DOB: October 10, 1952 SSN: 444-00-4444 Marital Status: Single Home Address: 5100
ID: 2469544 • Letter: D
Question
DOB: October 10, 1952
SSN: 444-00-4444
Marital Status: Single
Home Address: 5100 Lakeshore Drive, Pensacola, FL 32502
Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob’s personal wealth, including investments in land, stocks, and bonds, is about $14,000,000.
Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000.
The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s tax basis in the land and building is $2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $5,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business’s total value. The office furniture and equipment are fully depreciated.
Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandy—his daughter—in the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away.
Mandy’s personal tax information is as follows:
Mandy Jones
DOB: June 30, 1990
SSN: 999-99-9999
Marital Status: Single
Home Address: 5990 Langley Road, Pensacola, FL 35203
You will need to describe the tax and limited liability effects on a chosen business entity should Bob decide to reduce the amount of tax paid per year, as well as the protection of personal assets should there be a possible claim against the company’s assets.
Question
Create a detailed tax planning proposal how the client’s family can experience tax saving should the client pass away.
Explanation / Answer
Organizational Analysis & Design Plan: S Corporations
To:
From:
Subject: Tax Benefits and Liability for S Corporations
Date:
Based on the type and nature of the business of offering services, it is recommendable for Bob to form S corporation. S corporation consists of the various appealing tax benefits and still providers the business owner with the liability protection of a corporation. In the case of an S corporation, the income and losses obtained are transferred through to shareholders and reported on their individual tax returns (Wahab & Holland, 2012). Thus, Bob would not be required to bear the entire tax burden and losses encountered in the business. However, the business is projecting a 10% growth in the overall returns.
Bob is advised to use S corporation, as his form of business does not have inventory, which makes it appropriate and simpler to use the cash method of accounting, which is simpler, compared to the accrual accounting method. Under the cash accounting method, income is taxable after it has been received and expenses deductible paid. Some of the recent tax law and regulation changes lead to the creation of the Small Business Job Protection Act of 1996, which has made the S corporation attractive to the business owners and entrepreneurs (Schenk, 2014). Previously, S corporations were limited to 35 shareholders, while the recent tax law of 1996 would be increased to 75 shareholders. The expansion of the shareholders allows for more investors, which attract additional capital.
In spite of the tax benefits and limited liability protection, S corporations have some disadvantages. For instance, they are subject to numerous requirements, which must be adhered and thus it implies higher legal and tax service costs. They are expected to file the articles of incorporation and hold regular shareholders meetings. In spite of all, the costs of legal and accounting services for the S corporation equals the costs of standard corporation (Graham, Raedy & Shackelford, 2012). Additionally, the costs of preparing the returns are lower than that of the C corporation status. Since, the S corporations are subject to once a year tax filing requirements. On the other hand, the C Corporation is subject to quarterly filing requirements. Since the S corporations files their taxes once a year, the cost of preparing the returns is low annually. The company employees and shareholders enjoy full limited liability protection. Their personal assets cannot be used to pay for the losses of the corporations.
The tax and limited liability effects of S corporations includes that the corporations passes all corporate income, deductions and losses to their shareholders for federal taxation. Thus, the shareholders of the S corporations would report the flow through of income and losses to their personal tax returns. In S corporations, taxes are assessed on the corporate income. S corporations are liable for the certain gains and passion income within the entity level. Another major benefit of selecting S corporation status is that the corporation eliminates the disadvantage of double taxation related to corporate income and dividends from shareholders as in the case of the C corporation tax status (Schenk, 2014). After the selection of the S corporation status, Bob will be required to file various tax schedules and forms including IRS form 2553 and form 1120S U.S. income tax return for an S corporation.
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