Lewis A. Flemming You Decide-John And Jane Smith Tax Advice

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Lewis A. Flemming You Decide - John and Jane Smith Tax Advice 1. John Tax Issues a. How is the $300,000 treated for purposes of Federal tax income? The $300,000 would be classified and included in Johns gross income. Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident. "Except as otherwise provided" by law, Gross income means "all income from whatever source," and is not limited to cash received. However, tax regulations expand on this and say "all income from whatever source derived, unless excluded by law." The amount of income recognized is generally the value received or which the taxpayer has a right to receive. Certain types of income are specifically excluded from gross income (Section 61 of the Internal Revenue Code (IRC 61, 26 U.S.C. § 61)). The United States Supreme Court has interpreted this to mean that Congress intended to express its full power to tax incomes to the extent that such taxation is permitted under Article I, Section 8, Clause 1 (the Taxing and Spending Clause) of the Constitution of the United States and under the Constitution's Sixteenth Amendment. Section 61 lists examples of items that are taxable under the Code, including "Compensation for services, including fees, commissions, fringe benefits, and similar items"; Gross income derived from business; and "Gains derived from dealings in property". Other examples of income listed in section 61 include interest and dividends, rent, royalty payments, alimony payments; life insurance, pensions, and inheritances (http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_ 61). Eligible sources of gross income may be located in section 861. b. How is the $25,000 treated for purposes of federal tax income? The $25,000 should also be included in gross income, as they are also included in the fees for the legal services provided. This would be considered a contigent fee. In this type of fee arrangement, the attorney earns an agreed upon percentage of the amount of their client’s recovery (either in settlement or awarded in litigation), plus costs. Case time is not a factor in determining the amount of the fee. The focus is on the ultimate amount recovered for the client and what percentage the client agrees to pay the attorney. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? In order for John to reduce the taxable amount of his income of $300,000, he must maximize his deductions as business expenses. Business expenses are the cost of carrying on a trade or business. Expenses are usually deductible if the business is operated to make a profit. The tax code Section 162- Trade or business

expenses indicates for a business expenses to be deductible, it must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the business, while a necessary expense is one that is helpful and appropriate for the business. The other requirements for an expense to be deductible as a business expense include, it being reasonable in amount and practice; an expense is allowable as a deduction only if it is paid and incurred during the taxable year. Business expenses are deductible for adjusted gross income. They are deducted in computing John AGI on Schedule C of John and Jane Tax returns. Section 162 of the tax code indicates that John business expenses deductible could include traveling expenses, which is consists of amounts expended for meals and lodging, while away from home in the pursuit of business. Other types of business expenses includes, employee’s salaries, rentals or other payments for the use of property (not own) in the conducting business. Business interest, the amount charged for the use of money borrowed for business activities can also be written off. John
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