Falcon Corporation, a calendar year taxpayer, is a deepwater offshore drilling company that is planning to sell drilling equipment that it no longer needs. The drilling equipment has an adjusted basis of $400,000 ($700,000 - $300,000 depreciation) and a fair market value of $500,000. The AMT adjusted basis of the equipment is $425,000.
The buyer of the drilling equipment would like to close the transaction prior to the end of the calendar year. Falcon is considering the following options.
• $500,000 in cash payable on December 31, 2017.
• The sale is closed on December 31, 2017; the consideration is a $500,000 note issued by the buyer. The maturity date of the note is January 2, 2018, with the equipment pledged as security.
Falcon projects that its taxable income for 2017 and 2018 will be $400,000 (gross receipts of about $9.5 million) without the sale. Falcon has other AMT adjustments and tax preferences of $425,000 in 2017, which will not recur in 2018. Determine the tax consequences to Falcon under both options, and recommend the option that is preferable?