Federal Taxes & Management Decisions
TO: Mr. John Smith & Mrs. Jane Smith
FROM: Allan Steynor
DATE: February 3rd, 2013
RE: Tax Advice for 2013
Dear Mr & Mrs Smith,
I want to take the opportunity for choosing my CPA office to help with your annual tax needs. We hope that we can provide you with a high quality and professional service and that you are happy with the advice you receive. I have written a brief memo on the initial discussion that we had addressing the issues that you both raised individually and together. If you have any further enquiries please do not hesitate to contact myself or one of my colleagues.
1. John Smith Tax Issues
a. $300,000 received in fees
The $300,000 received in fees would be considered income under the definition “compensation for services, including fees, commissions, fringe benefits, and similar items.” You must report the $300,000 as gross income on your personal income tax form 1040 unless your state requires you to report income through your single member LLC on its tax return. Regardless you must ensure that you pay the appropriate income tax in a timely manner.
b. $25,000 received for expenses
Since this is reimbursement for expenses paid out in a different year the $25,000 would be treated as a recovery as you would have already received the benefit from the earlier deduction. This means that it would be treated as gross income similar to the $300,000 received in fees and must be treated likewise. Remember that you should report the expenses as deductions on your tax returns which should then cancel out this income, unless of course you did not incur the full $25,000 in expenses.
c. How to minimize the taxable income for both the $300,000 and $25,000.
There may not be much you can do to minimize the tax consequences for either if you have already received the lump sum payment. With regards to the $300,000 in fees, since you performed the work...