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Running head: Memorandum with AppendixP a g e | 1Memorandum with AppendixFinal Project NAMETax 650- Federal Taxation of Individuals Southern New Hampshire University
Running head: Memorandum with AppendixP a g e | 2MemorandumTo: Bob JonesFrom: NAMEDate: January 23, 2018Re: Tax Computations and AdviceBusiness EntityThere are several types of business structures recognized when forming a business. Theseinclude limited liability company, partnership, sole proprietorship, corporation, and Scorporation.[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 toform his business as an S corporation. According to the IRS, to avoid double taxation on thecorporate income, S corporations pass income, losses, deductions, and credits through to theirshareholders for federal tax purposes. This type of business offers liability protection to theirshareholders. Under 26 U.S. Code § 1361 - S corporation defined, to qualify for this type ofbusiness, the business must meet the following requirements.Be a domestic corporationHave only allowable shareholders Have no more than 100 shareholdersHave only one class of stockNot be an ineligible corporation (i.e. certain financial institutions, insurance companies,and domestic international sales corporations).
Running head: Memorandum with AppendixP a g e | 3Accrual Accounting and Cash BasisThere is a major difference between accrual accounting and cash basis accounting.Thesetwo methods determine when and how to recognize transactions. The accrual method involvesmatching your revenues with your expenses. It is a very common method used by businessesbecause this method conforms with GAAP. Publications 538 states that, under the accrualmethod, you generally report income in the tax year you earn it, regardless of when payment isreceived. For the cash method, Publications 538 states that you generally report income in the taxyear you receive it and deduct expenses in the tax year in which you pay the expenses. Becauseof its simplicity, smaller businesses usually use this method of accounting. It’s important to note26 U.S. Code § 448 - Limitation on use of cash method of accounting states that the cash basis isonly available for use if a company has no more than $5 million of sales per year. Based on thegiven case information, I believe it would be best for Bob to use the accrual method ofaccounting for his used car business. I think this is the best method for the client because hisbusiness is going to handle a lot of complex transactions along with an inventory of cars andpossibly parts/accessories. For an inventory in your business, you must use an accrual method ofaccounting for your purchases and sales.[IRS7]Revenue Recognized on The SaleAs previously mentioned, the accrual method is the best option for Bob’s business. This
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Taxation in the United States, Income tax in the United States