Question

On April 23, Mrs. Y purchased a taxi business from Mr. M for a $58,000 lump-sum price. The business consisted of a two-year-old taxicab worth $18,560, Mr. M’s license to operate a taxi business in Baltimore, his list of regular customers, and his registered business name “On Time Any Time Taxi.” Mrs. Y operated the business from April 24 through the end of the year. Use Table 7-2.

1. Compute Mrs. Y’s taxable income from the taxi business if her taxable income before any cost recovery deductions was $37,100. Assume Mrs. Y wants to minimize taxable income.
2. Compute Mrs. Y’s taxable income from the taxi business if her taxable income before any cost recovery deductions was $17,800. Assume Mrs. Y wants to minimize taxable income without bonus depreciation.

Answer 1

Compute Mrs. Y’s taxable income from the taxi business if her taxable income before any cost recovery deductions was $37,100. Assume Mrs. Y wants to minimize taxable income.

Consideration = 58,000; Worth of taxicab = 18,560

Hence, value assigned to intangibles (license, customer list, business name etc) = 58,000 - 18,560 = $  39,440

This cost of the intangible can be amortized over 180 months. Number of months starting April till December = 9

Hence, amortization expense for the year = 39,440 / 180 x 9 = 1,972

Hence, the minimum taxable income = taxable income before any cost recovery deductions - bonus depreciation - amortization expense = 37,100 - 18,560 - 1,972 = $ 16,568

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Compute Mrs. Y’s taxable income from the taxi business if her taxable income before any cost recovery deductions was $17,800. Assume Mrs. Y wants to minimize taxable income without bonus depreciation.

Taxable income without bonus depreciation = 17,800 - 1,972 = $ 15,828