ACCT 553 DEVRY WEEK 4 YOU DECIDE ACTIVITY
ACCT 553 DeVry Week 4 You Decide Activity
SCENARIO: You are a CPA with an office in NearLakes City and clients consisting primarily of professionals, entrepreneurs, and small business owners. John Smith, Esq., a practicing attorney with offices near yours, walks in your office and wants advice from you relating to a recent influx of cash he received as a result of winning a large jury verdict on behalf of his client in a personal injury case. His wife Jane Smith accompanies him during your meeting because she has some additional tax planning advice to ask of you.
ROLE: After reviewing John and Jane Smith’s points of view, it will be your turn as a tax professional to decide on the best course of action from a tax perspective on their issues. Prepare a three page memo (at least 900-1,500 words per page) to John and Jane Smith addressing the issues presented.
PLAYERS: JOHN SMITH ESQ.
“I worked on this case for over two years. The jury awarded my client $2,000,000 in damages, of which my fee was $300,000 plus recovery of expenses paid up front in the amount of $25,000. How is the $300,000 taxed? What about the $25,000? What can I do to minimize the tax consequences of each? Also, I am thinking about buying the building that I currently lease my office space in. My current lease is $3,500 per month. How is this lease reported on my income tax returns (either personally or for my business which is a separate law practice established as an LLC)? Do I get better tax benefits for paying the lease or for buying the building? What are the differences?”
PLAYERS: JANE SMITH-PROFESSIONAL
“I think that the fees would be better used for paying off our house and buying a new, bigger house that I’ve had my eye on. Does it make better tax sense for us to pay off the mortgage, sell the house, and buy a new house, or should we just use the money to buy the new house after selling the old house? Also, I sell handcrafted jewelry which earned me $20,000 last year. Do my business activities constitute a trade or business for federal income tax purposes? Or, is this just a hobby? Should I establish a separate trade or business to get tax benefits on these earnings? Does it make any difference that I use my car primarily for transporting my jewelry to different shops around town? Finally, I think I can earn more money if John were willing to invest $15,000 for new jewelry making equipment since my original equipment, which cost $10,000 five years ago, is almost obsolete. Does this make sense from a tax perspective?”
Given the scenario, your role and the ACCT553YouDecide information provided by the key players involved, it is time for you to make a decision.
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Prepare a three-page memo (at least 900-1,500 words per page) to John and Jane Smith addressing the issues presented:
1. John Smith tax issues:
How is the $300,000 treated ACCT553DeVryWeek4YouDecideActivity for purposes of federal tax income?
How is the $25,000 treated for purposes of federal tax income?
What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Is it more beneficial to continue leasing the business space or to buy the building?
2. Jane Smith tax issues:
What are the different tax consequences between paying down the mortgage (debt) and assuming a new mortgage (debt) for federal income tax purposes?
Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John’s case?
Does Jane have a business or hobby? Why is this distinction important?
Would Jane (and John) realize better tax benefits if she had a separate business for her jewelry-making activities?
What tax benefits would John realize if he invested $15,000 in Jane’s jewelry making?
Can Jane depreciate her vehicle or jewelry-making equipment? How?
3. John and Jane Smith tax issue:
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ACCT 553 DEVRY WEEK 4 YOU DECIDE ACTIVITY