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Memo To washbowl & Jane smith From ReMemo summarizing dissimilar assess issues 1. John Smiths task income issues Issue a) How is the $300,000 treated for purposes of federal valueation income? applicable faithfulness summary http//www. irs. gov/ occupancyes/ midget/selfemployed/index. html Conclusion The $300,000 leave behind be treated as self- employed income. Generally you be free-lance if you carry on a wad or melodic phrase as a sole proprietor, independent contractor, or if you are a phallus of a partnership. Self-employed individuals are required to file an annual return, and salary estimated tax quarterly.Issue b) How is the $25,000 treated for purposes of federal tax income? relevant practice of law abstract www. irs. gov Conclusion The $25,000 result be treated as self- employed income as well. John was awarded the 25,000 that paid up front expenses, so the number will cancel each other(a) out. Issue c) What is your determination regarding reducing the rateable metre of income for both (a) and (b) above? applicable Law Analysis http//www. efile. com/tax-credit/federal-tax-credits/. payoff 526- Charitable contributions. Section 170-charitable contributions and gifts ( c).Section 48- energy credit Conclusion Establish a self- employed retirement plan, coerce IRA contributions, make charitable donations including asset donations according to organizations described in section 501 (c)(3), make energy efficient improvement to the home according to IRC rule 48. Issue d) Do I get better tax benefits for paying the lease on authorisation space or for buying the building? What are the differences? Applicable Law Analysis IRC enroll 167- there should be allowable reasonable derogation for wear and tear on property used in the calling or business. http//www. law. cornell. edu). http//www. microsoft. com/business. IRC Code 179-allows tax remunerators to deduct the cost on sure types of property. Conclusion There are better tax benefits for buying the building. Owners of letting property can write of repairs immediately. Deprecation on commercial buildings is pursuen over 39 years you can also deduct concern on the purchase loan, property tax, and other qualifying expenses. (www. microsoft. com/business). The total amount you can deduct under section 179 cannot be much than $500,000. (www. irs. gov).When leasing a building, the monthly lease payment is tax deductible, but the tax payer cannot deduct bear on, property tax, or depreciate. 2. Jane Smith tax issues Issue a) What are the different tax consequences between paying down the mortgage (debt) and presumptuous a new mortgage (debt) for federal income tax purposes? Applicable Law Analysis www. law. cornell. edu Conclusion Satisfying the mortgage will cancel tax deductions for that mortgage loan. Without the mortgage interest, a customer could be placed in a higher tax bracket. This will cause the tax payer to possible owe more money.Assuming a new mortgage feature benefits rather than consequences. Issue b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive rest home using additional money from Johns case? Applicable Law & Analysis IRC code 1031. The IRC code 1031 allows deferral of taxes on the exchange of two assets. IRC code 1031 also allows one to sell an asset with the intension to use bribe to invest in a like asset. (http//financial-dictionary. thefreedictionary. com/Internal+Revenue+Code+section+1031) Conclusion John and Jane cannot utilize a 1031 tax exchange.Owners of investments and business property may qualify for a section 1031 deferral. Both properties in the exchange moldiness be held for use in a trade or business or for investment. Property used primarily for person-to-person use does not qualify for like-kind exchange treatment. Issue c) Does Jane have a business or hobby? Why is this distinction important? Applicable Law & Analysis IRC code 183. The IRC code 183 is also cal led the hobby spill rule, it minimize losses that can be deducted from income from hobbies or other non- attain activities.Conclusion Jane has a business. If time and effort put into the activity is intended to make a profit, this is considered a business. Business versus hobby is important because taxpayers who incorrectly repute losses from hobby activities can be subject to additional taxes, interest and penalties in an audit (http//www. irsvideos. gov/Professional/HobbyBusiness) Issue d) Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry- qualification activities? Applicable Law & Analysis www. irs. govConclusion Jane and John would have better tax benefits if Jane had a separate business for her jewelry- making activities. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year this could include the cost of material. Jane can also deduct expenses for the business use of her home. Jane can also deduct car expenses mileage judge from 1/1/11-6/30/11 is . 51 per mile and from 7/1/11-12/31/11 . 55 per mile (www. irs. gov) Issue e) What tax benefits would John realize if he invested $15,000 in Janes jewelry making? Applicable Law Analysis http//perlmutter. house. ov/index. php? option=com_contentview= wordid=707Itemid=88- Business tax benefits under the recovery act. Conclusion Small Business Investment Spurs investments in small businesses by cutting the capital gains tax on investors in small businesses who buy stock (in the next two years) and hold it for more than 5 years. (www. perlmutter. house. gov) Issue f) Can Jane depreciate her vehicle or jewelry-making equipment? How? Applicable Law Analysis Section 179. Section 179 allows business to deduct the beat purchase price of equipment purchased or financed during the tax year. (www. section179. org)Conclusion Section 179 deduction enables small businesses to deduct up to $250,000 of the cost of machinery, equipmen t, vehicles and furniture. To qualify for the section 179 deduction, your property must have been acquired for use in your trade or business. (http//www. irs. gov/businesses/small/article/0,,id=213666,00. html). The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) that you use in your business and first placed in service in 2009 is $2,960 ($10,960 for automobiles for which the special depreciation allowance applies. www. irs. gov) 3. John and Jane Smith tax issue Issue a) Should John and Jane file separate or joint tax returns? Applicable Law Analysis IRC Code 1- The law that impose federal income tax on income, and sets the amount of tax to be paid. Conclusion Married individuals filing joint returns will pay $75,528. 50 plus 39. 6% of income over $250,000. If Jane establishes her activities as a trade or business they would have to pay less in taxes.