CPA Exam — REG (Regulation)Federal Taxation of Property TransactionsEasy
A client, Mr. Wallace, purchased a new machine for his manufacturing business for $100,000. He paid $5,000 for sales tax, $2,000 for shipping, and $3,000 for installation. What is the depreciable basis of the machine?
- A$107,000
- B$105,000
- C$110,000
- D$100,000
Show answer & explanationAnswer & explanation
Correct answer: C. $110,000
The depreciable basis of an asset includes its purchase price plus all costs necessary to get the asset ready for its intended use. This includes sales tax, shipping, and installation costs.
Why the other options are wrong
- A. This incorrectly excludes installation costs.
- B. This incorrectly excludes shipping and installation costs.
- D. This only includes the purchase price, ignoring other necessary costs.
Depreciable Basis
The amount on which depreciation is calculated, including the asset's purchase price and all costs to acquire and prepare it for its intended use.
- Includes purchase price, sales tax, shipping, installation.
- Does not include financing costs or ongoing maintenance.
- Basis is reduced by depreciation taken over its useful life.
Memory trick: Purchase PLUS Prepare Equals Basis