9. Maurice, a single, cash method taxpayer, projects his taxable income for this year to be about...
Question:
9. Maurice, a single, cash method taxpayer, projects his taxable income for this year to be about $300,000. For AMT purposes, he reports positive adjustments and tax preferences of $200,000. He anticipates that his taxable income and positive adjustments and preferences will be about the same next year. He is evaluating several proposed transactions that could affect his current-year tax liability. One proposal involves an office building for which he is currently negotiating a lease. The lease has a starting date of July 1 of this year. It provides for annual rent of $24,000, and it carries an 18-month prepayment clause. Although Maurice favors a five-year lease, his tax adviser has suggested an 18-month period with an option to renew for 42 months. The adviser points out the tax advantage of being able to deduct the $36,000 of rent at the inception of the lease. The projected tax liability under each option would be as follows.
18-Month Lease 5-Year Lease
Regular income tax liability $70,726 $78,646
AMT $55,486 $54,286
Total $126,212 $132,932
After comparing these results, Maurice takes his adviser’s suggestion. The shorter-term lease reduces his taxes by about 5 percent. Is it appropriate for the tax law to allow Maurice to avoid taxes in this manner? Should Maurice take the shorter lease?
Federal Taxation 2016 Comprehensive
ISBN: 9780134104379
29th edition
Authors: Thomas R. Pope, Timothy J. Rupert, Kenneth E. Anderson