Question

1-

ack purchased a printing machine for $100,000 for use in business. As to the machine he deducted MACRS cost recovery of $30,000, repair costs of $3,000 and maintenance costs of $4,225.

Calculate Jack's adjusted basis for the machine?

2-

Jack invests $15,000 cash in a leasing activity for a 15% ownership share in the business. The remaining 85% owner is Jill.

Jill contributed $10,000 and borrows $75,000 that she invests in the business.

What is the at-risk amounts for Jack and Jill?

Answer 1

1. Jack Adjusted basis of the machine will be $70000.

Reason: Being repair cost of $3000 and maintenance cost of $4225 will not be consider as value of machinery because such expenses are revenue expenditure and to be charged in P&L. Only capital expenditure incurred for machinery should be considered in adjusted basis value. And thus only MACRS cost recovery of $30000 should be deducted.

Adjusted value: $100000 - $30000

                               =$70000

2. Jack and Jill had invested $15000 and $10000 respectively in the business of leasing. Jill had borrowed $75000 on behalf of business which is used to invest in business. Thus, assuming the borrowed funds is in the name of business, the liability shall be shared in the ratio of ownership. Thus, risk adjusted amount will be

=Invested Capital + Share of Liability

Jack = $15000 + $75000*15%

        = $15000 + $11250

        = $25250

Jill = $10000 + $75000*85%

        = $15000 + $63750

        = $78750