Standard business mileage rate will increase for the second half of 2022

The IRS recently announced that it’ll increase the standard mileage rate for qualified business driving for the second half of 2022. The adjustment reflects the soaring cost of gasoline this year. In fact, as of June 13, the nationwide average price of regular unleaded gas was $5.01 a gallon, according to the AAA Gas Prices website. This is compared with $3.08 a gallon a year ago.

Beginning July 1, 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the 58.5 cents-per-mile rate effective for the first six months of the year. The IRS also announced an increased standard mileage rate for medical driving and moving for members of the military.

“The IRS is adjusting the standard mileage rates to better reflect the recent increase in fuel prices,” said IRS Commissioner Charles Rettig. “We are aware a number of unusual factors have come into play involving fuel costs, and we are taking this special step to help taxpayers, businesses and others who use this rate.”

Basic business driving deduction rules

There are two options for deducting business driving expenses. If you use a vehicle for business driving, you generally have the option to deduct the actual expenses attributable to your business use. This includes expenses such as gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you may claim a depreciation allowance for the vehicle, based on the percentage of business use. Note that your deduction may be subject to so-called “luxury car” limits, indexed annually.

But many taxpayers don’t want to keep track of all their vehicle-related expenses. Instead of deducting your actual expenses, you may be able to use a standard cents-per-mile rate. With the standard mileage deduction, you don’t have to account for all your actual expenses, although you still must record certain information such as the mileage for each business trip, the dates you drove and the business purpose of the travel.

The cents-per-mile rate is adjusted annually by the IRS. Initially, the agency established a rate of 58.5 cents per business mile for 2022 (up from 56 cents per mile in 2021). But higher gas prices spurred calls for a mid-year adjustment. There’s some precedent for this action: The standard mileage rate was increased for the last six months of 2011 and 2008 after gas prices soared.

With the IRS announcement that the standard business rate will increase to 62.5 cents per mile for the last half of this year, taxpayers who use it will have to use a “blended rate” for 2022 to figure their deductions.

For example, let’s assume that you drive 10,000 miles every six months on business. You also incur $1,100 in related tolls and parking fees during the year. Based on the initial IRS rate, your deduction for business driving for the first six months of 2022 is $5,850 (10,000 miles × 58.5 cents). However, you can deduct $6,250 (10,000 miles × 62.5 cents) for business auto trips during the last six months of 2022. Thus, your total deduction is $13,200 ($5,850 + $6,250 + $1,100 tolls and parking fees).

There are additional rules that may prevent a taxpayer from using the standard cents-per-mile rate or the actual expenses method. For example, leased vehicles must use the standard mileage rate method for the entire lease period (including renewals) if the standard mileage rate is chosen for the first year.

Medical and moving driving

In addition to business driving, you can use the standard mileage rate if you use your vehicle for medical reasons and you deduct medical expenses on your tax return. For example, you can include in medical expenses the amounts paid when you use a car to travel to doctors’ appointments. The new rate for deductible medical expenses will be 22 cents per mile beginning July 1, up from 18 cents per mile for the first six months of 2022.

And the rate for moving-expense driving (currently available only for active-duty members of the military) will also increase to 22 cents per mile beginning July 1, up from 18 cents per mile. The rate for charitable driving, which can be amended only by Congress, remains unchanged at 14 cents per mile for the entire year.

What’s the right option for you?

Keep in mind that you still may fare better from a tax standpoint using the actual expense method than you would with the standard mileage rate, even after the latest rate increases. Contact Tatiana Sims to discuss your particular circumstances.

© 2022

Employee Spotlight – Ben VanMeter

What year did you join Slattery & Holman?

May 2021

Tell me a little about where you attended college and the degree(s) you earned? Any special accomplishments?

I just graduated from IU Bloomington’s Kelley School of Business with a degree in accounting.

What is your favorite thing about living in Indiana?

Making trips to the lake during the summer. I also enjoy having all four seasons.

Tell me a little about your family.

My family has lived in Indiana my whole life. My dad is a retired orthopedic salesman and my mom is an artist who shows her work at the Art IN Hand Gallery in Zionsville. I have one sister named Claire who just finished her second year at Dayton. She is studying biology.

If you didn’t have to sleep, what would you do with the extra time?

Spend time with my friends and family.

What fictional place would you most like to visit?

