How Is The $ 300, 000 Treated For Purposes Of Federal Tax Income

Words: 1508
Pages: 7

1. John Smith's tax issues:

Issue a) How is the $300,000 treated for purposes of federal tax income?

Applicable Law & Analysis:
From the information that was provided, the income was derived from the business and this gross income is taxable pursuant to Code§1.61-3(a). He is subject to self-employment tax, since the total amount of income that will come through to his personal tax income of half of the self-employment tax liability.

John will have to pay self-employment tax, which is the gross income that obtained in business in the amount of $300,000. He will actually have to pay "income" and "self-employment" tax on the "net" earnings from his business... not the entire $300K because presumably he has
…show more content…
IRC 1031 is not permitted on personal-use assets.

Issue c) Does Jane have a business or hobby? Why is this distinction important?

Applicable Law & Analysis:
We must determine if Jane’s jewelry making is a business or a hobby. One of the requirements is that a business is done to produce a profit. Jane’s jewelry making is done with profit as the purpose. She also delivers and makes her own product. It will qualify as business and not a hobby as long as the participation is continuous or regular. Pursuant to Code§183, a hobby expenses would not be eligible for deductions. However, the expenses with business are eligible for deductions.

In summary, Jane is making jewelry to sell for a profit. She also delivers the jewelry to her customers. Jane’s jewelry-making is a business because of the time and profit expectancy that she hopes to achieve. The qualification will include the time that she put into the business or the involvement that she has in the business. She would be able take advantage of tax benefits if she sets up her own business.

Issue d) Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities?

Applicable Law & Analysis:
If Jane decides to make her jewelry making a company, this will mean that all of her business expenses are deductible. As a self-employer, she will be able to deduct 50% of self-employment tax paid.

I recommend that she set a jewelry