Question

You are an accountant and just opened up your practice at an exclusive Beverly Hills plaza. George Clooney and his wife, Amal Clooney come to you for tax advice. George is a self-employed consultant. In 2017, George’s business generated revenue of $265,000 and incurred expenses of $28,000 for rent and utilities for an office. George also spent $18,000 purchasing depreciable equipment used in the business and paid a part time secretary $22,000 for administrative work performed during the year. He hired Mary, an assistant to help him in his consulting practice and paid her $50,000.

George paid $6,000 for his own health insurance and $1,0000 for term life insurance. He did not contribute to any retirement plans.

Amal also works as a consultant, but is employed by a large firm. Her salary in 2017 was $185,000. Amal’s employer paid $30,000 of premiums for her health insurance and provided $50,000 of group term life insurance to each of its employees. Amal is not covered by a qualified retirement plan at work, but she contributed $15,000 to a traditional IRA.

Amal routinely travels for her job and was reimbursed by her employer for all travel expenses. In addition, Amal spent $1,000 on other employee business expenses that were not reimbursed by her employer.

What are the tax consequences of these items? Can George and Amal deduct the expenses they incurred? Are there other tax planning opportunities the couple may be missing or tax issues of which they should be aware? Are they both self-employed or are they employees?

Answer 1

Tax consequences:

The business income of George Clooney $265,000 shall be included in determination of George’s assessable income tax. However, the amount of revenue of $265000 earned by George from his business will be allowed to be reduced by the expenditures incurred by George provided these have contributed to the generation of revenue in George’s business. Thus, rent, utilities and salaries paid to the employees will be allowed as deduction to compete the assessable income of George Clooney.   

In respect of Amal, her entire income will be subjected to tax as she is an employee. Thus, the salary received by her will be subjected to income tax.

Deductibility of expenses:

George can deduct the expenditures incurred in business provided these have exclusively incurred in order to earn revenue from business and have contributed to the revenues of the business. However, no such provision is applicable in respect of salaries income. Thus, no expenditures will be allowed to be ducted from the salary of Amal to determine her assessable income.

Tax planning opportunity:

George and Amal both should file income tax return jointly o reduce their income tax liability to the minimum extent possible. Thus, by filing jointly both will be able to claim higher amount of deductions and itemized deductions.

Self-employed or not:

No, not both George and Amal are not self-employed. George is self-employed but Amal is an employee.