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Running head: TAX 655 Final ProjectTAX 655 Final ProjectSamantha MansonSouthern New Hampshire University1
TAX 655 Final ProjectMilestone ITO: Bob JonesFROM: Samantha MansonDATE: July 6, 2017SUBJECT: Business Entity RecommendationAfter thorough research and weighing advantages and disadvantages of each type of entity, it is my recommendation that Mr.Jones should choose an S Corporation as his entity type for his used car business. While I was torn between an S Corporation and a Limited Liability Corporation, I believe an S Corporation will end up being the better fit.S Corporations are pass-through entities, meaning they are able to avoid double taxation by only being taxed at the personal tax level of each shareholder on their respective shares of the company. This would be of great value to Mr. Jones and his business, along with the liability protection that is available to owners/shareholders in an S Corporation. Since Mr. Jones has such a high net-worth and possesses such high value assets that are not related to his business, it is vital for him to have an entity that provides him and any future shareholders with personal liability protection. Even if he were to lose the business and its assets due to a lawsuit, his personal assets would not be able to be touched.When looking into Mr. Jones’ concerns about what may happen to his business after he dies, we can see through the tax law and the US Code that if he chooses a decedent for his shares, such as his daughter who may already have the rest of the shares of the company, the decedent will have these newly acquired shares treated as though they owned them just the same as Mr. Jones (26 U.S. Code 1367, n.d.). There will be no tax on the transfer or to show a capital gain. Another positive aspect of an S Corporation is that it will be very easy for Mr. Jones to 2
TAX 655 Final Projectbring his daughter on board and to transfer a 40% share of the company to her. She will the receive a K-1 each year to reflect her 40% share of the income that will need to be reported on her personal taxes since it is a pass-through.Milestone IITO: Bob JonesFROM: Samantha MansonDATE: July 16, 2017SUBJECT: Salaries and Tax EffectsDistributions, Dividends, or Salary…How should you take your pay?After electing to do business as an S Corporation, you and your daughter will benefit the most from withdrawing cash in order to pay yourselves. In an S Corporation, shareholders can take shareholder distributions and avoid tax being withheld. By paying yourselves through these distributions, you will be able to avoid steep payroll taxes (Haring, n.d.)However, if either of you perform any type of “essential employee functions” then you will likely need to put yourself partially on payroll to avoid the IRS breathing down your neck and taxing all of your pay. You have the ability to be partially on payroll like any other employeeand also partially taking distributions and not being taxed on these. The IRS can be very strict