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 as a deduction only if it is paid and incurred during the taxable year.
Business expenses are deductible for adjusted gross income. They are deducted in computing John AGI on Schedule C of John and Jane Tax returns.

Section 162 of the tax code indicates that John business expenses deductible could include traveling expenses, which is consists of amounts expended for meals and lodging,