TAX 650 Final Project.docx - Running Header Final Project 1 Final Project Michael Dougherty TAX 650 Prof Ryland F Mahathey Final 2 MEMORANDUM TO Bob

TAX 650 Final Project.docx - Running Header Final Project 1...

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Running Header: Final Project 1 Final Project Michael Dougherty TAX 650 July 24, 2016 Prof. Ryland F. Mahathey
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Final 2 MEMORANDUM TO: Bob Jones FROM: Michael Dougherty RE: Formation of Used Auto Sales Business: Structure and Tax Implications Mr. Jones: Thank you for providing me with the opportunity to assist you in your efforts to potentially open a used auto sales business. I have prepared this memorandum which addresses the tax issues/implications of establishing, as well as operating, said business, and have included samples of what your tax return might look like, based on the information you provided me: Bob Jones, age 60 and single, has recently retired from IBM. He has $690,000 available in his 401(k) fund and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income. Bob’s personal wealth including investments in land, stocks, and bonds is about $14,000,000. He reported an interest income of $20,000 and dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. Bob has hired your firm for professional advice regarding whether he should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and single. (SNHU,2016) Business Entity Selection and Liability Based on the data presented on the client, I would recommend that Mr. Jones, in forming his used car business, should establish the company as a domestic limited liability company (LLC) but choose to treat the LLC as a “disregarded entity” rather than a corporation, and thus any income/loss would be reported on Mr. Jones personal income tax return much like if he were to
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Final 3 structure the business as a sole proprietorship. 26 C.F.R. §301.7701-2 defines the term “disregarded entity” in general as “Except as otherwise provided in this paragraph (c), a business entity that has a single owner and is not a corporation under paragraph (b) of this section is disregarded as an entity separate from its owner.” (26 C.F.R. §301). Thus, any income/loss would be reported on Schedule C and included in his individual tax return. If the business were to generate a loss that was reported, said loss would be deductible under 26 U.S.C. §62 (a)(1), as the loss was generated by expenses “which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.” (26 U.S.C. §62) This structure also provides for protection from liability for client. “If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.” (Bulkat) As Mr. Jones has substantial assets, it
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