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 annually 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 received 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 he made estimated state income tax payments of $800 during 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-employment taxes and the election to use state sales tax as an itemized deduction.
a. Compute the depreciation for the current year 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 installment method if it 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?