A Brief Note On Law Student Tax Challenge Problem

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Tax Town, ABA State 10000

Tax Town, ABA State, 10000
Re: 2015-2016 Law Student Tax Challenge Problem

Mr. Paul,
Thank you for contacting our firm again this year to assist you in determining the tax consequences of your business and investment activities. We have completely analyzed all of your investments and will summarize the tax results for your review below. Your stock compensation package sounds great, but since you are receiving this as compensation for services, you must report this as income to the IRS. Unless you can show an inability to freely transfer the stock to someone other than your employer, or that the stock is subject to an obligation of providing future services or
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The remaining two-thirds of stock will not vest in 2015, because you can still forfeit the right to receive them. These shares will only be included in your future tax returns if you continue your employment with the company.
Congratulations on your new investment in the lemonade truck, though I’m sorry it’s not going as well as you would have liked. Lucky for you the IRS permits deductions for the expenses of starting a new business. There are two requirements for a deduction on account of start-up costs.
First, the payment must be paid in connection with creating a business. Within the past year you have incurred several expenses in connection with starting the business: (1) $1,000 of your own money as a down payment on the truck; (2) a $49,000 loan for the truck; (3) $750 for the lemonade maker; and (4) $1,500 on lemons, sugar, and boba tea.
Second, the expenses must be one that is allowed as a deduction. To be deducted the expense must be ordinary, necessary, and incurred during the taxable year in order to carry-on the business. In determining whether expenses are necessary, we look to the purpose in making the payments and whether they have a connection to the business. In your case this would be to have a place to run your business, and to have the equipment and inventory needed to make your product. A necessary expense is one that is appropriate and helpful for the business. It is both appropriate and extremely helpful to have a place
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