You Decide free essay sample

Memo summarizing various tax issues 1. John Smiths tax issues: Issue a) How is the $300,000 treated for purposes of federal tax income? John Smith’s earned income of $300,000 will reported as gross income either on Schedule c of the individual return or as gross income on the LLC return. As a result of the variance in the state laws as to whether or not a single person LLC can report on a business return is the reasons why it could be either reported on the Schedule C or LLC. Some states that do not allow the separate reporting see the LLC as meaning not to be reported separately from the individual. Issue b) How is the $25,000 treated for purposes of federal tax income? The advancement of $25,000 for expenses would have been listed as a client advance two years ago on the balance sheet. It would not have been reported as a deductible expense following the matching principle. We will write a custom essay sample on You Decide or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page When the $25,000 is reimbursed in the current year, the revenue subtracted by the expense should equal zero and there would be no net income to report as being taxable. Issue c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? There are a few ways John Smith can minimize the tax being assessed. John Smith could possibly invest the $300,000 to produce a taxable loss by the year end. Investing in rental real estate could be direct or partnership. John Smith could also pay most or all of his current expenses, which later can be directly written off using Section 179. Another way John Smith can reduce his taxable amount of income is to make us of the LLC and report it s a S Corporation where the wages paid to the shareholder may be less than the $300,000. This type of legal ploy can save a partial bit of the social security taxes which is an additional 15. 3%. There will be regular income tax on this as well. Issue d) Do I get better tax benefits for paying the lease on office space or for buying the building? What are the differences? Before filing a separate return, there are times where separate f iling can reduce the amount of tax paid in total. For example the capital gain rate can be less in separate returns or income may be low, but the individual may have high medical expenses. Tax programs are designed to test this theory when all the income and expenses items are labeled to each person. 2. Jane Smith tax issues: Issue a) What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes? The difference between paying down the mortgage and assuming a new mortgage for federal income tax purposes is the amount of deductible mortgage interest paid during a year. Since both are considered a deductible and both are the same kind of debt, the calculation would be the amount of interest multiplies by the tax rate of the taxpayers. Mortgage interest has a limit of $1,000,000 of deduction. Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from Johns case? No, John and Jane Smith cannot utilize a 1031 tax exchange to buy more expensive house using additional money from John’s case because Section 1031 exchanges are used for business assets, not personal residences. Using the money for a new house would not have been taxable event, but it will have been taxed at the source. The gain on personal residences is nontaxable nder Section 121, but there are limitations as well. Issue c) Does Jane has a business or hobby? Why is this distinction important? Jane has a business, not a hobby. The distinction is important because it relates to business losses. If the small business should suffer a loss, Section 183 classifies it as a hobby. Hobby loss is not deductible and business income is taxable. Issue d) Would Jane (and John) realize better tax benefi ts if she had a separate business for her jewelry-making activities? Jane should have a separate business for her jewelry, but it doesn’t necessarily mean â€Å"separate†. She can use Schedule C that is part of the Form 1040 in joint filing. Separate can also mean LLC which does report separately. Tax on the income will be part of their joint return, whether using a Schedule C or LLC. Issue e) What tax benefits would John realize if he invested $15,000 in Janes jewelry making? Looking at John’s income, there would be no tax benefits. Jane, however there is. Using the $15,000 for purchasing equipment could produce tax benefits that would become part of their joint return. John would benefit indirectly from his investment in Jane’s business, but Jane would have to use the fund for deductible purposes. If the funds were to just stay in the bank account, no benefit would come from that. Issue f) Can Jane depreciates her vehicle or jewelry-making equipment? How? Jane can depreciate her vehicle by declaring the depreciation and auto expense to the extent of the business use based on the mileage. Jane could keep a record of her miles use for her business and use the standard mileage rate. The equipment can be depreciated under Section179. This allows for a full write off in a year of acquisition. Another way the equipment can be depreciated is using the MACRS depreciation. This allows a systematic write off of equipment based on the type of assets. 3. John and Jane Smith tax issue: Issue a) Should John and Jane file separate or joint tax returns? No, John and Jane should not file separately. They should file a joint tax return because of the high income of the attorney and the additional income from business. Both of them will have to pay self employment taxes. .