You Decide 1

1137 Words Oct 8th, 2012 5 Pages
Memo
To: John & Jane Smith
From:
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?

Applicable Law & Analysis: http://www.irs.gov/businesses/small/selfemployed/index.html

Conclusion: The $300,000 will be treated as self- employed income. Generally you are self-employed if you carry on a trade or business as a sole proprietor, independent contractor, or if you are a member of a partnership. Self-employed individuals are required to file an annual return, and pay estimated tax quarterly.

Issue b) How is the $25,000 treated for purposes of federal tax income?

Applicable Law & Analysis: www.irs.gov

Conclusion: The
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Conclusion: Jane has a business. If time and effort put into the activity is intended to make a profit, this is considered a business. Business versus hobby is important because taxpayers who incorrectly report losses from hobby activities can be subject to additional taxes, interest and penalties in an audit (http://www.irsvideos.gov/Professional/HobbyBusiness)

Issue d) Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities?

Applicable Law & Analysis: www.irs.gov

Conclusion: Jane and John would have better tax benefits if Jane had a separate business for her jewelry- making activities. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year; this could include the cost of material. Jane can also deduct expenses for the business use of her home. Jane can also deduct car expenses mileage rates from 1/1/11-6/30/11 is .51 per mile and from 7/1/11-12/31/11 .55 per mile (www.irs.gov)

Issue e) What tax benefits would John realize if he invested $15,000 in Jane 's jewelry making?

Applicable Law & Analysis: http://perlmutter.house.gov/index.php?option=com_content&view=article&id=707&Itemid=88- Business tax benefits under the recovery act.

Conclusion: Small Business Investment: Spurs investments in small businesses by cutting the capital gains tax on investors in small businesses who buy stock (in the next two

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