchase price, omitting sales tax and installation costs.
- D. This includes the purchase price and installation, but omits sales tax.
Depreciable Basis
The amount an asset can be depreciated over its useful life, typically including the purchase price plus all costs incurred to get the asset ready for its intended use.
- Includes acquisition cost, sales tax, shipping, and installation.
- Does not include financing costs or routine maintenance.
- Used to calculate depreciation expense over the asset's life.
Memory trick: Basis is the 'BIG' cost to get it going.