John and Jane Smith

You Decide

This memo is to advise you on your tax concerns for John Smith, Jane Smith, and the two as a married couple. First we address John Smith’s issues.

1a) How is the $300,000 treated for purposes of federal tax income?

John provided a service and received payment therefore the $300000 is going to be part of his gross income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items.

1b) How is the $25,000 treated for purposes of federal tax income?

I believe that the $25000 will also be included in your gross income. And it could be taken as a business deduction.

1c) 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 for a) the $300000, he should maximize as many deductions as he is allowed. 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...