Mos Eisley Cantina from Star Wars.

What is a new skill that you would like to master? 

I would like to learn how to play guitar.

What do you wish you knew more about?

The tax code.

What’s the farthest you’ve ever been from home?

I took a school trip to Europe during my junior year of high school. We went to Italy and Greece. It was absolutely beautiful; the food was tremendous, and I learned a lot about the long history of these two countries.

What question would you most like to know the answer to?

You think this steak is cooked?

What is the most impressive thing you know how to do?

Cooking different foods. I have been making a lot of food lately (Cajun foods, chili, meatballs, wings, Mexican food, potato salad, breakfast foods, etc.) and I’m getting pretty good at it.

What was the best compliment you’ve ever received?

Being there for a friend when they needed me.

What silly accomplishment are you most proud of?

I won my friend group’s annual euchre tournament two years running. It’s a big deal.

What is your favorite smell?

The smell of the Cajun Holy Trinity (onions, celery, and bell peppers) cooking in a little oil.

If you had a clock that would count down to any one event of your choosing, what event would you want it to count down to?

IU winning another national championship in basketball and hanging our 6th banner.

When was the last time you climbed a tree?

I am not fond of heights, so it has been a while.

What’s the most unusual thing you’ve ever eaten?

I’ve eaten a chocolate-covered cricket before.

What was your first job?

When I was really young, I would water my neighbors’ flowers, and I eventually graduated to mowing lawns as well. My first official job was working on the bag staff at Meridian Hills Country Club.

If you could have any super power, what would it be?

I would want to read people’s minds.

Fully deduct business meals this year

The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).

So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.

Basic rules

Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)

To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.

Currently, the deduction for business meals is allowed if the following requirements are met:

  • The expense is an ordinary and necessary business expense paid or incurred during the tax year in carrying on any trade or business.
  • The expense isn’t lavish or extravagant under the circumstances.
  • The taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.
  • The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.

In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.

So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.

Provided by a restaurant

IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.

However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:

  • Grocery stores,
  • Convenience stores,
  • Beer, wine or liquor stores, and
  • Vending machines or kiosks.

The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.

Keep good records

It’s important to keep track of expenses to maximize tax benefits for business meal expenses.

You should record the:

  • Date,
  • Cost of each expense,
  • Name and location of the establishment,
  • Business purpose, and
  • Business relationship of the person(s) fed.

In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.

© 2022

Selling mutual fund shares: What are the tax implications?

If you’re an investor in mutual funds or you’re interested in putting some money into them, you’re not alone. According to the Investment Company Institute, a survey found 58.7 million households owned mutual funds in mid-2020. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex.

What are the basic tax rules?

Let’s say you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. However, most taxpayers will pay a tax rate of only 15%.

When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One challenge is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold.

When does a sale occur?

It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout.

It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares.

Another example: Many mutual funds provide check-writing privileges to their investors. Although it may not seem like it, each time you write a check on your fund account, you’re making a sale of shares.

How do you determine the basis of shares?

If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then, add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital.

The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis:

  • First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain.
  • Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on April 1, 2018.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest basis.
  • Average basis. The IRS permits you to use the average basis for shares that were acquired at various times and that were left on deposit with the fund or a custodian agent.

As you can see, mutual fund investing can result in complex tax situations. Contact us if you have questions. We can explain in greater detail how the rules apply to you.

© 2022

The tax rules of renting out a vacation property

Summer is just around the corner. If you’re fortunate enough to own a vacation home, you may wonder about the tax consequences of renting it out for part of the year.

The tax treatment depends on how many days it’s rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by nonrelatives if a market rate rent isn’t charged.

If you rent the property out for less than 15 days during the year, it’s not treated as “rental property” at all. In the right circumstances, this can produce significant tax benefits. Any rent you receive isn’t included in your income for tax purposes (no matter how substantial). On the other hand, you can only deduct property taxes and mortgage interest — no other operating costs and no depreciation. (Mortgage interest is deductible on your principal residence and one other home, subject to certain limits.)

