You Decide

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memo to: | Mr. & Mrs. John smith | from: | carol johnson | subject: | tax issues | date: | September 29, 2012 | | | | |
Dear Mr. & Mrs. John Smith:
After carefully evaluating your tax issues my staff and I have come to the following conclusions on the questions you presented us.
1. John Smith tax issues:
a. How is the $300,000 treated for purposes of federal tax income?
The $300,000 you earned is considered earned income; therefore, it should be reported as gross income on either a Schedule C of your individual income tax return or if you have reported your company as being a LLC, you can file a LLC return.
b. How is the $25,000 treated for purposes of federal tax income?
The $25,000 would not be
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There are no tax benefits to John's income, but Jane's could use the $15,000 for purchase of equipment which could produce tax benefits that would become part of their joint return. If she left them in her business bank account, there would be no benefit to either of them.
f. Can Jane depreciate her vehicle or jewelry-making equipment? How? She can use the standard mileage rate based on business miles. An alternative method would be to depreciate her vehicle and declare that depreciation plus all auto expenses to the extent of business use, based on mileage. If business miles amount to 60% of total miles, for example, then 60% of all expenses including depreciation would be allowable (IRS , 2012). Either method requires Jane to track her business mileage.
The equipment can be depreciated by one of two methods: Section 179 allows for a full write off in the year of acquisition (subject to certain limits). MACRS depreciation allows a systematic write off of equipment based on the type of asset. More business assets are either 5 year or 7 year property (CompleteTax, 2012).
3. John and Jane Smith tax issue:
a. Should John and Jane file separate or joint tax returns? Typically, married individuals more tax benefits by filing jointly. Filing a separate return provides relief from joint liability for taxes. However, married taxpayers who file separately are not eligible for many tax deductions and credits, and

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