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his wife both contribute they can gift $28,000 annually and have a life time exclusion of $10.98million significantly reducing the estate taxes. If they have other children or grandchildren, thecouple can gift money to them also as long as it doesn’t go over their annual amount.Additionally, Bob can give tax-free tuition gifts or medical expenses per 26 IRC 25.2503-6 tochildren and grandchildren to reducing his taxable estate. I.Gift or Transfer the Assets
Memorandum with Appendix9The best course of action for Mr. Jones should he leave the business in three years wouldbe to transfer stock to his daughter Mandy. The previous recommended business entity for Bobto form was an s corporation. Operating as an S corporation can help with family successionplanning by assisting in both estate and income tax planning. Only individual shareholders, aswell as the estate of a deceased shareholder and certain types of trusts and charitableorganizations, can own shares of an S corporation (FROMM, 2009) Under these types of entities,shares can be transferred to Mandy as there is no requirement for the taxes to be paid upfront.But it’s important to note that Bob would be subject to gift tax depending on the value of stock atthe time of transfer.J.Sell the BusinessThe tax consequences of selling a business depends on the structure of the business. IfMr. Jones decides to sell his business, the best course of action would be to directly transferincome to the owners. Because it is recommended for Bob to operate his business as an Scorporation, if he sells his business he will still be able to avoid double taxation and still maintaina single tax rate for profits. Capital losses will not affect the owner’s personal property whileowners can take direct profits all at once or in the form of installments. The installments optionoffers the advantage to the seller of receiving payments over time and only include in theirincome each year the part of the gain received that year (Center, n.d.)II.ConclusionA.Advantages and DisadvantagesMr. Jones has many options when it comes to choosing a type of business structure forhis used auto dealership. The several types of business structures recognized when forming a
Memorandum with Appendix10business including a sole proprietorship, partnership, corporation, and S corporation. Each entityoffers different advantages and disadvantages for its owners. A sole proprietorship is the easiest way to start a business as the sole proprietor is self-employed. Mr. Jones will report his net profit or loss on a 1040 from the Schedule C andeverything is transferred to his personal taxes. The advantages and disadvantages of this businessentity are that is a low start-up cost, direct decision-making control, income is passed through tothe shareholder, unlimited liability and it’s difficult to raise capital[JUX]. Under this structure theowner is fully responsible for all debts and obligations related to the business. Since the client isopting to include his daughter in the business, this is not an entity I would recommend for him.