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John Smith Tax Issue for $300,000 fee and $25,000 of expense

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?

John Smith tax issues:
a. How is the $300,000 treated for purposes of Federal tax income?
b. How is the $25,000 treated for purposes of Federal tax income?
c. What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
d. Should John and Jane file separate tax returns or jointly?

Solution Preview

a. How is the $300,000 treated for purposes of Federal tax income?

The $300,000 is earned income for John Smith and will be reported as gross income either on Schedule C of the individual return or as gross income on the LLC return. The reason why it could be either is a result of the variance in state laws as to whether a single person LLC can report on a business return or not. For the states that don't allow separate reporting, the LLC is said to be 'transparent' meaning it does not report separately from the individual.

b. How is the $25,000 treated for purposes of Federal tax income?

The $25,000 advanced for expenses would have been classified as a client advance (on the balance sheet) two years ago. It would not have been reported as a deductible expense following the matching principle. In ...

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