If you rent the property out for more than 14 days, you must include the rent you receive in income. However, you can deduct part of your operating expenses and depreciation, subject to several rules. First, you must allocate your expenses between the personal use days and the rental days. For example, if the house is rented for 90 days and used personally for 30 days, then 75% of the use is rental (90 days out of 120 total days). You would allocate 75% of your maintenance, utilities, insurance, etc., costs to rental. You would allocate 75% of your depreciation allowance, interest, and taxes for the property to rental as well. The personal use portion of taxes is separately deductible. The personal use portion of interest on a second home is also deductible if the personal use exceeds the greater of 14 days or 10% of the rental days. However, depreciation on the personal use portion isn’t allowed.

If the rental income exceeds these allocable deductions, you report the rent and deductions to determine the amount of rental income to add to your other income. If the expenses exceed the income, you may be able to claim a rental loss. This depends on how many days you use the house personally.

Here’s the test: if you use it personally for more than the greater of 1) 14 days, or 2) 10% of the rental days, you’re using it “too much,” and you can’t claim your loss. In this case, you can still use your deductions to wipe out rental income, but you can’t go beyond that to create a loss. Any unused deductions are carried forward and may be usable in future years. If you’re limited to using deductions only up to the amount of rental income, you must use the deductions allocated to the rental portion in the following order: 1) interest and taxes, 2) operating costs, 3) depreciation.

If you “pass” the personal use test (i.e., you don’t use the property personally more than the greater of the figures listed above), you must still allocate your expenses between the personal and rental portions. In this case, however, if your rental deductions exceed rental income, you can claim the loss. (The loss is “passive,” however, and may be limited under the passive loss rules.)

As you can see, the rules are complex. Contact us if you have questions or would like to plan ahead to maximize deductions in your situation.

© 2022

Employee Spotlight – Annie Sommer

What year did you join Slattery & Holman?
January 2020

Tell us a little about where you attended college and the degree(s) you earned? Any special accomplishments.
I graduated from IUPUI with a Bachelor’s degree in physical education with a focus in sports management. I went back to IUPUI to take accounting classes in 2016.

What is your favorite thing about living in Indiana?
Getting to experience all 4 seasons

Tell us a little about your family.
My husband and I have been married for 2.5 years. We welcomed a baby boy on May 4th, 2021.

If you didn’t have to sleep, what would you do with the extra time?
I have a 9-month-old. All I want to do is sleep!

annie sommer and son

What is a new skill that you would like to master?

What do you wish you knew more about?
Landscaping and gardening – we’re redoing our landscaping and we’re finding out it’s not as easy as we thought when picking flowers, bushes, or trees.

What’s the farthest you’ve ever been from home?

What is the most impressive thing you know how to do?
My husband and I really like to go ax throwing for date night. It turns out I’m pretty good and hit the bullseyes most of the time!

What is your favorite smell?
Any fresh-smelling scents or vanilla

If you had a clock that would countdown to any one event of your choosing, what event would you want it to countdown to?
My next vacation

What’s the most unusual thing you’ve ever eaten?
I’m super picky….letting different food touch on my plate is unusual for me.

What was your first job?
Working in the concession stand at the local softball fields

If you could have any super power, what would it be?
Time travel or the ability to read minds

Annie Sommer

Another Rough Tax Season for IRS and Taxpayers?

This could be another rough tax season for the IRS and taxpayers. Although this year’s filing season opened January 24, 2022 (the first day the IRS accepted and started processing 2021 returns), the IRS has a backlog of prior year returns to process, and is plagued by staff shortages due to the COVID-19 pandemic and reduced funding in the last few years. Even though the majority of 2020 returns were filed electronically, many of those returns still required manual review, resulting in significant delays in the IRS issuing refunds. This was the case with millions of 2020 returns of taxpayers who received unemployment compensation and had filed before Congress passed a law that retroactively exempted up to $10,200 of 2020 unemployment income per filer (that provision has not been extended to 2021). Human review was also required for a significant number of returns on which the Recovery Rebate Credit had to be reconciled with Economic Impact Payments #1 and #2.

Similar issues are likely to affect 2021 returns, especially those where taxpayers received Advance Child Tax Credit (ACTC) payments and/or Economic Impact Payment #3, both of which must be reconciled on the 2021 return. Thus, to avoid return processing delays, it is important to include the correct amounts received when doing the reconciliation. In January, the IRS began issuing Letters 6419 (for the ACTC) and 6475 (for EIP #3) to taxpayers. These letters provide information needed for the reconciliation calculations, so be sure to provide them to your tax return preparer. Filing an accurate tax return can prevent processing delays, refund delays and later IRS notices.

