Question

Morgan owned a convertible that he had purchased two years ago for $46,000 and which he transfers to his sole proprietorship. How is the sole proprietorship's basis for the car calculated? What additional information does Morgan need?

A) The sole proprietorship's basis is the original purchase price of $46,000.
B) The sole proprietorship's basis is the fair market value at the time of transfer.
C) The sole proprietorship's basis is the original purchase price adjusted for depreciation.
D) The sole proprietorship's basis is the original purchase price plus any additional improvements.

Answer 1

The sole proprietorship's basis for the car is calculated using the original purchase price adjusted for depreciation.

Step-by-step explanation:

The sole proprietorship's basis for the car is calculated using the original purchase price adjusted for depreciation. In this case, Morgan purchased the car two years ago for $46,000. To calculate the depreciation, Morgan would need to know the useful life of the car and the depreciation method being used (e.g., straight-line or accelerated depreciation).

Once Morgan has this information, he can calculate the annual depreciation expense and multiply it by the number of years since the car was purchased. The result is subtracted from the original purchase price to determine the sole proprietorship's basis for the car.