FINAL PROJECT Tax 650 ALISON WALKER
Final Project – Tax 650 Alison Walker I. Memorandum A. Recommend a type of business entity for the client to consider based on your tax research. Consider justifying your recommendation using the code and regulations that relate to the business entity. I recommend that Bob go with a C corporation. According to 26 US Code 162, deductions are allowed for ordinary and necessary expenses paid during that tax year that were needed to carry out or operate the business. Which include salaries, traveling expenses, rent/payments for property that is owned by the business. Bob could also deduct $5,000 of business start-up and $5,000 of organizational costs in his first year. Bob can qualify to use section 1202 (small business stock), use Section 368 – tax free organizations, and use Section 179. Bob can reinvest your extra cash back into the business and issue stock to his employees and raise capital using preferred stock. It can also help the owner(s) limit personal liability and ownership in the business is transferable. Bob’s company would be able to take part in pension plans, group life, and accident plans use medical reimbursement. He would be able to have multiple shareholders. The corporation can out live the original shareholders. Distributions can be paid out as dividends to the shareholders. B. Differentiate between accrual accounting and cash basis. Based on the type of business and the client’s accounting system, what is the impact when revenue is recognized? Which option would you recommend for the client? Using the cash basis would require the client to report revenues on the income statement when they cash is received and report expenses on the income statement when the cash is paid out. The accrual basis would require the client to report revenues on the income statement when they are earned even if money hasn’t be received yet and report expenses on the income statement when they occur not when the payments are made.
Final Project – Tax 650 Alison Walker I would recommend the client use the accrual method. It would allow Bob to have a better idea of his company’s income. This is because the income statement will show the revenues earned and expenses that occurred during that period of time. This will also give him a clearer picture of his assets and liabilities. I also would think that this method is the best choice for Bob since under GAAP the accrual method is required when the business deals with inventory. C. Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis. As mentioned above the accrual method recognizes revenues and expenses when they are earned not when the payment is made like the cash method requires. For example if Bob sold a car on Dec. 5 th for $15,000 he would record the sale on that day even if the customer was paying it through a bank loan that they may not get until Dec. 6 th . When selling inventory, Bob will have
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- Winter '15
- Taxation in the United States, Alison Walker