First, let me take the opportunity to say thank you Mr. & Mrs. Smith for seeking my professional advice. As a CPA, it is my duty and responsibility to provide you with the most updated and current solutions to your issues. After conducting a thorough research and investigation, in seeking the solutions to your issues, enclosed is my results and conclusion based on our current tax codes and laws. Here are the answers to the questions that were presented. Number one, John Smith tax issues:
(a)How is the $300,000 treated for purposes of federal tax income? In this case, the $300,000 was paid to John for his services in representing his client in court. According to IRC (Code Sec. 61).¹ it states, “ Fifteen of the more common types of “Gross Income” are enumerated by IRC Code Sec. 61. They are (1) compensation for services, including fees, commissions, fringe benefits, and similar items…” Paragraph ¶713, it states, “Compensation for Personal Services. All compensation for personal services, no matter what the form of payment, must be included in gross income. ” 1.
(b) How is the $25,000 treated for purposes of federal tax income? Since the case took two years before a verdict was rendered, and the $25,000 was received then, it would have be considered as a prepayment to this client expense account.. Cash method taxpayers recognize these items of income in the year of receipt whereas accrual method taxpayers recognize this income in the year the all-events test under Treas. Reg. § 1.451-1, is satisfied. However, if an accrual method taxpayer receives payments in advance of performance, then the income must be included in the year received unless deferral is permitted under Rev. Proc. 2004-34, 2004-1 C.B. 991. As, the expenses were incurred, the amount was deducted toward the actual payment of the expense. 1.
(c) My determination regarding reducing the taxable amount of income for both the $300,000 and $25,000. The $300,000 in compensation and the $25,000 in incurred expenses. The total amount of gross income for John in the current tax year will be $300,000. The $25,000 upfront payment, was paid two years ago, and has already been accounted for in the year the expenses actually attained. My advice, John will be to make sure to deduct all the expenses incurred in this case, as part of your “Business Expenses.” As stated in Paragraph ¶901, “ A taxpayer, whether a corporation, an individual, a partnership, a trust, or an estate, generally may deduct from gross income the ordinary and necessary expenses of carrying on a trade or business that are paid or incurred in the tax year (Reg. § 1.162-1)¹.” Also I will say John, that you should look into some retirement , which will provide a tax shelter and help to lowers your tax liability as per Code§219(f)(3). 1. (d) Weather, it is more beneficial to continue leasing the business space or to buy the building? It will be more beneficial if John were to purchase the building, rather than, continue to lease. There are greater tax advantages as an owner of the building, as opposed to being a tenant. Itemized deductions will increase which will help to lower your tax liability. As an owner of the building some items of deduction will include: State and Local Real Property Taxes: As per Code Sec. 164 (a) Business taxpayers can deduct taxes state, local, and foreign taxes paid or accrued within the tax year to the extent that they are directly attributable to trade or business …. Depreciation: In 1981, the tax depreciation system was dramatically changed and simplified by adoption of the Accelerated Cost Recovery System(ACRS)Accelerated depreciation, which increases the rate at which taxpayers are allowed to “recover” the costs of business-use property against their taxable incomes, is one of the easiest and most common business incentives used by Congress. This is particularly true for property that was purchased with borrowed money. Code Sec. 179(b)(1)(D). Mortgage Interest:...
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