Acc553 Mini Case
ACC553 Week 4 You Decide Activity
To : John and Jane Smith
From : Kathy Polk, CPA
Near Lakes City
Date : August 2, 2012
Dear Mr. and Mrs. Smith,
I would like to thank you for coming into the office and permitting us to review and deliberate the concerns you have with your tax questions. Please contact me, after you both have studied my suggestions, so we can address any other questions you may have at that time.
John Smith’s questions:
1(a) How is the $300,000 treated for purposes of Federal tax income? The $300,000 is considered to be earned income for John Smith and therefore will be reported as part of your gross income on the LLC return or on your individual income. The reason that it can be on either would be because of the variance in state laws.
1(b) How is the $25,000 treated for purposes of Federal tax income? The $25,000 you received as an advanced for expenses two years ago are considered as income. The advance would not have been considered as a deductible expense behind the matching principle. The current year that the $25,000 was reimbursed, the revenue less than the expense would be equal to zero. Therefore, there would be no net income to report as taxable income.
1(c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? To lessen the amount of tax on the income, John Smith could make report as an S Corporation and pay wages to the shareholders if it would be less than the $300,000. Mr. Smith could provide several retirement plans. The plans could be IRAs, profit sharing plans, or benefit plans, which need to be started before the end of year. He could also pay as many expenses as possible which can be written off during the year that the $300,000 is reported as income. Another thing you could do is produce a taxable loss with certain types of investments.
1(d) Is it more beneficial to continue leasing the business space or to buy the building? Normally owning the
To : John and Jane Smith
From : Kathy Polk, CPA
Near Lakes City
Date : August 2, 2012
Dear Mr. and Mrs. Smith,
I would like to thank you for coming into the office and permitting us to review and deliberate the concerns you have with your tax questions. Please contact me, after you both have studied my suggestions, so we can address any other questions you may have at that time.
John Smith’s questions:
1(a) How is the $300,000 treated for purposes of Federal tax income? The $300,000 is considered to be earned income for John Smith and therefore will be reported as part of your gross income on the LLC return or on your individual income. The reason that it can be on either would be because of the variance in state laws.
1(b) How is the $25,000 treated for purposes of Federal tax income? The $25,000 you received as an advanced for expenses two years ago are considered as income. The advance would not have been considered as a deductible expense behind the matching principle. The current year that the $25,000 was reimbursed, the revenue less than the expense would be equal to zero. Therefore, there would be no net income to report as taxable income.
1(c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? To lessen the amount of tax on the income, John Smith could make report as an S Corporation and pay wages to the shareholders if it would be less than the $300,000. Mr. Smith could provide several retirement plans. The plans could be IRAs, profit sharing plans, or benefit plans, which need to be started before the end of year. He could also pay as many expenses as possible which can be written off during the year that the $300,000 is reported as income. Another thing you could do is produce a taxable loss with certain types of investments.
1(d) Is it more beneficial to continue leasing the business space or to buy the building? Normally owning the