This method recognizes income when it is earned as

difficult in terms of revenue recognition. This method recognizes income when it is earned, as
opposed to when the money comes in. This method can be very beneficial to any business
through proper budgeting and strategizing because they are able to deduct business expenses.
Tax Effects on Cash Flow
Even though Bob must pay over $1,000,000 in taxes, his proceeds will still be plenty to
start his used car business. As an individual’s income rises, so does their marginal tax rate.
Since Bob just sold his land for $9,000,000, his marginal tax rate will be higher. By starting his
business this year, Bob can counterbalance his taxable liability. If he documents everything he
buys for his business, he can deduct those amounts from his tax return. IRC § 195 states that
$10,000 of the costs of starting a business, for the taxable year, may be deducted from the annual

MEMO W/ APPENDIX 8
tax return. Also, considering that Bob is interested in giving some of his proceeds to his
daughter, he could give a percentage of his proceeds from the sale of land to her. By doing this
he would decrease his AGI for the following year (26 I.R.C § 170).
Salary or Cash Distribution
When choosing between a salary or cash distribution, the structure of the business plays a
big factor in which would be appropriate. In a single member limited liability company (LLC),
all of the profits would go directly to Bob. This business structure would allow Bob to have the
independence that a sole proprietorship would offer, but it would still preserve his assets. With
this type of business structure, Bob could file business taxes on his personal return. Considering
all profits go directly to Bob, he would be able to withdraw cash from the profits of his business
to compensate himself. He also has the option of taking an owner draw to give to his daughter.
In a single member LLC, cash distribution is the absolute best option. Cash distribution is best
because all of Bob’s owner draws will be considered personal taxable income.
A single member LLC is the other business structure that would work well for Bob.
Organizing his LLC as an S-Corp would be a good alternative. The advantage of utilizing a S-
Corp would be that it is a combination of having a partnership and corporation. Another perk of
an S-Corp is that all proceeds will go to Bob and his shareholders, just like an LLC. Under the
business structure, however, salary distribution is the optimal choice since salary expenses are
deductible.

MEMO W/ APPENDIX 9
Appendix
Form 1040 : See attached.
Schedule and Tax Form : See attached.
Professional Advice
After thoroughly reviewing Mr. Jones’ business, there are a few items of great importance
that we shall focus on. Mr. Jones earned a capital gain of $6,550,000 from the sale of land and
this greatly affects his tax liability. Due to the affect on tax liability, we would suggest a 1031
exchange. By using a 1031 exchange, we can defer the sale of land by exchanging it for property
that is similar. If Mr. Jones decides to utilize the exchange, his long-term capital gain will not be
recognized.