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• W1552297749 abstract "This series is based on questions from AICPA tax certificate of educational achievement (CEA) courses. When appreciated depreciable property is contributed to a partnership in exchange for a partnership interest, there may not be sufficient tax depreciation to allocate to noncontributing partners based on book (market) value. How can this situation be handled? A. Until recently, the that causes this problem could not be avoided. Treasury regulations section 1.704-3--proposed in 1993 and finalized in 1995--provides three optional accounting methods for the effects of the ceiling rule: 1. Traditional method. 2. Traditional method with curative allocations. 3. Remedial allocation method. ILLUSTRATION The three methods can be best explained with an example. Assume Z contributes depreciable real estate to the XYZ partnership in exchange for a one-third interest in partnership capital, profits and losses. The property has an adjusted basis of $150,000 with a remaining recovery period of 10 years and a market value of $450,000 with a remaining economic life of 15 years. Straight-line depreciation applies and tax depreciation is $15,000 per year. Book depreciation is $30,000, and partners X and Y (each with a one-third interest) expect to receive a $10,000 depreciation allocation each even though total tax depreciation is limited to $15,000. Before Internal Revenue Code section 704 was amended in 1984, to add section 704(c) (1) (A), the partnership could have allocated $5,000 of tax depreciation to each partner and ignored the expectations of the noncontributing partners. The partners could have agreed among themselves to recognize the noncontributing partners' expectations, except the ceiling rule would have limited the allocations to X and Y to $7,500 each with nothing left to allocate to Z. Such an agreement became mandatory beginning with the Deficit Reduction Act of 1984. Traditional method. This method has the same effect as the ceiling rule, depriving both X and Y of $2,500 of annual depreciation deductions. Traditional method with curative allocations. This method requires tax and book depreciation to be computed proportionally. Thus, over a 10-year life, book depreciation (under the section 704(b) regulations) would be $45,000 per year--S15,000 to each partner. Tax depreciation of $15,000 would be split evenly between X and Y. Then, to ameliorate the effect of the ceiling rule, the partnership would make a special allocation of a $7,500 ordinary loss each to X and Y with an offsetting special allocation of $15,000 of ordinary income to Z. Thus, both X and Y would receive tax deductions equal to their shares of book depreciation. The traditional method with curative allocations must be elected in the partnership agreement. Remedial allocation method. This method generally accomplishes the same net result, over time, as the traditional method with curative allocations. However, book depreciation is computed using the property's remaining economic life. In the example, book depreciation is $30,000 for 15 years, allocated $10,000 to each partner. …" @default.
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• W1552297749 title "Small Business Tax Solutions" @default.
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