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Final ProjectSouthern New Hampshire UniversityTax 650
Final ProjectMemoTo:Bob JonesFrom:cc:Date:July 20, 2016Re:Tax Computations and AdviceBusiness Entity: A partnership and an S corporation generally are not treated as a separate tax entity. Instead, they are conduits through which income, deductions, losses, and credits pass to the owners’ tax returns. However, the corporation can elect S election and be treated as a pass through entity (Anderson, Pope, & Rupert, 2016.) §1361of the Internal Revenue Code (IRC) the corporation must meet eligibility requirements to convert to an S corporation (IRC, §1361, 2016.) Therefore, in order to elect s corporation status Bob, you will have to file IRS S Corp form 2553 (Incorporate.com, 2016.) S corporation has two main reasonsfor electing S corporation, to avoid double taxation on distributions, and the second is to allow corporate losses to flow through to the shareholders. However, one must also include limited liability to the shareholders, as well as free transferability or sale of interest; stocks in the corporation (Small Business Encyclopedia, 2016.) S corporations are responsible for tax on certain built-in gains and passive income. The tax law imposes no limits to the number or types of entities that can own interests in a partnership or stock in a C corporation. However, S corporation shareholders only can be 2 | P a g e
Final Projectindividuals who are U.S. citizens or residents, certain trusts, estates, and qualifying tax exempt organizations, and the number of shareholders is limited to 100. This rule is much less restrictive than in the past because members of a family are now counted as a single shareholder for purposes of the 100 shareholder limit (Anderson, Pope, & Rupert, 2016.) I believe it is in your best interest to use S Corporation as your business entity. However, I must share with you that a shareholder’s stock and debt basis in the S corporation is very important. As a shareholder, your stock and/or debt basis will fluctuate depending on the S corporation’s operations. Therefore, for both you and your daughter, the taxable amount of a distribution is contingent on your stock basis (IRS, 2016.) If you do NOT plan to work in the business, and are using this as an investment, and want only a small distribution, then you cannot do that as an S corporation. You would need to have a different business entity, however, in our conversations, you have stated that you will be working full-time with your daughter, and therefore, S corporation will accommodate your needs and be the best business entity for your used automobile dealership. Accrual Accounting vs. Cash Basis: In differentiating between cash method and accrual method, we must first define each. Cash method involves recording the revenue upon receipt of cash, while also recording an expense when cash has been paid out for the cost or expense (Kieso, Kimmel, & Weygandt, 2015.) Therefore, revenue and expense or cost is respectively recorded when cash, other property, or service has been received, and when cash, or other property, or service has been paid.