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home / study / questions and answers / math / other math / dan turned age 65 and retired this year. he owned ... Question Dan turned age 65 and retired this year. He owned and operated a tugboat in the local harbor before his retirement. The boat cost $100,000 when he purchased it two years ago. A tugboat is 10-year property. Dan deducted $10,000 of depreciation on the boat the year he purchased it and he deducted $18,000 of depreciation last year. He did not elect Section 179 expensing or bonus depreciation. He sold the tugboat in November of this year for $90,000 collecting an $18,000 down payment. The buyer agreed to pay 8% interest annualy on the unpaid balance and to pay $18,000 annually for four years toward the principal. The four $18,000 principal payments and related interest payments begin next year. Dan received $72,000 of business income and incurred other business expenses of $30,000 this year before he retired. He recieved Social Security benefits of $2,000 and withdrew $10,000 from a regular IRA account. He contributed $4,000 to his church, paid real property taxes of $2,000, and home mortgage interest of $6,500. Dan paid $200 of state income taxes when he filed last year's return earlier this year and $220 after year end. In addition, Dan made federal estimated payments of $8,000. Dan is a single cash basis taxpayer. Ignore self-imployment taxes. a. Compute the depreciation for the current yearr on the tugboat. b. Compute the amount of gain to be reported currently on the sale of the tugboat. Assume that Dan wants to use the instalment method if ti can be used. The accumulated depreciation on the tugboat is subject to Sec.1245 depreciation recapture and must be reported currently. c. How much interest, if any, must Dan report this year? d. What is the income from the business, excluding the gain on the sale of the tugboat? e.What is Dan's AGI? f. What is the amount of Dan's itemized deductions? g. What is Dan's taxable income?

Explanation / Answer

Question a. Dan charged MACRS Depreciation for 10 years property. So, 3rd year Depreciation will be 14.40% Because he sold in November, he charged depreciation = 100000 x 14.4% x 11/12 =13,200 Question b. Book Value of Tugboat = 100000- 10000-18000-13200 = 58,800 Total Gain on sale = 90000-58800 = 31,200 Current Gain =31,200/90,000 x 18000 = 6240 Question c. Sales Value 90000 Less: down payment 18000 Unpaid Balance 72000 Interest on unpaid balance for 1 month= 72000 x 8%/12 = $480 Dan should report $480 as interest for the year. Question d. Income from Business: Business Income 72000 Interest Income 480 Less: Business Expenses -30000 Business Income 42480 question e. Business Income 42480 Social Security benefits 2000 Regular IRA Withdrawl 10000 AGI 54480 Question f. Contribution to church 4000 Property Tax 2000 Mortgage Interest 6500 State Income Tax 1220 Total Itemised deduction 13720 Question g. Taxable income: AGI 54480 Less: Deduction 13720 Taxable Income 40760

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