Acct 553 You Decide

YOU DECIDE ACTIVITY

Gelisha Black

ACCT 553- FEDERAL TAXATION

PROFESSOR MICHAEL ABNER

September 29, 2015

Memorandum

To: John & Jane Smith

From: Gelisha Black

Date: [ 9/23/2015 ]

Re: John & Jane Smith Tax Issues

Per your tax inquiries submitted to our firm, I have prepared responses to your questions below:

(1) John Smith's Tax Issues:

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

The Internal Revenue Code Section 61(a)(1) states Except as otherwise provided in the subtitle, gross income means 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. According to this IRC code, the $300,000 would be treated as gross income.

To be compliant with the IRC you will need report the $300,000 as your gross income in the year that the $300,000 is awarded.

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

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. (IRS Publication 535, 2014,) $25,000 was received as a reimbursement for costs incurred and it should be recorded as a business expense if it has been spent for business related activities. The $25,000 you received in advance for expenses should be included in your gross income for your tax return. Providing that you can show the full amount was used strictly for business expenses, the amount can be deducted through itemized deductions.

The $25,000 received for expenses should be reported as gross income; however, this amount can be deducted as miscellaneous itemized deductions, with limitations of course

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

To be deductible, a business expense must...