Essay about Acct553 - Wk4 - You Decide

1469 Words Dec 8th, 2013 6 Pages
Memorandum

To: John & Jane Smith From: Andrea R. Martinez Date: 11/28/2013 Re: Tax Issues

Per my conversation with Mr. and Mrs. Smith regarding their specific tax issues, I have done some research on each matter. The recommendations that follow will be beneficial in helping to reduce their tax liabilities.

1. John Smith tax issues:

a) How is the $300,000 treated for purposes of Federal tax income?

Gross income, as defined in IRC 26 § 61, is “all income from whatever source derived, including (but not limited to) the following items: (1) compensation for services, including fees, commissions, fringe benefits, and similar items.” (IRC 26 § 61(a)(1)). With this
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When following the matching principle, no expenses would have been reported.

John will need to match the revenue of $25,000 reimbursed in the current year with the expenses incurred. The resulting net reportable income will be zero.

c) What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?

1. Filing Form 8832 “Entity Classification Election” to be taxed as a corporation can result in savings in taxes each year.

2. Set-up of a qualified retirement plan for employees. Some of the retirement plans for self-employed are SEP (Simplified Employment Plan), SIMPLE (Savings Incentive Match Plan for Employees), and Individual 401(k). The set-up and funding of some must be done by year end. John will be able to fund any of these plans to the limits as stated in the plan chosen.

3. Based on IRC § 179, John will be able to “elect to treat the cost of any section 179 property as an expense not chargeable to capital account”, subject to certain limitations. Also, he will want to pay as many current expenses in the year the income is reportable.

4. Locating investments that may produce a taxable loss by year-end. Based on the $300,000 of earned income, these losses may be miniscule. Rental real estate is another viable investment.

d) Is it more beneficial to continue leasing the business space or to buy the building?

While leasing

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