FROM: NearLakes City CPA
RE: Smith tax issues
John Smith is a Lawyer that just won a two year lawsuit and collected fees of $300,000 paid to his firm along with the $25,000 for recovery of expenses that was paid up front. John is thinking about purchasing his office building that he is currently leasing at $3,500 per month.
Jane Smith wishes to payoff and sell current home and purchase a new one. She uses her primary vehicle to transport handcrafted jewelry that she earned $20,000 on last year. Jane would like to purchase new equipment and retire the old equipment that was acquired for five years ago at $10,000 and is bordering on the obsolete.
How the $300,000 collected in fees is treated for federal tax income purposes? Attorneys always include contingency fees in their gross income and are considered taxable (section 104 of the Internal Revenue Code of 1986). Any additional business expenses that were not covered by the initial recovery retainer of $25,000 can be deducted.
How the $25,000 collected in fees is treated for federal tax income purposes? The $25,000 should be deducted as a business expense if all of it was used towards wining the lawsuit. If not the remaining amount would be considered ordinary income along with the $300,000 collected at the end of the lawsuit.
What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? John could invest part of the fee collected into a retirement account and also use some of the money to invest into his company thus making it a business expense which lowers your overall tax liability. If John has the option of collecting his fee on an annuity basis along with his client he could reduce his current income and his tax liability. He would also create a guaranteed income for his company for the annuity period creating a more desirable company as a whole thus lowing future debt...