...investments (over 1 year). Surprisingly, there are several easy ways to drastically reduce tax liabilities with some planning and basic knowledge of the IRS tax code. There are several tools at their disposal including utilizing Internal Revenue Service Section 1031 (1031 Exchange), using pretax income to form a self-directed IRA, or by forming a limited liability company (LLC) to protect their investment. The 1031 Exchange began as the idea that two individuals could trade one property for another and, as a result, there was no gain or loss realized. In 1979 the Internal Revenue Service (IRS) came to the realization that it was not as common to find someone who wanted to trade real property in this manner. As a result the IRS modified the Law allowing an individual or corporation to sell property and purchase another property as long as specific guidelines were met. This created a very important tool that investors could use to minimize or even completely remove any tax burden. “The most important advantage of 1031 exchanges is the fact that you can defer all capital gains indefinitely. The other deferral tools available usually only allow a deferral period” (Williamson 2003, 46). This is what sets the 1031 exchange apart from all other tools. By understanding...
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...Subject: Qualifying Like-kind Exchange Facts: Twinbrook Corporation purchased a larger manufacturing facility for $2,100,000. Three months after Twinbrook purchased the new facility, it sold the old facility to White Flint Corporation for $2,000,000. Issue: Can Twinbrook Corporation qualify for a like-kind exchange of its manufacturing facilities? If not, under what circumstances would the transaction meet the requirements of a like-kind exchange? Authorities: IRC § 1001 (c) IRC §1031 (a)(1) IRC §1031 (a)(3) IRC Reg. § 1.1031(k)-1(b)(2)(i)) Rev. Proc. 2000-37, 2000-2 C.B. 308 Rev. Proc. 2004-51, Conclusion: Twinbrook Corporation did a transaction that does not qualify as a like-kind exchange because they obtained the new property for three months before disposing the old property. However, the exchange could qualify for the like-kind exchange if they went through an exchange facilitator. Analysis: IRC §1031 (a)(1) states that a company would not recognize a loss or gain in a qualifying like-kind exchange. In this case Twinbrook Corporation would not recognize the loss if the transaction would qualify as a like-kind exchange. Both manufacturing facilities are classified as real property; therefore, the two facilities are considered like-kind property. The problem is that the company used cash as part of the transactions and did not go through a third party intermediary; therefore, Twinbrook Corporation does not qualify for a like-kind exchange. IRC § 1001 (c) simply...
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...MEMORANDUM To: John and Jane Smith From: XXXXXX, CPA Near Lakes City Date: February 7, 2013 Dear Mr. & Mrs. Smith, Thank you for coming to our offices and allowing us to review and discus your concerns regarding your tax questions. I have been assigned to reply to your questions and I have listed my recommendations below. After you both have reviewed these recommendations, please contact me so we can go over any additional questions you may have. Mr. Smith’s questions: 1(a) How is the $300k treated for purposes of Federal tax income? According to the IRC §61(a)(1), “Except as otherwise provided in this 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”, the $300,000 you received must be included as part of your gross income, compensation for services, and as such it is taxable. 1(b) How is the $25,000 treated for purposes of federal tax income? The $25k you received as a recovery for expenses you paid in advance must also be treated as income. In general, an expense cannot be deducted if paid in advance. This is true for both the cash basis method of accounting and the accrual method of accounting. The prepaid amount is treated as an asset with a useful life extending beyond the current tax year, and carried over to the tax year where the expense applies. The Internal Revenue...
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...To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, though securitized properties are not excluded. The properties exchanged must be "like-kind", i.e., of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. Personal property used predominantly in the United States and personal property used predominantly elsewhere are not like-kind properties. Real properties generally are of like-kind, regardless of whether the properties are improved or unimproved. However, real property in the United States and real property outside the United States are not like-kind properties. Taxpayers may wonder whether items such as equipment used on a property are included in the lump-sum sale of the property, and if they are able to be deferred. Under Treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value that does not exceed 15% of the fair market value of the larger property does not need to be identified within the 45 day identification period but still needs to be exchanged for like kind property to defer gain. Cash to equalize a transaction cannot be deferred under Code Section 1031 because it is not like-kind. This cash is called "boot" and...
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...John Smith Tax issue 1(a) Issue: The issue is the $300,000 in income for John’s fees. How to treat this in Income Tax? Rule of Law: Section 61(a) of the Code the concept of income is broad and general. 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; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust. I.R.C § 61 Analysis: Section 61(a) it basically says that the gross income is not limited to these items, but that these are just the most typical sources of income. It is irrelevant whether or not the above items are received in money, goods, or services. Conclusion: The $300,000 that John received for services rendered from the court case is considered earned income for the year. 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. ...
