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Section 1411 in IRC, explains the conditions in which the 3.8% Medicare tax is applicable to taxpayers under different circumstances. IRC § 1411(b) states
Tax 650: Memorandum 4the threshold amount for the additional 3.8% tax. Since Bob is single and his AGI is above $200,000, he is subject the Medicare tax. However, if Bob elects to receive installment paymentsfrom the sale of his land instead of one lump sum; His taxable liability would decrease considerably under section 453. Capital and ordinary gains or losses are reported on schedule D (capital gains and losses) on the 1040 tax return form. To report gains or losses on schedule D, all gains and losses must bereported on form 8949. Also, form 6252 is required to report installment sales. A new 6252 form must be filled out every year until all funds from the contracted installment sale amount is received. The tax consequences of selling or liquidating the land is that the gain will be taxed as a net long-term gain rather than ordinary income. Since the disposition of the property can be considered a net Sec. 1231 gain. The gain initially appears on Form 4797 and then will flow through to the Sched. D. The selling expenses, broker’s fees, closing costs, appraisals, and surveys affect the gain as well. These amounts can be added to Bob’s base property expenses; by adding these amounts to his expenses he can decrease the reportable gain. Bob will have a considerable amount of capital to start his used car business. Since he will be starting off with a lot of money, his marginal tax rate will be high. To offset his taxable liability for the year, Bob would have to start up his business and anything he spends towards his business that is considered necessary and ordinary by the Internal Revenue Services for his business would be able to be deducted. Also, under section 195, Bob would be able to immediately deduct up to $10,000 of his start- up cost for the taxable year he starts his business. He can also, gift a portion of the sales to his daughter which would also lower his AGI for the next year (26 I.R.C § 170). This can help reduce the taxable amount but with the large amount of capital gain that Bob has, it
Tax 650: Memorandum 5seems unlikely that he will be able to maneuver the deductions so much so that he would receive a sizeable drop in the taxable income.Determining to take salary or cash distributions would depend on the business structure Bob selects for his business. The difference between a salary or cash distribution really comes down to payroll taxes. In most cases, shareholders classify their income has distributions in orderto avoid payroll taxes and simply save a cost to the entity. The problem with this is that entities have been auditing for misclassifying their salaries as distributions and ultimately cost themselves plenty of money. If Bob selects to be a single member limited liability company (LLC) income passes through to him. A single member LLC provides Bob the autonomy of a sole proprietorship while protecting his personal assets. He would file taxes on his personal