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method of accounting, Bob will be only permitted to use the accrual method ofaccounting for filing his income tax returns because he will be managing inventory in hisnew used car business. For that same reason, we recommend that the accounting and taxfile be done using the accrual method of accounting. Bob’s business will be managinginventory 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 taxreturn using the accrual method, in order to comply with the IRS Code, he would have toconvert his cash basis accounting into the accrual method by accumulating all theinvoices 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 accrualmethod 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 IRSCode. Milestone Three: Choice of Business EntityI.MemorandumA. Recommend a type of business entity for the client to consider based on your taxresearch. Consider justifying your recommendation using the code and regulations thatrelate to the business entity. There are four types of business entities Bob can choose from. The 26 US Code definesthe following four types of businesses as described below: Sole Proprietorship – A sole proprietorship is someone who owns anunincorporated business by himself or herself. It is not considered a separatelegal entity. Sole proprietorships are subject to single level taxation. As stated above, a sole proprietorship is not a legal entity; it refers to a personwho owns the business and is personally responsible for its debts. In this case, asole proprietorship would not be an option for Bob since he want to share hisbusiness with his daughter. Partnerships – A partnership is the relationship existing between two or morepersons 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 thebusiness. A partnership must file an annual information return to report theincome, deductions, gains, losses, etc., from its operations, but it does not payincome 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 hertax return.The main disadvantages of opening a partnership is that the partners are liable fortheir actions and the actions of their partners, the partnership has a limited life (itmight end upon the withdrawal or death of a partner), and a partnership usuallyhave limitations that keep it from becoming a large business. I do not think thisoption is viable for Bob’s new business because all the partner’s personal assets