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...guidance to minimize your tax liability for I have been in practice for 5 yrs. As you know, there will be a billing for this consultation, but no tax return will be prepared unless an agreement is met. The issues to be discussed are as follows: 1. John Smith tax issues: a. How is the $300,000 treated for purposes of Federal tax income? b. How is the $25,000 treated for purposes of Federal tax income? c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? 2. Jane Smith tax issues: a. What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal income tax purposes? b. Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case? c. Does Jane have a business or hobby? Why is this distinction important? d. Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry making activities? e. What tax benefits would John realize if he invested $15,000 in Jane’s jewelry making? f. Can Jane depreciate her vehicle or jewelry making equipment? How? 3. John and Jane Smith tax issue: a. Should John and Jane file separate tax returns or jointly? If you feel comfortable with the information I provide, I am willing to arrange both federal and state returns from the required materials you will hand over to me. In order to free myself from...
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...It was a pleasure to meet with you last week. This memo is in regard to your concerns that you mentioned during our meeting and my recommendation for each one. Please review this memo and call me if you have any questions. 1) John Smith tax issues: a. How is the $300,000 treated for Purposes of Federal Tax income? 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…..” (http://www.taxalmanac.org/index.php/Internal_Revenue_Code:Sec._61._Gross_income_define d#Location_in_Internal_Revenue_Code) According to IRC Publication 3402 Taxation of Limited Liability Companies “an individual owner of a single-member LLC classified as a disregarded entity is not an employee of the LLC. Instead, the owner is subject to tax on the net earnings from self-employment of the LLC which is treated in the same manner as a sole-proprietorship.” (http://www.irs.gov/publications/p3402/ar02.html#en_US_publink1000205890). The $300,000 is his active income. It is subject to self-employment income tax. Also, based on the cash method accounting sole proprietorship, your fee/ compensation will be taxed when you receive it. b. How is the $25,000 treated for purpose of Federal tax income? According to IRC Sec.104 (a) (2) “Any winnings in a personal injury lawsuit that covers the treatment of physical injuries are not taxable except for attorney fees which are taxable...
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...Memo To: John and Jane Smith From: Alyssa Webster Date: [ 2/2/2014 ] 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 and Analysis Code Section 61(a) lists fifteen items that must be included in gross income. Number 1 on this list is compensation for services including fees, commission, fringe benefits and similar items. Number 2 is gross income derived from business (¶4301, reference 1). This is important because the $300,000 was a fee received as compensation for service as a lawyer. Also, as a lawyer, fees received are income derived from business. Compensation for services is taxed when received (under cash basis) and at fair market value (¶4315, reference 1). This means the $300,000 is taxed in the year it is received and at the full value since the fair value of cash is the value at the time of transaction. Conclusion Based on Code Section 61(a) it is understood that the fee that is paid is compensation for the services performed by Mr. Smith and also part of his gross income from business. It is assumed that Mr. Smith will be reporting his taxes as a cash basis tax payer. Since this is the case, the full value of the $300,000 is taxed as gross income from last year (when it was received). Issue (b): How is the $25,000 treated for purposes of federal tax income? Applicable Law and Analysis Code Section 61(a) lists fifteen items...
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...Tax Research Memo Personal Injury winning treatment and other issues research ________________________________________________________________ XYZ CPAs NearLakes City John Smith tax issues 1 a Issue: Treatment for purposes of Federal Tax Income of $300,000 fee received out of the amount awarded by Jury. Applicable Law: Any winnings in a personal injury lawsuit that cover the treatment of physical injuries are not taxable except for attorney fees which are taxable. IRC Sec 104(a)(2).Taxability also depends upon the place of residence of the taxpayer. Conclusion: As per the provisions of IRC Sec 104(a) (2), $300,000 received by John Smith as fees from jury award is taxable for federal tax income purposes. 1b Issue: Treatment for purposes of Federal Tax Income of $25,000 expenses paid upfront and received out of the amount awarded by Jury. Applicable Law: Any winnings in a personal injury lawsuit that cover the treatment of physical injuries are not taxable except for attorney fees which are taxable. IRC Sec 104(a)(2).Any expenses can be claimed as a deduction.Taxability also depends upon the place of residence of the taxpayer. Conclusion: Expenses paid upfront and received as part of the jury award can be claimed as a deduction in the hands of the recipient (IRC Sec 104(a) (2). 1c Issue: Reducing the taxable amount of income for both (a) and (b) above. Applicable Law: An...
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...Dear Mr. & Mrs. Smith, It was a pleasure meeting with you on last week. This memo contains a list of the concerns that you mentioned during our meeting and the recommendation I have for each of your concerns. Please call me once you have reviewed the memo so we can go over any questions you may have and work on getting things in order. John's questions: a. How is the $300,000 treated for purposes of Federal tax income? • The $300,000 is included in your gross income. You earned the $300,000 by providing legal services. For federal income tax purposes, "gross income" means all income from whatever source derived and includes compensation for services I.R.C. § 61. Any income, from whatever source, is presumed to be income under section 61, unless the taxpayer can establish that it is specifically exempted or excluded. In Reese v. United States, 24 F.3d 228, 231 (Fed. Cir. 1994), the court stated, "An abiding principle of federal tax law is that, absent an enumerated exception, gross income means all income from whatever source derived". b. How is the $25,000 treated for purposes of Federal tax income? • The 25,000 should be included as part of income for the current year. If the expenses had not been expensed or deducted in the year the expense was incurred then it should be deduction this year. Either way, the net effect should zero out. c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above...
