Question

Josie has operated a successful doll manufacturing business as a sole proprietorship since 2016. She plans on incorporating the business on January 1, 2019 by transferring the following assets; Cash $ 1,000,000 Inventory FMV $ 4,000,000 Tax Basis $3,000,000 Manufacturing Equipment (7-year MACRS property) FMV $ 5,000,000, Cost when purchased in 2016 $8,000,000, Accumulated depreciation on December 31, 2018 is $6,250,800 calculated as follows: Cost in 2016 Bonus Depreciation (2016) MACRS Depreciation (2016) $ 4,000,000 X.1429 MACRS Depreciation (2017) 4,000,000 X.2449 MACRS Depreciation (2018) 4,000,000 X.1749 Accumulated Depreciation $8,000,000 4,000,000 571,600 979,600 699,600 $ 6,250,800 In exchange for these assets. Josie will receive 100 % of the common stock of Josie, Inc (1) In 2019, JI will need to transport the manufacturing equipment to its new manufacturing facility, and have it installed. C Transportation and installation costs will be $ 400,000. Josie's questions are as follows: 1. Will Josie recognize any gain or loss on the exchange of the assets for 100 % of Jl stock? 2. What basis will Jl have in the inventory and the manufacturing equipment received in the exchange? 3. What basis will Josie have in her Jl stock? 4. What is the tax treatment of the 2019 transportation and installation costs?! 5. Will Jl be able to depreciate the manufacturing equipment transferred by Josie? What method will Jl utilize to calculate depreciation? Calculate the 2019 depreciation expense.

Answer 1

FMV 1) Gain/(loss) to be recognised for 100% JI Stock Assets Carrying Gain value (Loss) Cash 1,000,000 1,000,000 Manufacturing equipment 5,000,000 6,250,800 - 1,250,800 Inventory 4,000,000 3,000,000 1,000,000 Total 10,000,000 10,250,800 - 250,800 2) Basis of Inventory and Manufacturing equipmet received Assets Value $ Basis Manufacturing equipment 5,000,000 FMV Inventory 4,000,000 FMV Total 9,000,000 3) Basis of JI Stock -expressed as a journal Assets Debit $ Credit $ Cash 1,000,000 Manufacturing equipment 5,000,000 Inventory 4,000,000 JI Stock 10,000,000 Total 10,000,000 10,000,000 4) Tax treatment of transportation and installation costs - will be considered as Business expense since in books, it will be considered as period costs 5) Depreciation of MACRS equipment Assets $ Manufacturing equipment 5,000,000 Remaining useful life (7-3) Depreciation rate (100%/4 years) 25% Double declining depreciation 25%*2 50% rate Depreciation 2,500,000 Josie can use double decling depreciation method for the remaining years