Mr. & Mrs. Smith,

It was a pleasure to meet with you both and hear your questions pertaining to your taxes. I have analyzed the information you provided to my agency and would like to address the following specific issues and recommend alternative strategies to reduce your personal tax liability.

First, I’d like to address Mr. Smith’s issues.

1(a). How is the $300,000 treated for purposes of federal tax income? The $300,000 is earned income for you and will be reported as gross income either on the Schedule C of the individual return or as gross income on the LLC tax return for the law firm. The reason why it could be either is a result of different state laws specifying what a single person LLC can report on a business return. 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. (1) 1(b). How is the $25,000 treated for purposes of federal tax income? The $25,000 advance for expenses would have been classified as a client advance two years ago and reported as a deductible expense on this year’s tax return due to the GAAP matching principle. This year, when the $25,000 is reimbursed, the revenue minus the expense equals zero. In other words, there is no net taxable income to report.

1(c). What is your determination regarding reducing the taxable amount of income for both (a) and (b) above? If the income was received in 2011, there is little you can do now to minimize the tax consequence, except to claim all allowable deductions. Since they would generally have to be paid in 2011 to be deductible in 2011, you can't incur any new expenses now to help. If you qualify to make a Traditional IRA contribution and haven't already for 2011, you still have until April 17, 2012 to do so, but that is little help for substantial income like the $300,000 earned