Memo
To:

John and Jane Smith

From:

Jaleesa Branch

Date:

10/6/14

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?
The $300,000 is treated as business income. After deducting all of the business expenses, the remaining amount will be the taxable income. Lawyers either work on a salary in a big law firm, or work directly with clients and collect the fees from these clients. If it is a salary, then it will be taxed the same way as ordinary income in the W-2 form, and if it is a business income like in our situation here with John, then it will be treated as a self-employment income that will be taxed after deducting any …show more content…
I would recommend that she had a separate business for her jewelry-making activities, so she can have a clear separate entity for her business, since she will have to report her income in a separate schedule C. She will also be able to deduct all expenses related to the business.

Issue (e): What tax benefits would John realize if he invested $15,000 in Jane's jewelry making? If they decided to use part of the $300,000 income for John, then they will be able to deduct the $15,000 as part of either startup cost if it is the first year for the business, or they can depreciate 100% of the assets using the 179 section that enable the business owner to depreciate the full amount in one year.

Issue (f): Can Jane depreciate her vehicle or jewelry-making equipment? How?
She absolutely can depreciate her vehicle and jewelry-making equipment. However, she will need to determine the use percentage of her vehicle for business and for personal purposes. If the vehicle is 100% used for business purposes, then she can depreciate the

l Page 4

whole value of the vehicle in 5 years, but if it used about 50 % for example, then she will only deduct 50% of the vehicle’s value. The business equipment will be deducted based on the MACRS schedule, which varies based on the equipment’s nature.
3. John and Jane Smith’s Tax Issue
Issue (a): Should John and Jane file separate or joint tax returns?
The married filing