Federal Tax Week 3 You Decide Essay Example
1. John Smith's tax issues:
Issue a) How is the $300,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
From the information that was provided, the income was derived from the business and this gross income is taxable pursuant to Code§1.61-3(a). He is subject to self-employment tax, since the total amount of income that will come through to his personal tax income of half of the self-employment tax liability.
Conclusion:
John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has business deductions.
Issue b) How is the $25,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The $25,000 is the reimbursement John for the expenses that were paid in advance for this client. Under Code§1.61-3(a), the funds are considered as incidental income. John would have to maintain the receipts from the expenses that he has incurred so that the proceeds will have a balancing deduction. The expenses were necessary for his business and he will be able to deduct the full amount.
Conclusion:
John will have the $25,000 included in the gross income. However, he will be able to deduct the full amount because they were expenses for the business. good
Issue c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Applicable Law & Analysis:
John will have self-employment tax to pay. He will also have the $25,000 added to the gross income. He will be able to deduct the expenses. Since, John is self-employed; he may want to look into investing in a retirement plan to reduce the taxable amount < good! . Under Code§219(f)(3), John would be able to establish a retirement program and receive a tax deduction each year of $10,000 < where did you
Issue a) How is the $300,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
From the information that was provided, the income was derived from the business and this gross income is taxable pursuant to Code§1.61-3(a). He is subject to self-employment tax, since the total amount of income that will come through to his personal tax income of half of the self-employment tax liability.
Conclusion:
John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has business deductions.
Issue b) How is the $25,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
The $25,000 is the reimbursement John for the expenses that were paid in advance for this client. Under Code§1.61-3(a), the funds are considered as incidental income. John would have to maintain the receipts from the expenses that he has incurred so that the proceeds will have a balancing deduction. The expenses were necessary for his business and he will be able to deduct the full amount.
Conclusion:
John will have the $25,000 included in the gross income. However, he will be able to deduct the full amount because they were expenses for the business. good
Issue c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Applicable Law & Analysis:
John will have self-employment tax to pay. He will also have the $25,000 added to the gross income. He will be able to deduct the expenses. Since, John is self-employed; he may want to look into investing in a retirement plan to reduce the taxable amount < good! . Under Code§219(f)(3), John would be able to establish a retirement program and receive a tax deduction each year of $10,000 < where did you