You Decide
You Decide Activity (125 points)
Scenario Summary
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 …show more content…

Issue (b)
How is the $25,000 treated for purposes of federal tax income?
Applicable Law & Analysis:
Title 1 Property Tax Code Subtitle E chapter 33.48 (a) states “In addition to other costs authorized by law, a taxing unit is entitled to recover the following costs and expenses…(1) all usual court costs, including the cost of serving process”.
Conclusion:

Given that John Smith likely expensed the $25,000 in the year that it was paid, it should be reported as income in the current year. The net effect of the two transactions is zero and, in IAW the matching principle, it would not have been reported as a deductible expense.
There is no net income to report as taxable. This amount doesn't form part of the deductible expenses for the year as there is still the claim for reimbursement; the amount actually received is treated as a non-taxable repayment of a loan.
Issue (c)
What is your determination regarding reducing the taxable amount of income for both (a) and (b) above?
Applicable Law & Analysis:

Considerations include the following: (1) According to the IRS “an LLC is an entity created by state statute”. The IRS uses tax entity classification which allows the LLC to “be taxed as a corporation, partnership, or sole proprietor, depending on elections made by the LLC and the number of members.” An LLC can also “be either