Method of accounting bob will be only permitted to

method of accounting, Bob will be only permitted to use the accrual method of
accounting for filing his income tax returns because he will be managing inventory in his
new used car business. For that same reason, we recommend that the accounting and tax
file be done using the accrual method of accounting. Bob’s business will be managing
inventory and complex transactions due to the nature of the used car sales.
If Bob ends up using cash basis of accounting for his business and files his income tax
return using the accrual method, in order to comply with the IRS Code, he would have to
convert his cash basis accounting into the accrual method by accumulating all the
invoices due and all the estimated expenses corresponding to the year to be filed. Also,
Bob will have to register all the income associated to the sales completed even though,
the cash may not have been received yet. On the other hand, if Bob uses the accrual
method of accounting for his day to day business and for this income tax return,

adjustments to the financial statement won’t be necessary in order to comply with the IRS
Code.
Milestone Three: Choice of Business Entity
I. Memorandum
A. Recommend a type of business entity for the client to consider based on your tax
research. Consider justifying your recommendation using the code and regulations that
relate to the business entity.
There are four types of business entities Bob can choose from. The 26 US Code defines
the following four types of businesses as described below:
 Sole Proprietorship – A sole proprietorship is someone who owns an
unincorporated business by himself or herself. It is not considered a separate
legal entity. Sole proprietorships are subject to single level taxation.
As stated above, a sole proprietorship is not a legal entity; it refers to a person
who owns the business and is personally responsible for its debts. In this case, a
sole proprietorship would not be an option for Bob since he want to share his
business with his daughter.
 Partnerships – A partnership is the relationship existing between two or more
persons who join to carry on a trade or business. Each person contributes money,
property, labor or skill, and expects to share in the profits and losses of the
business. A partnership must file an annual information return to report the
income, deductions, gains, losses, etc., from its operations, but it does not pay
income tax. Instead, it “passes through” any profits or losses to its partners. Each

partner includes his or her share of the partnership’s income or loss on his or her
tax return.
The main disadvantages of opening a partnership is that the partners are liable for
their actions and the actions of their partners, the partnership has a limited life (it
might end upon the withdrawal or death of a partner), and a partnership usually
have limitations that keep it from becoming a large business. I do not think this
option is viable for Bob’s new business because all the partner’s personal assets