You Decide: Week 4

You Decide: Week 4 Assignment

ACC 553 / Federal Faxes and Management Decisions

As a CPA, I will be giving clients John and Jane Smith tax advice. John Smith, Esq., a practicing attorney with offices near mine, walked in my office and wanted advice from me relating to cash he received as a result of winning a large jury verdict. His wife, Jane Smith, also has some additional tax planning questions for me.

John worked on this case for over two years. The jury awarded his client $2,000,000 in damages, of which he earned a fee of $300,000 plus recovery of expenses paid up front in the amount of $25,000. He is also thinking about buying the building that he currently leases office space in. The current lease is $3,500 per month. He wants to know how the lease is reported on his income tax returns, either personally or for his business which is a separate law practice established as an LLC. He also wants to know if he gets better tax benefits for paying the lease or for buying the building, and what differences there are, if any.

1. John Smith tax issues:

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

The $300,000 will be considered earned income for John. Because his law practice is established as an LLC, it will be reported as gross income on the company return. The partnership including an LLC, must furnish Schedules K-1 to the partners, which in this case would be John.

http://www.irs.gov/faqs/faq/0,,id=199631,00.html

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

Over two years ago, when John has started the case, he paid $25,000 upfront expenses relating to the case. He recovered this amount after the trail was over. Therefore, the $25,000 would have appeared as an advance expense that he gave to his client two years ago, before any money was awarded to the client. The $25,000 for this tax year would be considered a pay back or reimbursement. Because...