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...Memo |To: |Mr. & Mrs. John Smith | |From: |----------, CPA | |CC: |---------------------- | |Date: |May , 2013 | |Re: |YOU DECIDE, WEEK 4 | John Smith Tax Concern 1(a): The issue is the $300,000 in income for John’s fees. How to treat this in Federal Income Tax? In reading Cornell University Law School (as much of this memo comes from) referencing the IRS code, Section 61(a), the code the concept of income is broad and general. 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; (2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust. (I.R.C § 61) My investigation of this leads me to conclude that Section 61(a) basically says that...
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...Owner A would like to process an exchange process for those two properties. He wants to take a benefit of like-kind exchange, because under Internal Revenue Code (IRC), like-kind exchange can defer gain and loss from the transaction. Therefore, it may save some tax cost. However, those IRC defined this nontaxable like-kind exchange in an extremely narrow range. Conflicts of the recognition of like-kind properties often happen between taxpayer and the Tax Count. Therefore, it may hard for owner A to take this tax advantage of like-kind exchange. This paper will focus on qualification issue of like-kind exchange. It will firstly briefly show the relevant Federal Income Tax code of like-kind exchange and highlight two controversial parts when those codes applying. Additionally, several relevant cases will be analyzed to show how like-kind exchange property is qualified in real world. Those cases also give Owner A some suggestions of house exchange. Finally, based on cases analyze above, a possible exchange plan of Owner A will be explained. General Rule of Like-kind Exchange IRS Code In general, according to§1031(a), no gain of loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Besides, property should be identified and this exchange should be completed within 180...
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...Property is transferred to the corporation only in exchange for stock in the transferee corporation. Immediately after the exchange, the transferor-shareholders in aggregate control the transferee corporation by owning at least 80% of its stock And If a transferor receives money or property (other than stock in the transferee corporation), the transferor recognizes a gain (but no loss) equal to the lesser of the boot received or the realized gain. In addition, a corporation that transfers appreciated property (other than its own stock or debt obligations) to the transferor-shareholders also recognizes a gain on the exchange. 3. provide tax relief when a person transfers property to a corporation in exchange for stock in that corporation and has no proceeds from the sale of the existing property with which to pay the tax on any realized gain. 4. taxpayers participating in a like-kind exchange receive cash or other property in addition to the like-kind property. This non-like-kind property is referred to as a “boot, when that occurs, the taxpayer has not received solely like-kind property. Fortunately, a “ceiling rule” in section 1031 takes care of this problem by providing that gain or loss is recognized, but only to the extent of the amount of boot received. 5. No gain willl be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the...
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...memo to: | Mr. & Mrs. John smith | from: | carol johnson | subject: | tax issues | date: | September 29, 2012 | | | | | Dear Mr. & Mrs. John Smith: After carefully evaluating your tax issues my staff and I have come to the following conclusions on the questions you presented us. 1. John Smith tax issues: a. How is the $300,000 treated for purposes of federal tax income? The $300,000 you earned is considered earned income; therefore, it should be reported as gross income on either a Schedule C of your individual income tax return or if you have reported your company as being a LLC, you can file a LLC return. b. How is the $25,000 treated for purposes of federal tax income? The $25,000 would not be reported as income. The reasons why are that the $25,000 should have been classified as an expense (client advance) on the balance sheet at the time your received it two years ago. It would not have been reported as a deductible expense following the matching principle. In the current year when the $25,000 is reimbursed, the revenue minus the expense equal to zero. However, if you expensed it in the year it was paid, the $25,000 would be reported as income on this year’s income tax. c. Determination regarding reducing the taxable amount of income for both (a) and (b) above? You can make use of an LLC reporting as an S Corporation where wages that are paid to the shareholder may be less than the $300,000. The regular income tax rates will apply...
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...AC553 – You Decide 1. John Tax Issues: a. How is the $300,000 treated for purposes of Federal tax income? The $300,000 is included in John’s Gross Income. Section 61 of the IRS Tax code generally defines gross income as all income from whatever source derived, including the compensation for services, fees, commissions, fringe benefits and similar items. Therefore the $300,000 is classified as compensation John received for legal services rendered. b. How is the $25,000 treated for purposes of Federal tax income? The $25,000 should also be included in gross income, as they are also included in the fees for the legal services) provided. c. What is your determination regarding reducing the taxable amount of income for both a and b In order for John to reduce the taxable amount of his income of $300,000, he must maximize his deductions as business expenses. Business expenses are the cost of carrying on a trade or business. Expenses are usually deductible if the business is operated to make a profit. The tax code Section 162- Trade or business expenses indicates for a business expenses to be deductible, it must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the business, while a necessary expense is one that is helpful and appropriate for the business. The other requirements for an expense to be deductible as a business expense include, it being reasonable in amount and practice; an expense is allowable...
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