ACCT553 Research Paper


To: John and Jane Smith


Date: 10/9/14

Re: Memo summarizing several tax concerns

1 . David Smith's Duty Issues

Issue (a): Just how is the three hundred, 000 cured for purposes of federal government tax salary?

The 300 dollar, 000 that John received from the courtroom case is known as earned income for the season. The 300 dollar, 000 is definitely earned cash flow for Ruben Smith and will be reported since gross income either on Schedule C of the individual return or as gross income for the LLC return.

Applicable Legislation and Analysis

Section 61 with the Internal Earnings Code (IRC 61, 21 U. S. C.  § 61) defines " gross income, " the starting place for deciding which components of income are taxable for federal tax purposes in the us. Section sixty one states that " besides as or else provided in this subtitle revenues means all income via whatever origin derived". (


The $300, 500 has to be taxed because it is regarded as gross income. Ruben will have to shell out self-employment taxes, which is the gross income that obtained in corporate in the quantity of $300, 000. He will probably actually have to pay " income" and " self-employment" tax for the " net" earnings from his business... not the whole $300K mainly because presumably this individual has business deductions.

Issue (b): How is the $25, 000 remedied for functions of federal tax cash flow?

The $25, 000 may not be reported as salary. The reasons why are that the $25, 000 really should have been classified as a cost on the balance sheet. It would not have been reported as a insurance deductible expense pursuing the matching principle. In the current season when the $25, 000 is usually reimbursed, the revenue without the expense comparable to zero. Appropriate Law and Analysis

Advances commonly consist of travel expenses, costs of medical documents, costs of reports, observe fees, deposition costs, processing fees, exploration costs, costs of photos, laboratory test fees, and sheriff's charges for service ( Canelo v. Comr., 53 TC 217 (1969)). Corporate lawyers may fees expenses to get setting up a company or recording fees with respect to filing documents. (

Bottom line

However , should you expensed this in the year it absolutely was paid, the $25, 500 would be reported as cash flow on this year's income tax.

Concern (c): What is your determination regarding reducing the taxable volume of salary for the two (a) and (b) above?

John would like to reduce his taxable income. One way to do this is to benefit from itemized reductions.

Suitable Law and Analysis

Steve will have self-employment tax to pay. He will also have the $25, 500 added to the gross income. He can be able to take the bills. Since, Ruben is a sole proprietor; he may wish to check into investing in a old age plan to decrease the taxable volume. An itemized deduction is definitely an suitable expense that individual taxpayers in the United States can statement on their federal income tax returns in order to decrease their taxable income. Many taxpayers are allowed a decision between the itemized deductions and the standard discount. After computing their tweaked gross income (AGI), taxpayers may itemize their particular deductions (from a list of permitted items) and subtract individuals itemized rebates (and any applicable personal exemption deductions) from their AGI amount to reach their taxable income quantity. Alternatively, they will elect to subtract the conventional deduction for their filing status (and any applicable personal exemption deduction) to arrive at their taxable cash flow. In other words, the taxpayer may well generally take the total itemized deduction quantity, or the regular deduction quantity, whichever is greater. (


Another way to reduce his taxable cash flow is to type an LLC. LLCs enable you to reduce estate taxes by simply transferring possessions like a friends and family business, plantation, real estate or perhaps...


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