John Smith operates his personal attorney service, which for tax purposes the limited liability company (LLC) and treated as a partnership. A partnership's income and expenses are to be reported on the U.S. Return of Partnership Income, Form 1065, on an annual basis. If there is more than one owner to John Smith's business, each partner will pay the income tax by filing a Form 1065 Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. This form will identify the income, expenses, and other items, as well as how much is distributed to each partner's share in accordance with their agreement (IRS.gov, 2011).

John Smith is also curious as to how the $25,000 of prepaid expenses will be treated on his federal taxes. The federal government considers business expenses as those that are the cost of operating a trade or a business. Because these costs were used in the operation...
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