John Smith Tax Issues Essay

1377 WordsDec 10, 20116 Pages
Week 4 – You Decide John Smith tax issues: a. How is the $300,000 treated for purposes of Federal tax income? The $300,000 that John received for services rendered 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. “US code defines gross income in 26 U.S.C § 61 states except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items.”…show more content…
By forming an LLC John can take advantage of deducting certain business expenses. Purchases relating to business can be written-off. By deducting these expenses, John will be able to reduce his taxable income. Another way to reduce John’s taxable income is to take advantage of retirement plans such as profit sharing, IRA’s, SEP-IRA’s, and defined benefit plans. By contributing to these plans John con contribute pre-tax dollars into the plan. This would lower his taxable income. In regards to buying the building that John is leasing his office in, he could reduce his taxable income be depreciating the building. By depreciating the building John would deduct the amount that would be depreciated and then that amount wouldn’t be considered taxable income. The lease payment would be deductable through the LLC. John does have to remember that he will also be receiving payments from the other tenants. I think in this case it would be advantageous to purchase the building with different tax advantages of depreciating the building. 2. Main Issue #2: Jane Smith tax issues: a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax
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