1. John Smith Tax Issue: a) How is the $300,000 treated for purposes of Federal tax income?

I assume that John smith follows the rule of cash basis accounting system. Thus, he would recognize this amount when he gets paid. $300,000 is his professional income or it would be treated as Self Employment Income for the Federal tax purpose and it would be reported in the Schedule C and in the Form 1040 as well. It is an ordinary income of the profession or Self employment Income. If John owns the building then he can deduct interest as a business expenses for the Federal tax purpose in line 16 and he also can deduct depreciation on building as a commercial real estate property over 39 years in line 23 and owners insurance in line 15 and other expenses those are related to the real estate property. I think it is better that John pay off debts and owns a bigger house.

b) How is $25,000 treated for Federal Income tax purpose? $25,000 would be deductible as a business expenses and would be reported in the Schedule C. According to IRC; all expenses that are related to the business are deductable in the Schedule C. c) What is your determination regarding reducing the taxable amount of Income for both (a) and (b) above? John got $300,000 as a professional fees and it is a Self employment Income thus, there would be nothing John can minimize the taxes except purchase of an equipment for the business and John may defer Federal Tax liabilities by making contribution to the retirement fund. $25,000 can be deductable as a business expenses for the tax purpose. LLC is generally considers same with the self employment business (unless specified) and all incomes and expenses would be reported in the Schedule C. lease expenses would be deduct on line 20 of schedule C.

Self employed individuals must pay self employment tax (that includes social security and Medicare taxes] and income tax [according to IRC]

John Smith may deduct travel expense as business related expenses that would be reported in Schedule C. but travel expenses related to the personal travel would not be deductable for the Federal Tax purpose. 2. Jane Smith tax Issues: a) What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for Federal Income Tax purpose? It depends upon the Jane Smiths financial status; it is a financial matter that should be analyzed in detail. Paying off debts would lead to the higher tax burden because interest on mortgage may be deducted for the Federal tax purpose. Taking new Debts depend upon the interest rates. Thus, Jane Smith should consider the three factors; one is difference in interests rates and second financial position and third is time period of mortgage or debts. b) Can John Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from Johns case? NO, John Smith cannot utilize a 1031 tax exchange to buy more expensive house using additional money because 1031 only would be applicable for business property not their personal residence. Whenever we sell an investment or any business property then, we recognize capital gain or capital loss at the time of sale. But IRS Sec- 1031, provides an exception that allows us to postpone paying tax on gain if we do invest the sales proceeds in the similar property as a part of qualifying Like kind of Exchange. Thus, property those are not similar (Like kind of exchange) are covered under this section and John Smith cannot utilize a 1031 tax exchange to buy more expensive house using additional money. c) Does Jane have a business or hobby? Why is this distinction important?

According to Internal Revenue Code; an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit and IRS defines that an activity carried on for earning a profit if it earns a profit during at least three years of the last five tax years including the current year. An engagement in the activities should be regular. d) Would Jane and John realize better tax benefits if she had a separate business for her Jewelry making activities? They would not get better tax benefits if they make separate business entity because both are different activities that would be reported separately in Schedule C and should make separate account for expenses. e) What tax benefits would Johns realize if he invested $15,000 in Janes Jewelry making activities? Yes, John you may choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This deduction is often referred to as IRS Sec- 179 deduction. Even because of such deduction John will have a loss from the jewelry business his total taxable income from both businesses will be reduced. f) Can Jane depreciate her vehicle or jewelry making equipment? Yes Jane can depreciate her vehicle or Jewelry making equipment because it is used for the business purpose. Jane should provide documents as evidence that it is used for business purpose not for personal purpose.

3. John & Jane Smith tax issue: a) Should John and Jane Smith file separate tax return or jointly? John and Jane Smith should file a joint return for getting more tax benefits. They should choose their status as married filing jointly.

According to IRS; under Married filing jointly status, both husband and wife are responsible for any tax they owned and the lowest tax rate applies to them under a married filing jointly status.

References: http://www.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod 05/tt_mod05_03.jsp http://www.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod 14/tt_mod14_01.jsp http://www.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod 14/tt_mod14_02.jsp http://www.irs.gov/businesses/small/selfemployed/index.html#struct ures

http://www.irs.gov/app/understandingTaxes/hows/tax_tutorials/mod 14/tt_mod14_05.jsp http://www.irs.gov/businesses/small/industries/article/0,,id=98491,0 0.html http://www.irs.gov/newsroom/article/0,,id=179801,00.html