1. Main Issue #1: John Smith tax issues:
a. How is the $300,000 treated for purposes of Federal tax income?
The $300,000 is earned income for John Smith and will be reported as gross income either
on Schedule C of the individual return or as gross income on the LLC return. US code defines
gross income in 26 U.S.C § 61 as “income means all income from whatever source derived,
including (but not limited to)…” The reason why it could be either is a result of the variance in
state laws as to whether a single person LLC can report on a business return or not. For the
states that don't allow separate reporting, the LLC is said to be transparent meaning it does not
report separately from the individual. The $300,000 is also will be considered part of lawyer’s
income as all income includes all monies derived from all sources and it will be taxable income.
b. How is the $25,000 treated for purposes of Federal tax income?
I should note that it is possible that John Smith might have expensed the $25,000 in the
year that it was paid, but if that was true, the $25,000 would be reported as income in the
current year. The net effect of the two transactions is still zero, even though reported in two
different years. It would not have been reported as a deductible expense following the matching
principle. There is no net income to report as taxable. This amount doesn't form part of your
deductible expenses for the year as you hold the claim for reimbursement. Moreover, the
amount you actually receive is treated as a non-taxable repayment of a loan. Title 1 Property
Tax Code Subtitle E chapter 33.48 (a) states “In addition to other costs authorized by law, a
taxing unit is entitled to recover the following costs and expenses…(1) all usual court costs,
including the cost of serving process”.
c. What is your determination regarding reducing the taxable amount of income for both (a)
and (b) above?
To minimize the tax to be assessed on the income, John Smith can:
1. Make use of and LLC reporting as an S Corporation wherein wages paid to the
shareholder may be less than the $300,000. According to IRS “an LLC is an entity created by
state statute. The IRS uses tax entity classification, which allows the LLC to be taxed as a
corporation, partnership, or sole proprietor, depending on elections made by the LLC and the
number of members.” Furthermore, an LLC “can be either a partnership or a corporation,
including an S corporation. To be treated as a corporation, an LLC has to file Form 8832, Entity
Classification Election, and elect to be taxed as a corporation.” The regular income tax rates will