Summary: Memo Analyzing Various Tax Issues

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Memo To: John & Jane Smith From: Date: [ 8/12/2012 ] Re: Memo summarizing various tax issues 1. John Smith's tax issues: Issue A) How is the $300,000 treated for purposes of federal tax income? Applicable Law & Analysis: The $300,000 you earned from your services as a lawyer is going to have to be reported as gross income. As section 26, 61 clearly stats in the U.S code “gross income means all income from whatever source derived, including (but not limited to) the following items: Compensation for services, including fees, commissions, fringe benefits, and similar items…etc.” According to tax law the $300,000 you received from compensation for your services would have to be reported and will be taxed. There is however the option (if you so choose) to not receive the payments all at once. Much like the option in a lottery winning, you could quite possibly opt to…show more content…
Issue C) Does Jane have a business or hobby? Why is this distinction important? Applicable Law & Analysis: Well at the moment if we’re going to be literal she has a hobby that has quite the potential to turn into a small but profitable business. It actually makes a huge difference if it is a business or a hobby. For instance you cannot deduct losses from hobbies but you could deduct business expenses and losses if she actually turned it into a business. For example the money she spent on the equipment that she owns could count as a deduction if it was a business instead of just a hobby. Conclusion: I would recommend starting up a business seeing how there is the intent to make a profit anyways and you would be entitled to business expense deductions that you otherwise would not be entitled to. Issue D) Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities? Applicable Law &
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