ACCT553
Memo
To: John and Jane Smith
From:
Date: 10/9/14
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 that John received from the court case is considered earned income for the year. The $300,000 is earned income for John Smith and will be reported as gross income either on Schedule C of the individual return or as gross income on the LLC return.
Applicable Law and Analysis
Section 61 of the Internal Revenue Code (IRC 61, 26 U.S.C. § 61) defines "gross income," the starting point for determining which items of income are taxable for federal income tax purposes in the United States. Section 61 states that "except as otherwise provided in this subtitle gross income means all income from whatever source derived". (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_61)
Conclusion
The $300,000 has to be taxed because it is considered gross income. John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has business deductions.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
The $25,000 would not be reported as income. The reasons why are that the $25,000 should have been classified as an expense on the balance sheet. It would not have been reported as a deductible expense following the matching principle. In the current year when the $25,000 is reimbursed, the revenue minus the expense equal to zero.
Applicable Law and Analysis
Advances commonly include travel expenses, costs of medical records, costs of reports, witness fees, deposition costs, filing fees, investigation costs, costs of photographs, laboratory test fees, and sheriff's fees for service ( Canelo v. Comr., 53 TC 217
To: John and Jane Smith
From:
Date: 10/9/14
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 that John received from the court case is considered earned income for the year. The $300,000 is earned income for John Smith and will be reported as gross income either on Schedule C of the individual return or as gross income on the LLC return.
Applicable Law and Analysis
Section 61 of the Internal Revenue Code (IRC 61, 26 U.S.C. § 61) defines "gross income," the starting point for determining which items of income are taxable for federal income tax purposes in the United States. Section 61 states that "except as otherwise provided in this subtitle gross income means all income from whatever source derived". (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_61)
Conclusion
The $300,000 has to be taxed because it is considered gross income. John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has business deductions.
Issue (b): How is the $25,000 treated for purposes of federal tax income?
The $25,000 would not be reported as income. The reasons why are that the $25,000 should have been classified as an expense on the balance sheet. It would not have been reported as a deductible expense following the matching principle. In the current year when the $25,000 is reimbursed, the revenue minus the expense equal to zero.
Applicable Law and Analysis
Advances commonly include travel expenses, costs of medical records, costs of reports, witness fees, deposition costs, filing fees, investigation costs, costs of photographs, laboratory test fees, and sheriff's fees for service ( Canelo v. Comr., 53 TC 217