final project.docx - TAX-655 Final Project Memorandum with Appendix Heather Spall 12 May 2018 Background Mr Bob Jones owns a successfully used car

final project.docx - TAX-655 Final Project Memorandum with...

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TAX-655Final Project Memorandum with AppendixHeather Spall
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12 May 2018BackgroundMr. Bob Jones owns a successfully used car business in Florida; he is currently operating the business as a sole proprietor. However, Jones is considering changing the business entity to have his daughter Mandy be an owner of the business in either the partnership, S corporation or aC corporation structure. If Mandy is brought in as an owner, she would be a manager with a possibility of 40 percent interest. Currently, the business is valued at $53,000,000, with a growth of 10 percent over the next several years. The land and building of the business are worth 2,000,000 and $400,000 respectively for tax basis. The inventory values are 12,000,000 that has a cost basis of 5,000,000.The office furniture and equipment are fully depreciated but still have value in the business worth. Jones had a $1,200,000 in taxable income last years with the business and the personal investments of land, stock, and bonds. Business EntityCurrently, the business is a sole proprietor if anything would happen to Jones, the business would close. For Jones’ business, an S-corporation would work the best for the current environment of the business. When converting the business to a different entity, there are areas tolook at such as tax consequences from the conversion, the legal liability, the recordkeeping and benefits of switching to a different entity. For the business to switch to an S-corporation “at a minimum, Articles of Incorporation or Organization will have to be filed with the appropriate state authorities. Corporations must also establish Bylaws and conduct a formal meeting of shareholders”[How181]. The S-corporation would allow Jones to keep the entity as a small business and increase the lifetime of the business.
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Accounting MethodThe S-corporation has different advantages and disadvantages to it. Some the cash basis vs. accrual accounting methods, with a corporation with inventory accrual method, is used. “The IRS considers an inventory to be items you produce, purchase or sell to generate income. As such, you have to use the accrual method if you wholesale, manufacture or sell products”[Edr]. The nature of the used car business switching S-Corporation would take away the choice to use cash or accrual methods. The cost of preparing the return would increase, a sole proprietor has just a Schedule C tofile for the business with the rest of Jones own tax return for every year. With the s-corporation a form 1120S, Schedule K, and the payroll taxes form 940/941 is filed instead of the Schedule C. The addition more tax form, Jones would be filing his own personal taxes and the business corporation taxes. In other words, switching would cause Jones to go from filing one return to having to file two returns.
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