Despite reduced staffing and the ongoing pandemic, the IRS projects for 2022 that they will process electronically filed returns and pay refunds designated to be direct deposited into the taxpayer’s bank account within 21 days of receiving the return. While this turnaround time can’t be guaranteed, the earlier you file, the better the chance of seeing your refund within that time frame. If the IRS systems detect a possible error, missing information, or there is suspected identity theft or fraud, the IRS may need to correspond with the taxpayer, requiring special handling by an employee. In that case, it may take the IRS more than the typical 21 days to issue any related refund. Sometimes the IRS can correct a return without corresponding, in which case they will send an explanation of the change(s) to the taxpayer.

To stop the filing of fraudulent returns, the IRS is prohibited by law from issuing a refund from a return where the Earned Income Tax Credit or Additional Child Tax Credit is claimed until after mid-February. However, that does not prevent taxpayers from filing their returns before then.

Taxpayers generally will not need to wait for their 2020 return to be fully processed in order to file for 2021. Therefore, if you filed your 2020 return, but the IRS has still not processed it, don’t let that stop you from preparing and filing your 2021 return.

Our advice is to not procrastinate in filing your return, even though the IRS may be bogged down.

In addition to return processing woes, the IRS has had customer service problems, specifically a lack of representatives available to answer taxpayers’ calls. Last tax season, because of COVID-19-related tax changes and staffing challenges, more than 145 million calls were received by the IRS phone system from January 1 to May 17–more than four times the number of calls in an average year. Alas, the IRS was able to answer only about 10% of those calls, and callers who were lucky enough to have their calls answered generally experienced extremely long wait times before speaking with an IRS employee.

The IRS encourages taxpayers to go to to search for answers to their tax questions, but that isn’t always an adequate substitute for talking to a knowledgeable agent. Those who have their returns prepared by a tax professional have the benefit of being able to contact them with questions instead of frustratedly trying to reach the IRS. Given how understaffed the IRS is currently, it’s more beneficial than ever for taxpayers to have their returns professionally prepared.

If you are an existing client and have questions regarding your 2021 tax returns, or you are someone looking for professional preparation, please contact our office. We are here to assist you.

How One Small Company Found Its Opening and Disrupted an Entire Industry in the Process

If you had to make a list of some of the fastest-growing industries in the United States, activewear would undoubtedly be on it.

It’s a field that is made up of a few different categories: athletic clothing, swimwear, yoga items and footwear, to name a few. According to one recent study, the industry was worth about $354 million in 2020. By as soon as 2026, that number is expected to grow by an impressive 25%.

Some of this growth can be attributed to the impact of the COVID-19 pandemic. People suddenly found themselves stuck in their homes and were looking for any opportunity to get outdoors, so many turned to physical fitness. But over the last decade, there’s also been an increasing trend of people taking more accountability in terms of their health and well-being, and an entire industry has benefited in the process.

It’s also an incredibly competitive marketplace, with new organizations cropping up all the time. You may think there isn’t room for new companies and that every possible niche has already been explored, but Vuori proved otherwise.

Founding Vuori

In 2015, entrepreneur Joe Kudla decided to create a new company based on a significant gap he saw in the activewear industry.

Roughly 10 years prior, he was experiencing considerable back pain, and after trying a variety of different methods for relief, he turned to yoga to ease his pain. His back issues stemmed from a lifetime of playing sports such as football and lacrosse. But even after his problems were resolved, he found that he still loved yoga on a conceptual level.

Around the same time, he watched other activewear companies like Lululemon become enormously successful, but there was a catch. Almost all of these brands catered mainly to women, since that’s who was generally thought of as the primary audience. Some of them offered yoga clothing for men, but to Kudla, it always seemed like an afterthought.

With that simple realization, an idea was born.

Joe Kudla got to work on the organization that would eventually become Vuori. It was inspired not only by the idea of giving men similar options to those that had always been available to women, but also by where he lived in Southern California. His home at the time was a big beach community, and he wanted to bring surf culture into the world of performance clothing.

Kudla had a hunch that he had identified a woefully underserved part of the activewear marketplace, and he was absolutely right. After a somewhat slow start in 2015, the company became profitable just two years later in 2017. In 2021, the company was able to raise $400 million from the Vision Fund, which valued the company at an incredible $4 billion.

