Advanced Tax Reporting

1123 Words5 Pages
Re: Tax Issues Relevant Facts John Smith, Esq. worked on a case for over two years. The jury awarded his client $2,000,000 in damages, of which his fee was $300,000 plus recovery of expenses paid up front in the amount of $25,000. John is also thinking about buying the building that he currently leases his office space in. His current lease is $3,500 per month. John Smith’s business is a separate law practice established as an LLC. Jane Smith sells handcrafted jewelry which earned her $20,000 last year. Jane’s jewelry making equipment is five years old, cost $10,000 and is almost obsolete. Specific Issues 1. John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? b. How is the $25,000…show more content…
Under 26 USC § 121, gains on the sale for married taxpayers filing jointly would be excluded up to $500,000 (or $250,000 each for married filing separately) given the residence was owned and occupied as a principal residence for two out of the last five years. b. 26 USC § 1031 provides for like-kind exchange treatment on property that must qualify by being held either for productive use in a trade or business or for investment. c. Per 26 USC § 183, an activity that has motives of profit is defined as a trade or business. The investment of equipment and time invested for the purpose of making profit would qualify Jane’s jewelry making as a business. This distinction is important, as a business is allowed to deduct items such as travel, tool and home office expenses. d. Per 26 USC § 162, traveling expenses shall be allowed as a deduction while away from home in the pursuit of a trade of business. A portion of the home that is dedicated to the business may also qualify for itemized deductions. e. John would not realize any immediate tax benefits, as 26 USC § 263 provides no current deductions for capital expenditures; these costs must be recovered over the useful life of the acquired property. f. Per 26 USC § 179, vehicle depreciation is not allowed unless vehicle is an SUV over $25,000/6,000 pounds. However, Jane’s travel expenses would be allowed and the
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