5/31/2017
Business
Analysis
Used Car Dealership
Jane Doe
ABC CONSULTING, LLC
`
MEMO
To:
Bob Jones
From:
Jane Doe
Cc:
John Doe
Date:
May 31, 2017
Subject: Business Analysis: Used Car Dealership
Bob, a 60-year-old retired man who is opening a used car dealership in Pensacola,
Florida, has hired JSJS Consulting, LLC to provide detailed analysis and
recommendations on which business entity would best fit his business needs as well
as the tax implications.
Bob currently has 690k in his 401k as well as land that he bought in 1966 for $450k
that is now worth 9 million dollars, in which he will use as his start-up capital. He
will also give transfer 40% interest in the business to Mandy, his daughter.
I. BUSINESS & TAX ANALYSIS
A.
Business Entity
After thorough research, I recommend that Bob sets up his used car dealership as an
LLC and elects to be taxed as a partnership. Treasury regulation § 301-7701-3 states
ABC Consulting,
LLC
`
that depending on the number of members and the elections that are made, a Limited
Liability Company (LLC) can be treated as a corporation, partnership or sole
proprietorship for federal tax purposes. An LLC provides an entrepreneur with the
benefits of a partnership and a corporation. An LLC is a pass- through entity, just like
a partnership and just like a corporation, an LLC provides liability protections to the
members. To form an LLC in the state of Florida, Bob will have to file an Articles of
Organization with the Division of Corporations. The article must include the LLC’s
name, address, and signatures of the LLC’s registered agent and LLC
members(managers). It must also include the effective date if different from the
filing date. The filing fee is $125.00 and the articles can be filed my mail or online.
After successfully forming the LLC, Bob will need apply for an Employer ID
number (EIN) which is used to identify his business.
B.
Accrual Method Vs Cash Method
In section 446 it reads that taxable income should be computed under the method of
accounting that the taxpayer uses to calculesate income throughout the year and the
methods of accounting that are permissible. The permissible accounting methods are
the accrual methods, cash receipts and disbursement method, and any other method
that is permitted under § 446.
The purpose of the accrual method of accounting is to match income and expenses in
the correct year. There two test that help determine when income can be reported
under the accrual method. The all events test, where an accrual method taxpayer
reports an income when “all events” have occurred that gives the taxpayer the right
`
to receive the item of income and the amount can be determined with reasonable
accuracy (CFR 1.446-1). Economic performance test, this test is satisfied when
services or property is rendered by the other party (Rupert et al…2016). The all
events and economic performance test also determines when certain items can be
deducted under the accrual method of accounting. Section 461(h) states that all
events test must be satisfied in order to deduct a tax liability. There are three
principals in which all events occur in order to deduct liabilities which are: 1. all
