QUESTION ONE (20 points)
Father has an auto repair shop, which he operates as a sole proprietorship.
Not including the
following facts, his adjusted gross income from the business during 2001 is $150,000 and will be
the same amount in 2002.
Father consulted you about marital problems.
He anticipates leaving his
wife and kids sometime next year.
He would like to minimize his obligation to pay alimony and child
support (both of which you know to be a function of his income).
You have learned, from
experience, that “income” as determined for U.S. tax purposes is typically a reference point for the
determination of alimony and child support.
Father is interested in purchasing a new machine that will cost $215,000.
It has a class life of
If he purchases the machine today, what will be his adjusted gross income for 2001
To minimize his 2001 income, he would elect section 179.
would be advisable because the alimony and child support
issues will likely be a function of the income from both 2002
and 2001 (and perhaps even some earlier years).
179(b) the limit would be 24,000 reduced by at least 15,000
(the amount by which the property cost exceeds 200,000).
would need to know whether he placed other section 179
property into service during 2001, as well.
If he did, the cost
would be added to the 215,000, resulting in a larger reduction:
if he placed $9000 or more into service during 2001, he would
have no section 179 eligibility.
To the extent his section 179
amount would be lower, his depreciable basis for 2001 and
2001 would be greater in the following discussion.
example, if he could not use section 179, his section 168
amounts (using the mid-year convention) for 2001 and 2002
would be 43,000 and 68,800, causing his AGI to be
If he is able to use the mid-year convention under section 168
(purchase of the machine did not result in his having made
over 40% of his purchases of section 168 property in the final
quarter), he would also have 41,200 depreciation in 2001 and
65,920 in 2002.
[I calculated this with the depreciation
calculator, using 209,000 as the depreciable basis (215,000
minus 9,000 per section 179) and five years as the recovery