- Week 9 -Assignment 9-2.docx - Running head Memorandum...

Running head: Memorandum with Appendix P a g e | 1
Memorandum with Appendix
Final Project
NAME
Tax 650- Federal Taxation of Individuals
Southern New Hampshire University

Running head: Memorandum with Appendix P a g e | 2
Memorandum
To: Bob Jones
From: NAME
Date: January 23, 2018
Re: Tax Computations and Advice
Business Entity
There are several types of business structures recognized when forming a business. These
include limited liability company, partnership, sole proprietorship, corporation, and S
corporation.[IRS1] Each entity offers different benefits, tax rules and liabilities for its owners.
Based on the case information provided and tax research, I believe it would be best for Bob to
form his business as an S corporation. According to the IRS, to avoid double taxation on the
corporate income, S corporations pass income, losses, deductions, and credits through to their
shareholders for federal tax purposes. This type of business offers liability protection to their
shareholders. Under 26 U.S. Code § 1361 - S corporation defined, to qualify for this type of
business, the business must meet the following requirements.

Be a domestic corporation

Have only allowable shareholders

Have no more than 100 shareholders

Have only one class of stock

Not be an ineligible corporation (i.e. certain financial institutions, insurance companies,
and domestic international sales corporations).

Running head: Memorandum with Appendix P a g e | 3
Accrual Accounting and Cash Basis
There is a major difference between accrual accounting and cash basis accounting. These
two methods determine when and how to recognize transactions. The accrual method involves
matching your revenues with your expenses. It is a very common method used by businesses
because this method conforms with GAAP. Publications 538 states that, under the accrual
method, you generally report income in the tax year you earn it, regardless of when payment is
received. For the cash method, Publications 538 states that you generally report income in the tax
year you receive it and deduct expenses in the tax year in which you pay the expenses. Because
of its simplicity, smaller businesses usually use this method of accounting. It’s important to note
26 U.S. Code § 448 - Limitation on use of cash method of accounting states that the cash basis is
only available for use if a company has no more than $5 million of sales per year. Based on the
given case information, I believe it would be best for Bob to use the accrual method of
accounting for his used car business. I think this is the best method for the client because his
business is going to handle a lot of complex transactions along with an inventory of cars and
possibly parts/accessories. For an inventory in your business, you must use an accrual method of
accounting for your purchases and sales.[IRS7]
Revenue Recognized on The Sale
As previously mentioned, the accrual method is the best option for Bob’s business. This