Fix a three-page memo ( at least 900-1. 500 words per page ) to John and Jane Smith turn toing the issues presented:
1. John Smith revenue enhancement issues:
a. How is the $ 300. 000 treated for intents of federal revenue enhancement income? B. How is the $ 25. 000 treated for intents of federal revenue enhancement income? c. What is your finding sing cut downing the nonexempt sum of income for both ( a ) and ( B ) above? d. Is it more good to go on renting the concern infinite or to purchase the edifice?
2. Jane Smith revenue enhancement issues:
a. What are the different revenue enhancement effects between paying down the mortgage ( debt ) and presuming a new mortgage ( debt ) for federal income revenue enhancement intents? B. Can John and Jane Smith use a 1031 revenue enhancement exchange to purchase a more expensive house utilizing extra money from John’s instance? c. Does Jane hold a concern or avocation? Why is this differentiation of import? d. Would Jane ( and John ) realize better revenue enhancement benefits if she had a separate concern for her jewelry-making activities? e. What revenue enhancement benefits would John recognize if he invested $ 15. 000 in Jane’s jewellery devising? f. Can Jane deprecate her vehicle or jewelry-making equipment? How?
3. John and Jane Smith revenue enhancement issue:
a. Should John and Jane file offprint or joint revenue enhancement returns?
To: John & A ; Jane Smith
Rhenium: Summary of assorted revenue enhancement issues
Your first inquiry is how is the $ 300. 000 treated for intents of federal revenue enhancement income? In Code 61 ( a ) . income derived from services is one of the listed signifiers of nonexempt income. i This includes fees. committees. periphery benefits and similar points. Since the compensation was earned this twelvemonth. even though you worked on the instance for two old ages. you will include it as ordinary income this twelvemonth.
You can cut down your revenue enhancement liability by subtracting necessary concern disbursals that were paid in the same revenue enhancement twelvemonth. Code Sec 162 ( a ) . ii Any wages or compensation paid to others. travel disbursals. which include repasts and lodging that are non inordinate. or other trade disbursals can be deducted against your income.
You besides received $ 25. 000 to retrieve disbursals. Reimbursed disbursals are non nonexempt. Sec 162 ( a ) ( 1 ) ( A ) three supplying that you furnished your client with a list of disbursals that were reimbursable and any staying sum was given back. Any sum that was non refunded to the client that exceeded the reimbursable sum is nonexempt. Sec 162 ( degree Celsius )
If you did non supply a list of disbursals to your client the $ 25. 000 will be portion of your gross income and the disbursals can be deducted.
If you purchase an office edifice you are allowed to take a depreciation disbursal against the footing of the edifice for wear and tear. iv The existent hard currency paid is non deducted when it is paid. An office edifice would be Section 1250 belongings and depreciable over 27. 5 old ages. 5 Interest on the office edifice mortgage would besides be revenue enhancement deductible but the mortgage would finally be paid off and you would non hold that tax write-off any more.
The full sum of the rental is revenue enhancement deductible as it is a necessary concern disbursal. Sec 162 ( a ) . Since your rental is $ 3. 500 a month. you can subtract $ 42. 000 a twelvemonth for the rental disbursal. It can be deducted every twelvemonth you are renting the edifice. You would hold to purchase a edifice that costs more than $ 1 million to acquire near to the same one-year tax write-off. It is more good for you to go on to rent the office edifice you are in.
Mortgage involvement can be deducted as an itemized tax write-off on Schedule A. vi The tax write-off can be taken on your first or 2nd place on the involvement on loans up to $ 1 million since it was purchased after October 13. 1987 and the loan is secured by the house. Excess involvement on an extra $ 100. 000 can be deducted for place equity loans. Rev Rul 2010-25. The 2nd abode must be used for at least 14 yearss or 10 % of the figure of yearss if it is rented out. If you pay down the debt before you get a new mortgage. you could potentially lose out on some of the mortgage involvement tax write-off.
When you sell your personal abode. Cod Sec 121 allows you to except $ 500. 000. or $ 250. 000 if filing individually. of the addition on the sale since you have owned and occupied the place for two out of the last five old ages.
You are non eligible to use a 1031 exchange. A 1031 exchange is for belongings held for production in a trade or investing intents. Personal abodes do non measure up. vii A 1031 exchange is for postponing revenue enhancements on capital additions and depreciation recapture on concern belongings.
Section 61 ( a ) besides includes hobby income in nonexempt gross income. The $ 20. 000 that you made from selling the jewellery you manus crafted is considered income from a trade because your motivation is to do a net income. IRS Publication 535 besides outlines that doing jewellery is a concern because of the clip and attempt put into it and that you expect to go on to do a net income from it.
If you want to maintain the jewellery as merely a avocation you can merely subtract disbursals to the extent of your income under Section 183. eight You could non do jewellery with the purpose to do a net income. You would be much better off if you keep the jewellery as a separate concern so that you could take concern tax write-offs in surplus of your income. As a avocation. you would lose out on depreciation and other expense tax write-offs beyond your income. Hobby tax write-offs are merely taking on Schedule A. If you have a twelvemonth that you do non hold plenty to enumerate your tax write-offs you would lose out on all of the concern disbursals.
It would besides be good to put up a limited liability company. ( LLC ) A LLC limits the partner’s liability to your footing in the company and will protect your personal assets and is disregarded for revenue enhancement intents. You would besides avoid paying self-employment revenue enhancements if you were a exclusive owner and study on a Schedule C. Alternatively. you can pay yourself a pay and the employer portion of your revenue enhancements would be deductible.
If John were to put $ 15. 000 into Jane’s jewellery concern he would non hold a revenue enhancement tax write-off or benefit until he sold the stock or the concern became worthless. Under Sec 1202ix. 50 % of the addition on the sale of his stock would be excluded.
Besides. under Section 1244. if the stock becomes worthless John could take an ordinary loss tax write-off alternatively of a capital loss tax write-off which is limited to his capital addition income.
Jane can besides take a depreciation tax write-off against her personal vehicle under Section 168 ( degree Celsius ) . Jane will necessitate to maintain records of vehicle usage for concern intents. The cost of operating and maintaining can be apportioned between concern and personal usage.
Some of your place disbursals can be deducted as a place office since Jane’s chief topographic point of concern is in your homex. Although place office tax write-offs are limited to the concern income. they excess can be carried frontward to the following twelvemonth. Make certain you keep records of your public-service corporations that are used for your concern and they can be apportioned between personal and concern usage. Partial depreciation can besides be taken on your place.
You should register a joint return as married filing jointly taxpayers get more revenue enhancement benefits. Your revenue enhancement liability could be lower than your revenue enhancement liability combined if you file married filing individually.