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Final Project : Memo, Conclusion, AppendixTAX 655Southern New Hampshire UniversityJessica Benard
I: MEMORANDUMTO: Mr. Bob JonesFROM: Jessica BenardSUBJECT: Tax efficient Investment and Business Strategy RecommendationsA: Business Entity:Mr. Bob Jones has operated his used car dealership as a sole proprietorship. He has been doing very well and is now seeking advice on whether to convert his company to a different business type. While it may be costly to convert over, I am recommending that Mr. Jones convert his business to an S Corp. S Corps are favored by many business owners for their single taxation (as opposed to the double taxation of a C Corp).B: Accounting Method:1: Cash V Accrual:With the accrual accounting method, you record your revenues and expenses in the year you incur them. With the cash method, you record your revenues and expenses in the year you actually pay out or receive the money.“A corporation generally has to use the accrual accounting method for tax purposes if its gross receipts amount to more than $5 million. The corporation, therefore, may find that it can use the cash method for the first few years, but has to change to the accrual method as it grows.
As an S corporation, you may be able to choose between the accrual and cash accounting methods, regardless of the size of your company or the amount of your income.[ CITATION Cas19 \l 1033 ]” A key point is when it involves inventory a S Corporation must use accrual method. “The IRS considers an inventory to be items you produce, purchase or sell to generate income.[ CITATION Cas19 \l 1033 ]” Since Mr. Jones operates a car dealership and has inventory as a factor of income, accrual method is required. 2: Cost of Preparation of Tax Return:“For a Form 1120S the price is around $778.00.[ CITATION Ave19 \l 1033 ]”3: Tax Benefits:“An S Corporation is a corporation that has elected to be taxed as a flow-though entity (similar to an LLC or Limited Partnership). This type of taxation, the S election, allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C Corporation.[ CITATION SCo19 \l 1033 ]”4: Limited Liability Protection:“S corporation protects personal assets from debts and claim against the company, a protection shared by all corporations and LLCs. Only shareholders' actual investments are at risk.But that protection is limited, and can even be lost without proper accounting.[ CITATION Wha191 \l 1033 ]” If an S corporation originally operated as a sole proprietorship, as in this casewith Mr Jones, an owner's personal assets remain at unlimited risk for any debts or claims held against the company before its incorporation. If an S Corp that has other shareholders then they will be protected from sharing the liability.
5: Employee Benefits:“The main benefit of incorporating as an S Corporation over being self-employed is the tax savings on self-employment taxes (Social Security and Medicare). For each dollar of profit, itcould mean as much as 14.13% in tax savings. An S-Corp must pay a reasonable salary to any