Accounting Memo John and Jane Smith Add, Case Study

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Accounting Memo

John and Jane Smith

Add, NearLakes CPA Services

RE:

Tax Implications

Mr. And Mrs. Smith:

I have carefully reviewed the materials from our recent meeting and have the following information and recommendations for your situation:

Under U.S. Tax law, Gross Income is defined as compensation for fees, services, commissions and similar items (26 CFR 1,61.2) (Internal Revenue Service, 2013). In this case, the income derived from a client in a personal injury case is considered taxable income. The IRS would expect that you note this as income to the firm and would expect an estimated tax be paid. Based on a simple calculation from the IRS site, and treating this $300,000 as a bonus, we would recommend that you make a payment of $85,048 in Estimated Taxes by the end of next quarter. Failure to do so might cause the IRS to levy additional penalties when the tax return is filed for next year, their assumption being that you recovered this money now, and knew it would be taxable (Internal revenue Services, 2014).

1b. While your firm paid out $25,000 in expenses, you were reimbursed for those expenditures. They were legitimate means of preparing for trial and for materials and needs during the trial process. Those expenditures will be taken into consideration as line item expenses on the yearly tax return, and will likely expand based on additional materials for this, and other trials.

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For instance, certain additional expenses (meals, lodging, etc.) may not have been billed to the client, but other expenses were billed and monies received. The money received will go into your accounting line item as "Reimbursements" on an Income Account and will therefore be part of your annual income. Per IRC section 162(a) I would recommend that you set aside at least 20% of the expenses into an account in anticipation of tax liability, due to the lack of complete clarity from the above exception. However, not prepaying anticipated tax should not likely be penalized (Internal Revenue Service, 2013).

1c. You do not mention a few potential issues within your personal and professional life that might help offset tax liabilities when you have a large settlement. The new tax law requires taxpayers to reduce exemptions by 2% for every $2,500 over an income of $250,000-$300,000. You might consider making an S Corp election and being paid a reasonable salary and thus reducing net profit on your income. This would keep funds within the corporation for use, but not be subject to the same taxable percentage. You could also use a material participation exception, which can be worked out based….....

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