While completing undergraduate school work in information systems, Dallin Bourne and Michael Banks decided to start a business called ISys Answers which was a technology support company. During year 1, they bought the following assets and incurred the following fees at start-up:
Year 1 Assets ........... Purchase Date ............Basis
Computers (5-year) ........ October 30, Y1 .......... $15,000
Office equipment (7-year) .... October 30, Y1 .......... $10,000
Furniture (7-year) ...... October 30, Y1 .......... $3,000
Start-up costs ............... October 30, Y1 ........... $17,000
In April of year 2, they decided to purchase a customer list from a company started by fellow information systems students preparing to graduate who provided virtually the same services.The customer list cost $10,000 and the sale was completed on April 30th.During their summer break, Dallin and Michael passed on internship opportunities in an attempt to really grow their business into something they could do full time after graduation.In the summer, they purchased a small van (for transportation, not considered a luxury auto) and a pinball machine (to help attract new employees).They bought the van on June 15, Y2 for $15,000 and spent $3,000 getting it ready to put into service.The pinball machine cost $4,000 and was placed in service on July 1, Y2.
Year 2 Assets .................. Purchase Date .......... Basis
Van ............................ June 15, Y2 ...................... $18,000
Pinball Machine (7-year) ........ July 1, Y2 ..................... $4,000
Customer List ..................... April 30, Y2 .................... $10,000
Assume that ISys Answers does not claim any §179 expense or bonus depreciation.
a. What are the maximum cost recovery deductions for ISys Answers for Y1 and Y2?
b. Complete ISys Answers' form 4562.
c. What is ISys Answers' basis in each of its assets at the end of Y2?