Consistency Begets Results

As previously stated, when Vuori originally launched in 2015, it got off to a slower start than Joe Kudla and his other team members expected. However, they doubled down on the original idea by soliciting as much feedback as possible from potential customers as to what they wanted and needed, while using that insight to fuel the direction of the company.

During that period, they learned something interesting—a lot of women were buying Vuori’s products that were aimed toward men. They wanted something that was comfortable and sophisticated, and they didn’t much care how they got it. That realization, coupled with an emphasis on the Vuori message of positivity and healthiness, saw the company make just as big of an impact with women as it did with men. As a result, Vuori launched the female-driven side of its business in 2018. The response to both collections has been significant.

Around the same time, Vuori began partnering with various retail outlets to stock its clothing. One of the largest, REI, began an initial test run by stocking the company’s clothing in 30 of its stores. After an overwhelming success, Vuori was soon expanded to all of their locations. Nordstrom and Equinox soon followed suit. What began as a small business based in California soon became a company with national recognition and availability.

When Vuori received $400 million in funding to “execute on its growth strategy,” Joe Kudla saw things a bit differently. Despite all the uncertainty in the world due to COVID-19’s disruption of nearly every industry, Kudla insists that Vuori doesn’t actually need the money it has raised—it’s doing perfectly fine on its own. In early 2020, as the pandemic was still beginning to take hold, Vuori had around 100 employees. Today, it has 450 employees. By as soon as 2024, Kudla anticipates that this number will climb to approximately 1,000.

He indicated that the majority of the funds being raised were going to reward those people who became shareholders early—those who shared his vision and believed in the company since its initial launch.

That being said, some money is planned to go back into the business. Kudla wants to invest in Vuori’s infrastructure and technology—strategic moves that will allow it to better serve its customers nationwide. He also wants to continue developing a “Murderers’ Row” of executive team members in order to secure the future of the company he worked so hard to build from the ground up.

All of Vuori’s success is very impressive, especially given the fact that the company was founded because one man wanted to be more comfortable while practicing yoga. It also underlines the value inherent in a good idea, regardless of where that idea may come from.

What Is Tax Basis and Why Is It So Important?

For tax purposes, the term “basis” refers to the monetary value used to measure a gain or loss. For instance, if you purchase shares of a stock for $1,000, your basis in that stock is $1,000; if you then sell those shares for $3,000, the gain is calculated based on the difference between the sales price and the basis: $3,000 – $1,000 = $2,000. This is a simplified example, of course—under actual circumstances, purchase and sale costs are added to the basis of the stock—but it gives an introduction to the concept of tax basis.

The basis of an asset is very important because it is used to calculate deductions for depreciation, casualties and depletion, as well as gains or losses on the disposition of that asset.

The basis is not always equal to the original purchase cost. It is determined in different ways for purchases, gifts and inheritances. In addition, the basis is not a fixed value, as it can increase as a result of improvements or decrease as a result of credits claimed, business depreciation or casualty losses. This article explores how the basis is determined in various circumstances.

Cost Basis – The cost basis (or unadjusted basis) is the amount originally paid for an item before any improvements, credits, business depreciation, expensing or adjustments as a result of a casualty loss.

Adjusted Basis – The adjusted basis starts with the original cost basis (or gift or inherited basis), then incorporates the following adjustments:

  • increases for any improvements (not including repairs)
  • reductions for tax credits claimed based on the original cost or the cost of improvements
  • reductions for any claimed business depreciation
  • reductions for any claimed personal or business casualty loss deductions

Example: You purchased a home for $250,000, which is the cost basis. You added a room for $50,000 and a solar electric system for $25,000, then replaced the old windows with energy-efficient double-paned windows at a cost of $36,000. You claimed tax credits of $7,500 and $200, respectively, for the solar system and windows. The adjusted basis is thus $250,000 + $50,000 + $25,000 – $7,500 + $36,000 – $200 = $353,300. Your payments for repairs and repainting, however, are maintenance expenses; they are not tax deductible and do not add to the basis.

 Example: As the owner of a welding company, you purchased a portable trailer-mounted welder and generator for $6,000. After owning it for 3 years, you then decide to sell it and buy a larger one. During this period, you used it in your business and deducted $3,376 in related depreciation on your tax returns. Thus, the adjusted basis of the welder is $6,000 – $3,376 = $2,624.

