1(a). Mr. Smith, to answer your first question, regarding the tax treatment of $300,000, fee received by you. First of all let me explain how LLC works. LLC is a limited liability company and is not a separate tax entity like a corporation; instead, it is what the IRS calls a "pass-through entity," like a partnership or sole proprietorship. All of the profits and losses of the LLC "pass through" the business to the LLC owners (called members), who report this information on their personal tax returns. The LLC itself does not pay federal income taxes, but some states impose an annual tax on LLCs. The reporting on taxes will be done according to the state in which you are residing, and taking into consideration that not all states allow for LLC to have a separate reporting from the individual. To conclude, the $300,000 fee received by you and being a sole owner of your LLC, you must report all profits (or losses) of the LLC on Schedule C and submit it with your 1040 tax return. 1(b). You have also received a sum of $25,000, as a reimbursement for your expenses. As you no doubt already know, you don't have to pay taxes -- income taxes or self-employment taxes -- on most of the money that your business spends. However, considering that you have worked on the case for two years, we need to know if $25,000 were reported for prior years as a deduction on your tax return. If you have deducted the $25,000 as business expense, the sum received now would be taxable. If the expenses were not deducted on you prior tax returns, the $25,000 will not be taxable.

1(c). As far as the reduction of the taxable income for both received by you, let’s look further into the issue? If $300,000 was received as lump sum, there not much that can be done, besides taking advantage of all the deductions allowed. Because LLC members are considered self-employed business owners rather