1. John Smith tax issues:
a. How is the $300,000 treated for purposes of federal tax income? In order to determining how the $300,000 fee was received as Federal income on the part Mrs. John Smith, we first have to determine the requirements for income. According to Code Sec. 61(a)(1) of the Internal Revenue Code (IRC) “gross income includes all income from whatever source derived,” that is including the following items: compensation for services, including fees, commission, fringe benefits and similar items (Intuit-TaxAlmanac, 2006). In John’s case, income received from fees that were paid by his client from rendered services will meet that requirement of gross income. Under Section 451(1)(a) of the Internal Revenue Code provides that the amount of any gross income is recognizes in the taxable year the taxpayer receives the item unless, under the method of accounting used in computing taxable income, the income is properly recognizes in different period (IRS.Gov, 2011). Mrs. John was compensated in the amount of $300,000 from fees of the service provided to his clients on the current tax year. Hence Mrs. John is control of cash once the fees were paid in full in the current year. According to Sec. 61(a)(1) John received income from fees in the current year, thus the amount received under Sec. 451 (a) will require that he recognized income in the taxable year, he received payment amount. b. How is the $25,000 treated for purposes of federal tax income? In deciding how the $25,000 is treated for the purpose of Federal tax income, the amount is treated as a reimbursement of expense. In Code Sec. 162 (a), which governs, the deductibility of trade or business expenses reads, that “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business (Smith, Harmelink, & Hasselback, 2013). The $25,000 is an addition of a recovered expense amount paid up from by the client, it can be treated as income, or it can also be treated as expense. In Section 61(a)(1) any amount derived from any source can be treated as gross income. However, the $25,000 can also be deducted as an expense as stated in Code Sec. 162 (a). Even if the expense is not specify, “all ordinary and necessary expense incurred during the taxable year,” such as the $25,000 recovery of expense may qualify for deduction under Sec. 162 (a). In order to offset the $25,000 income as expense, it will have to meet the expense criteria under Sec. 162(a) all ordinary and necessary expenses of carrying on a trade or business are deductible (Smith, Harmelink, & Hasselback, 2013). In this case $25,000 income can be offset by the same amount as expense amount from trade or business, which are deductible amount. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? From part (a) and (b) John will have to include $300,000 and $25,000 as gross income, and deduct current year expense in his income tax. They are options available to John for reducing his tax liability. First of all John will have gather receipts for incurred expense related to service he provided to his clients. John will have to itemize and specify the expense related to conducting business in the current year. As stated in Sec. 162 (a)(1) a reasonable allowance for salaries or other compensation for personal services actually rendered (Smith, Harmelink, & Hasselback, 2013). Also Sec. 162 (a)(2)(3) which states that traveling expense and rental payment as condition continued use property, for the purpose of trade or business to which the taxpayer has not taken or is not taking title or in which has no equity (Smith, Harmelink, & Hasselback, 2013) is an allowed deduction as ordinary or necessary expense incurred.
d. Is it more beneficial to continue leasing the business space or to buy the...