Premium Essay

Advanced Tax Reporting

In: Business and Management

Submitted By jamesonbradford
Words 1134
Pages 5
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 treated for purposes of federal tax income?
c. How can John reduce the taxable amount of income for both (a) and (b) above?

d. Is it more beneficial to continue leasing the business space or to buy the building?
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 purposes?
b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case?
c. Does Jane have a business or hobby for federal income tax purposes? Why is this distinction important?
d. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities?
e. What tax benefits would John realize if he invested $15,000 in Jane's jewelry making?
f. Can Jane depreciate her vehicle or jewelry-making equipment? How?
3. John and Jane Smith tax issue:
a. Should John and Jane file separate or joint tax returns?
1. a. Per 26 USC § 1 – Tax Imposed, there are two tables that can be applied.
For married individuals filing joint returns:

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