TAX 650 - Final Project.docx - TAX 650 \u2013 Final Project Client Bob TAX 650 \u2013 Final Project I Memo A Recommended Business Entity I recommend that Bob

TAX 650 - Final Project.docx - TAX 650 u2013 Final Project...

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TAX 650 – Final Project Client: Bob April 15, 2018 TAX 650 – Final Project
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I. Memo A. Recommended Business Entity I recommend that Bob forms an S corporation. This will allow him to use the accrual accounting method, share interest with his daughter, protect his personal assets, and limit his personal liability in the company ( §1361) . S Corporations are for smaller businesses that wish to operate as pass-through entities while also having the added benefit of limited liability protection for the shareholders. S Corporation status gives Bob everything he wants: ownership of the business, no double taxation, easy transfer of ownership to his daughter, and limited liability protection ( §1366). B. Cash vs Accrual & Revenue Recognition The key difference between the accrual and cash accounting methods is the timing of when revenue and expenses are recognized. The cash method recognizes revenue only when money is actually received and recognizes expenses only when money is actually paid. The accrual method recognizes revenue when it is earned and recognizes expenses when they are incurred . In other words, revenue is accounted for even if no cash has been received and expenses are accounted for even if no cash has been paid ( § 448). The most significant impact of choosing one of these methods is the timing of revenue recognition. The cash method forces a company to recognize revenue only when cash specifically changes hands. On the other hand, the accrual method forces a company to recognize revenue when it is earned, for example when a sale is agreed upon but not yet paid. The choice of method can impact which period revenue is recognized in, meaning the it can affect quarterly or even annual revenue levels. However, no matter which method is chosen, the business must stick with that chosen method ( § 446).
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The cash method is most common with small businesses such as sole proprietorships or home businesses. Cash basis accounting is simple and straightforward, providing a much more accurate picture of the amount of money that a company has. The accrual method is the most commonly used method. This is because C/S corporations and partnerships are required to use it and cannot elect to use the cash method, especially if they have inventory ( § 448). The accrual method is much more appropriate for larger businesses who must stock inventory, sell goods on credit, or enter into extended contracts in which revenues and expenses are not immediate. The cash method does not allow companies to have accounts receivable, whereas the accrual method does ( § 446). If Bob is able to start his business as a sole proprietorship, the cash method may be easier to manage with a small business. However, since Bob is considering sharing interest in the company with his daughter – or possibly other future investors – it may be best for him to start an S corporation. Partnerships or C/S corporations cannot use the cash method if they have inventory. Therefore, I recommend that Bob uses the accrual
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  • Winter '15
  • rylandmahathey
  • Corporation, Taxation in the United States, Limited Liability Company, S corporation

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