How do I report an increase in basis on an asset I am selling under an S-Corp

[erikhedberg]

Thanks all for your guidance.

      I purchased some land as an asset in my S-Corp 10 years back.  Purchase price was $30,000 which I assume is my basis.  In the ten years I owned the land, I cleared, planted 200 grape vines and tended the vineyard. Presently, I have 8 year old mature vines which have a significant value.  I believe this increases the basis of the land?

    In 2020, I sold this S-Corp asset for $100,000.  Can I claim the mature grapes has increased my basis to offset the capital gain?  If so. how?

Thank you very much,

    Erik  

[Anonymous_]

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@erikhedberg wrote:

.....I believe this increases the basis of the land?

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You can increase your basis by the total cost of land improvements over the years, but you cannot increase your basis by the increase in market value.

[erikhedberg]

HI Champ,

    Thanks for the response. I am in Turbo for Business.  Where would I go in Turbo (or Form)  to claim an increase in basis for the grape vine money I spent to grow the vineyard.

Thanks,

    Erik

[Rick19744]

Just to be clear here, how did you treat those costs when the expense(s) were incurred?

• What exactly are you looking to add to your basis?
• Your time involved cannot increase your basis
• How did you treat the cost of acquiring the grape vines when that occurred?  If you expensed those costs then you cannot also increase the basis of the land.

[Anonymous_]

To enter your land improvements, click the Start or Update button to the right of Dispose of Business Property in the Federal Taxes/Income section of the program. 

You will add land improvements during the interview.

[erikhedberg]

HI Rick (Champ),

    Thank you so much for the time and effort in your response.  I really appreciate it.  The non-deductible effort was I cleared the land, turned the soil, planted clover for 2 years, then planted 200 grape vines.  Through 10 more years, I pruned, managed and harvested grapes.  My neighbor fermented the wine.  Of course, all non-deductible

I deducted the cost of the vines, fertilizer, trellises and the irrigation system.  

Originally, the  young vine grafts cost $10 a piece.  However, the vines have matured and are worth considerable more.  From talking with other vineyard owners, I would estimate that these mature, producing vines are now worth about $75 a piece or more.  The vines were sold with the land.  

With your guidance, I am trying to find out if the increase in value of the grapes vines can be added to the basis of the land I sold.  Maybe this is a farming category?

Thanks very much,

    Erik

[Anonymous_]

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@erikhedberg wrote:

With your guidance, I am trying to find out if the increase in value of the grapes vines can be added to the basis of the land I sold.  Maybe this is a farming category?

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@erikhedberg Can you explain the rationale for your belief that the increase in value can be added to the basis?

You might want to review the information at the following web sites.

https://www.irs.gov/pub/irs-utl/wine_industry_atg.pdf

https://www.irs.gov/publications/p225

Part of the federal income tax system is predicated upon imposing a tax on any gain (whether capital or ordinary) in value when property is sold. That entire system would be rendered moot if taxpayers were able to add increases in value to their bases when property is sold.

[Rick19744 · Accepted solution]

As a follow-up to your response to my questions:

1. Basis in any asset is predicated on economics.  Based on your facts, you incurred an original cost which clearly meets the economics test; you had out of pocket expense associated with the purchase.  This is the beginning of your basis.
2. Had you actually paid someone to perform some of the tasks you noted, then these costs would have been deductible.  However, the tax law does not allow an increase in basis or deduction for either your time or a volunteers time.  There is no economic outlaw.
3. As noted by @Anonymous_ , what you are wanting to do, runs contrary to the tax law.  Anyone investing in the stock market would love to be able to increase their stock basis should FMV exceed their cost minimizing or eliminating any gain.  Once again, there is no economic outlay of cash in either case, and as a result, no impact to basis. 
4. You have already benefited from a tax perspective in deducting the costs noted; vines, fertilizer, etc.
5. Based on your facts, there is no support in the tax law to increase your basis in the vines based on an increase in FMV.

[erikhedberg]

Hello Rick,

    Thanks for your guidance and your knowledge base.  I now understand that the mature grape vines have no value in terms of basis.  Unfortunately,  the sale price did reflect mature grape vines.  As you explained, that is categorized as profit for hard work.  That all said,  thanks for your help.  Because of this sale,  I am looking at a $70K tax bill for 2020.  I am just exploring possible avenues to minimize this bill.

Sincerely,

  Erik

[Anonymous_]

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@erikhedberg wrote:

.....Because of this sale,  I am looking at a $70K tax bill for 2020.  

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Based upon the facts you stated in your posts, you are looking at a $70,000 gain (maximum) for 2020, not a $70,000 income tax bill - and that gain is long-term which is taxed a more favorable rates.

Moreover, do not forget the cost of the land improvements that you made which add to your basis.

[erikhedberg]

Hello Tagteam,

    Thanks for our response and sorry for the confusion.  With the numbers posted , I was just talking about adjusting basis as a result  of land improvement possibilities.  Other assets sold in 2020 including the land add up a $70,000 combined Federal and State tax due for 2020.   Obviously poor tax planning.

Thanks,

  Erik