Ac553 You Decide Week 4
Memo
To: John and Jane Smith
From: Your Name, CPA
Date: February 2, 2013
Subject: Explanation of business and personal tax benefits and liabilities.
1(a). As a result of a recent court settlement for a client John earned $300,000 for his law practice LLC. He wants to minimize his tax liability and understand how the IRS will treat this money earned. He lease’s office space for $3,500 per month. He wants to know the advantages in leasing office space versus purchasing the building.
John has income derived from a business and as such the gross income will be taxable (Code §1.61-3(a)) (Tax Almanac, 2005). This $300,000 taxable income will pass through to his personal taxes and is subject to self employment tax since he has an LLC. He will get a deduction from gross income for half of the self employment tax liability on the self employment tax.
John currently has a lease payment that provides him a deduction of $42,000 per year or $3,500*12 (26 USC § 162 (a) 3) (Law Cornell, 2012). He is allowed this deduction since the lease is required for his business to continue, and he has no title or equity in the building. If he decides to purchase the building, then he will no longer have this deduction. Capital purchases are not allowed for any expenditure for new buildings or to improve property (Code §263 a 1) (Tax Almanac, 2007, May 22).
John and Jane could establish traditional IRA’s and make contributions up to $5,000 each. Even though Jane has a minimal income, John is allowed to establish and contribute to an IRA on behalf of his spouse (Code §219(c)) (Tax Almanac, 2007, April 27). A Roth IRA has phase out limits but with planning this could be another option further down the road. John has would not qualify for the full tax benefits of a Roth IRA this year without hitting phase out limits. Since John and Jane do not have an employer retirement plan they will be able to deduct the full amount on a traditional IRA (§219(f) (3)) (Tax Almanac, 2007, April
To: John and Jane Smith
From: Your Name, CPA
Date: February 2, 2013
Subject: Explanation of business and personal tax benefits and liabilities.
1(a). As a result of a recent court settlement for a client John earned $300,000 for his law practice LLC. He wants to minimize his tax liability and understand how the IRS will treat this money earned. He lease’s office space for $3,500 per month. He wants to know the advantages in leasing office space versus purchasing the building.
John has income derived from a business and as such the gross income will be taxable (Code §1.61-3(a)) (Tax Almanac, 2005). This $300,000 taxable income will pass through to his personal taxes and is subject to self employment tax since he has an LLC. He will get a deduction from gross income for half of the self employment tax liability on the self employment tax.
John currently has a lease payment that provides him a deduction of $42,000 per year or $3,500*12 (26 USC § 162 (a) 3) (Law Cornell, 2012). He is allowed this deduction since the lease is required for his business to continue, and he has no title or equity in the building. If he decides to purchase the building, then he will no longer have this deduction. Capital purchases are not allowed for any expenditure for new buildings or to improve property (Code §263 a 1) (Tax Almanac, 2007, May 22).
John and Jane could establish traditional IRA’s and make contributions up to $5,000 each. Even though Jane has a minimal income, John is allowed to establish and contribute to an IRA on behalf of his spouse (Code §219(c)) (Tax Almanac, 2007, April 27). A Roth IRA has phase out limits but with planning this could be another option further down the road. John has would not qualify for the full tax benefits of a Roth IRA this year without hitting phase out limits. Since John and Jane do not have an employer retirement plan they will be able to deduct the full amount on a traditional IRA (§219(f) (3)) (Tax Almanac, 2007, April
Cited: Bradford Tax Institute. (2012). Reg. Section 1.183-1(b) Activities Not Engaged in for Profit. Retrieved on February 2, 2013 from http://www.bradfordtaxinstitute.com/Endnotes/Reg_1_183-1b.pdf Exeter- 1031 Exchange LLC Justia.com - U.S. Supreme Court Center. (2013). Deputy v. Du Pont - 308 U.S. 488 (1940). Retrieved on February 2, 2013 from http://supreme.justia.com/cases/federal/us/308/488/case.html Law Cornell Overview of Deductions and Losses. (2012). Retrieved on February 2, 2013 from http://custom.cengage.com/pktax/09_edition/Ch7ITAX.pdf Revenue Rulings, Revenue Procedures, Notices and Announcements Tax Almanac. (2005, May 11). Treasury Regulations, Subchapter A, Sec. 1.61-3. Retrieved February 2, 2012 from http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.61-3 Tax Almanac Tax Almanac. (2006, August 18). Internal Revenue Code:Sec. 212. Expenses for Production of Income. Retrieved on February 2, 2013 from http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._212._Expenses_for_production_of_income Tax Almanac Tax Almanac. (2007, May 22). Internal Revenue Code:Sec. 263. Capital expenditures. Retrieved February 2, 2013 from http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._263._Capital_expenditures Tax Almanac 472 F. 2d 1157 - Grier v. United States. (1973, January 26). Retrieved on February 2, 2013 from http://openjurist.org/472/f2d/1157/grier-v-united-states