John and Jane Smith's

Homework s After reviewing John and Jane Smith’s points of view, I came with the fallowing advices for all tax issues that were brought to me.

John Smith, Esq. - Lawyer

“John Smith - 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.

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)?”

1. John Smith tax issues:

1.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 (1040) 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.

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

The 25,000 is treated as ordinary business expenses, which also go on the Sch. C

This amount doesn't form part of your deductible expenses for the year as you hold the claim for reimbursement. Moreover, the amount you actually receive is treated as a non-taxable repayment of a loan.