week 4 you decide Essay

1415 Words6 Pages

John and Jane Smith


Jaleesa Branch




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?
The $300,000 is treated as business income. After deducting all of the business expenses, the remaining amount will be the taxable income. Lawyers either work on a salary in a big law firm, or work directly with clients and collect the fees from these clients. If it is a salary, then it will be taxed the same way as ordinary income in the W-2 form, and if it is a business income like in our situation here with John, then it will be treated as a self-employment income that will be taxed after deducting any
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While John can deduct the office lease as a business expense, but he will be able to deduct the mortgage interest, real estate taxes, and depreciates the business property in 39 years using the (MACRS) Modified Accelerated Cost Recovery
System, plus any insurance paid on the property.

Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
The 1031 form cannot be used in John and Jan case, since it is a personal property. The
1031 exchange is used in investment, where you can replace a rental property for example with another property delaying the tax on the gain by rolling over this gain to the new property.

Issue (c): Does Jane have a business or hobby? Why is this distinction important?
Jane seems to be doing well in this business and making profit, and while she may think that she is not depending on the business as a steady income, but the IRS requires

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taxpayers to report any income received and included in the gross income. Therefore, it is better to take a full advantage of reporting the income and report the business expenses as well, because if she reports the income as an income earned in a hobby, then she will not be able to claim any business expenses. If the jewelry business make profit in three years out of five years, according to the IRS, that is considered a business. But, if the business does not meet this condition, then it is a hobby
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