week 4 you decide
Memo
To:
John and Jane Smith
From:
Jaleesa Branch
Date:
10/6/14
Re:
Memo summarizing various tax issues
1. John Smith's Tax Issues
Issue (a): How is the $300,000 treated for purposes of federal tax income?
The $300,000 is treated as business income. After deducting all of the business expenses, the remaining amount will be the taxable income. Lawyers either work on a salary in a big law firm, or work directly with clients and collect the fees from these clients. If it is a salary, then it will be taxed the same way as ordinary income in the W-2 form, and if it is a business income like in our situation here with John, then it will be treated as a self-employment income that will be taxed after deducting any business expenses. The $300,000 is included in John’s Gross
Income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items. Therefore the $300,000 is classified as compensation John received for legal services rendered.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
The 25,000 is treated as an income and at the same time as a business expense. The $25,000 should be included in John’s income since he received it, while he still can claim this amount as a business expense, so he will be taxed on this amount.
1
Issue (c): What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
In order for John to reduce the taxable amount of his income of $300,000, he must maximize his deductions as business expenses. Business expenses are the cost of carrying on a trade or business. Expenses are usually deductible if the business is operated to make a profit. The tax code Section 162- Trade or business expenses indicates for a business expenses to be deductible, it must be both ordinary and necessary. An
To:
John and Jane Smith
From:
Jaleesa Branch
Date:
10/6/14
Re:
Memo summarizing various tax issues
1. John Smith's Tax Issues
Issue (a): How is the $300,000 treated for purposes of federal tax income?
The $300,000 is treated as business income. After deducting all of the business expenses, the remaining amount will be the taxable income. Lawyers either work on a salary in a big law firm, or work directly with clients and collect the fees from these clients. If it is a salary, then it will be taxed the same way as ordinary income in the W-2 form, and if it is a business income like in our situation here with John, then it will be treated as a self-employment income that will be taxed after deducting any business expenses. The $300,000 is included in John’s Gross
Income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items. Therefore the $300,000 is classified as compensation John received for legal services rendered.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
The 25,000 is treated as an income and at the same time as a business expense. The $25,000 should be included in John’s income since he received it, while he still can claim this amount as a business expense, so he will be taxed on this amount.
1
Issue (c): What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
In order for John to reduce the taxable amount of his income of $300,000, he must maximize his deductions as business expenses. Business expenses are the cost of carrying on a trade or business. Expenses are usually deductible if the business is operated to make a profit. The tax code Section 162- Trade or business expenses indicates for a business expenses to be deductible, it must be both ordinary and necessary. An