Keeping records regarding improvements is extremely important, but this task is sometimes overlooked, especially for home improvements. Generally, you need to keep the records of all improvements for 3 years (and perhaps longer, depending on your state’s rules) after you have filed the return on which you report disposition of the asset.

Gift Basis – If you receive a gift, you assume the donor’s (giver’s) adjusted basis for that asset; in effect, the donor transfers any taxable gain from the sale of the asset to you.

Example: Your mother gives you stock shares that have a market value of $15,000 at the time of the gift; however, your mother originally purchased the shares for $5,000. You assume your mother’s basis of $5,000. If you then immediately sell the shares, your taxable gain is $15,000 – $5,000 = $10,000.

There is one significant catch: If the fair market value (FMV) of the gift is less than the donor’s adjusted basis and you then sell it for a loss, your basis for determining the loss is the gift’s FMV on the date of the gift.

Example: Again, say that your mother purchased stock shares for $5,000. However, this time the shares were worth $4,000 when she gave them to you, and you subsequently sold them for $3,000. In this case, your tax-deductible loss is only $1,000 (the sales price of $3,000 minus the $4,000 FMV on the date of the gift), not $2,000 ($3,000 minus your mother’s $5,000 basis).

Inherited Basis – Generally, a beneficiary who inherits an asset uses the asset’s FMV on the date of the owner’s death as the tax basis. This is because the tax on the decedent’s estate is based on the FMV of the decedent’s assets at the time of death. Normally, inherited assets receive a step-up (increase) in basis. However, if an asset’s FMV is less than the decedent’s basis, then the beneficiary’s basis is stepped-down (reduced). (Congress has been considering a change that would make the inherited basis the amount of the decedent’s adjusted basis, thus eliminating the beneficial step-up in basis rule.)

Example: You inherited your uncle’s home after he died in 2020. Your uncle’s adjusted basis in the home, which he purchased in 1995, was $50,000, and its FMV was $400,000 when he died. Your basis in the home is equal to its FMV: $400,000.

Example: You inherit your uncle’s car after he died in 2020. Your uncle’s adjusted basis in the car, which he purchased in 2015, was $50,000, and its FMV was $20,000 at his date of death. Your basis in the car is equal to its FMV: $20,000.

An inherited asset’s FMV is very important because it is used to determine the gain or loss after the sale of that asset. If an estate’s executor is unable to provide FMV information, the beneficiary should obtain the necessary appraisals. Generally, if you sell an inherited item in an arm’s-length transaction within a short time, the sales price can be used as the FMV. The parties involved in an arm’s length transaction typically do not have a pre-existing relationship. A simple example of a transaction not at arm’s length is the sale of a home from parents to children. The parents might wish to sell the property to their children at a price below market value, but such a transaction might later be classified by a court as a gift rather than a bona fide sale, which could have tax and other legal consequences.

For vehicles, online valuation tools such as the Kelly Blue Book can be used to determine FMV. The value of publicly traded stocks can similarly be determined using online tools. On the other hand, for real estate and businesses, valuations generally require the use of certified appraisal services.

If you have any questions regarding tax basis, please contact our office.

Employee Spotlight – Erica Stout

Erica L. Stout

What year did you join Slattery & Holman?
July 2021

Tell us a little about where you attended college and the degree(s) you earned? Any special accomplishments.
IU Bloomington B.S. in Accounting and Finance

What is your favorite thing about living in Indiana?
The Indy airport and fall in Bloomington.

Tell me a little about your family.
My husband, Nick, is also a CPA.  We have one son, John, who keeps us very busy.

If you didn’t have to sleep, what would you do with the extra time
Travel to either ski, see musicals, or visit art museums.

What is a new skill that you would like to master?
Speak a different language fluently.

What do you wish you knew more about?
All history, especially my family’s ancestry.

What’s the farthest you’ve ever been from home?

What is the most impressive thing you know how to do?
Get a toddler to sleep.

What was the best compliment you’ve ever received?
“You are always able to smile and put on a brave face.”

What silly accomplishment are you most proud of?
Roasting coffee beans.  It is way harder than it sounds.

What is your favorite smell?

If you could have any super power, what would it be?
Teleportation! It would be amazing to just appear in a different city for dinner with family/friends who are far away.