Question

Compliance Assignment One

Our client, Pat Walshlander has requested our advice regarding the potential tax treatment of an anticipated change in his career path. Several years ago, Mr. Walshlander began participating in local and regional talent shows as a ventriloquist with “Hobo”, an antique puppet his grandmother had given to him as a child. His grandparents were former vaudeville performers and his childhood was spent listening to their stories and practicing/perfecting his acts with Hobo.

He and Hobo have enjoyed moderate success recently and even won a few cash prizes and a cruise to Caribbean last year. His interest and participation in the activity has increased steadily over the years and he spends most of his free time rehearsing new ideas, traveling to shows in the surrounding states, and taking acting, voice and singing classes to improve his performance. His “day job” as a marketing representative for a computer software company pays very well and allows him to accommodate the growing cost of his increasing ventriloquist activities. Mr. Walshlander is also the beneficiary of a significant trust established by his grandparents.

Mr. Walshlander has decided to quit his marketing job and focus on his act with Hobo full time. He wants to take the act nationally and has recently purchased a large recreational vehicle he intends to live in and travel with Hobo across the country. This will allow him to accommodate his ever growing wardrobe collection of matching business suits he and Hobo use in their performance (one of shows; trademarks is the use of identical, albeit differently sized, designer suits that reflect the latest trends in men’s business wear - these suits are expensive and are a significant yearly cost of the show). Mr. Walshlander is excited to embark on this new endeavor but has several questions about how this will impact his personal tax situation. Mr. Walshlander projects the income from his activity will generate $140,000 of income and he will incur $40,000 of expenses in connection with the activity. His adjusted gross income will be $102,000; he will file single and claim a $12,000 standard deduction.

Please prepare a letter (Min 4 Pages) to Mr. Walshlander outlining your advice on the potential tax treatment of his new venture and planning tips to ensure the most favorable tax treatment for his act. We have prepared his federal income tax returns in the past so be sure to include a description of how his compliance obligations might be expected to change form his previous returns.

Answer 1

Hello Pat

                   Hope you are doing good. We have heard about your new venture with Hobo and are very excited to attend the show. Your performances with Hobo in the past have been miraculous and is a treat to watch. Please keep us updated with your show timings so that we do not miss them.

                   This is in connection to your latest letter wherein you are posted several of your queries about the tax management after you have embarked in to the art venture. We would like to assure you that we have your tax management covered and are always available at your disposal for any kind of assistance or help that you would require. Before I start with the details of your tax assistance, let me give a brief about your last years tax filing and how this year’s tax filing needs to be different.

                               Until last year, your total gross income was approx. $25,000 for which we had paid a total tax of about 10% and rounded of paying a total of $2500 as tax. You would be aware that for the income earned from your job as a marketing representative for the Software company is different and has a slab defined for it, according to which we had to pay 10% of the total gross savings. However, this year the criteria for the payment of taxes would be different owing to your added income from additional and different sources.

                             According the defined tax slab, for income earned from leisure activities and jobs which are not defined as hard labor in the Government records, a standard tax deduction of 20% is levied on the tax payer. Therefore. Comparatively we might need to pay a slightly higher taxes this year. If we break the calculation, your total gross income from the ventriloquist venture is expected to be around $80,000. Over that, your income from the Software company is approx. $25,000. Let us round off your total gross income as $102,000. Now, on the $25,000 income, we would still be required to pay a tax of 10%, making in to $2,500 and for the remaining $80,000 we would need to pay a tax of 20%, which means a tax of $16,000. Therefore, that total tax that we might require to pay would round to approx. $18,000 to $18,500.

                         Please read through the brief of the tax filing mentioned above and get back to me for any further queries you might have. We shall meet as and when you please us to.

                                                                                                                                      Yours faithfully

                                                                                                                                   XXXXXXXXXXXXXXXXX