To:John & Jane Smith
Re:Memo summarizing various tax issues
1. John Smith's 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. 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 as 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...