TAX 655 - Final Project.docx - TAX 655 \u2013 Final Project Part I Memorandum Part II Conclusion Part III Appendix I Memorandum To Bob Jones Client From

TAX 655 - Final Project.docx - TAX 655 u2013 Final Project...

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TAX 655 – Final Project May 12, 2019 Part I: Memorandum Part II: Conclusion Part III: Appendix
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I. Memorandum To: Bob Jones, Client From: ABC123 CPA Firm Subject: Bob Jones Tax Advice A. Business Entity Type Sole proprietorships, partnerships, S corporations and C corporations all have different advantages and disadvantages that business owners must weigh in order to choose the right one for them. So far, you have operated your used car dealership as a sole proprietorship. Sole proprietorships are not separate entities, but rather an extension of the owner. This means the owner has the last say on all matters and controls the business outright. Also, all business assets and income or loss are reported as part of your own individual annual tax return. Additionally, sole proprietor status means you bear all legal liability and responsibility for the dealership, putting your personal wealth at risk. Based on the personal and business financial information you have provided, I would advise converting to an S corporation for the used car dealership. The benefits of S corporation status include limited liability protection for management and shareholders, flow-through taxation treatment, tax-favorable characteristics of income, easy transfer of ownership, accrual accounting method, and enhanced business credibility. S corporations only require one person to form, whereas LLC’s may require at least two individuals in some states. Furthermore, S corporations exist like C corporations, where the lifespan of the business is unlimited, which provides easy transfer of ownership when it comes time for doing so.
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S corporations are treated as corporations under state law but have the benefit of being treated as a flow-through entity by the Internal Revenue Service (IRS). In short, this means that S corporations have limited liability protection but avoid the double taxation of a C corporation. However, S corporations are not technically stand-alone entities. “When you first launch a business, you need to set up your business structure, either a corporation or LLC, with the state. Then, if you choose, you can apply for S corporation tax treatment with the IRS” (Akalp, 2016). To obtain S corporation status, the corporation – with the consent of all shareholders – must use form 2553 to file for S election with the IRS within the first seventy-five days of the tax year. Additionally, you must meet the eligibility requirements as stated under Internal Revenue Code (IRC) § 1361. These requirements are that the company must be a domestic corporation, must have shareholders who are individuals and US residents, may not have more than 100 shareholders, and may not have more than 1 class of stock (§1361). B. Accounting Method 1. Cash Basis vs Accrual 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
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