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express and implied warranty claims. Cases like theses seem to occur relatively regularly for used car dealerships, and limited liability protection will help Bob protect his personal finances.Tax EffectWith Bob choosing to have his company as a C corporation, he would have to use a 1120 Form to file his taxes for the dealership. The 1120 Form will have to be used for the dealership because it is working as its own separate entity, but Bob would still have to use an individual 1040 Form for his own personal taxes. Along with the 1040 Form for Bob, he would possibly need the 1040 Schedules A through C for dividends and other possible necessities on his personalside. Some other forms Bob would have to use for the dealership are Form 4562 for depreciation on equipment and Form 1120 Schedule D for either gains or losses.II. ConclusionEconomic Impact on Personal ReturnsBob having the car dealership as a C corporation will help him financially on a personal level. If Bob had his new dealership as an S corporation then he would have been able to receive dividends, from the dealership, without a double taxation (taxed on the company level and then again on a personal level), but Bob is going to be working as an owner-employee which means he will have to take a fair salary for the work he does. This means that the positive benefits of a having a pass-through entity will be minimalized by the lessened dividends. If Bob were to try to
TAX 650 FINAL PROJECT 7take a low yearly salary while collecting higher dividends to avoid payroll taxes then he has the possibility of being audited by the IRS and having to pay back taxes on missed payroll funds.C corporations also have the benefit of having a lower corporate tax rate compared to an individual tax rate. Let’s use the level of $50,000 in taxable income for a non-specific year. Corporate tax rates for $50,000 is 15% compared to an individual at the same level being 25%. (cpapracticeadvisor.com, 2016) That alone with the added benefits of being able to deduct Bob’s yearly salary makes a C corporation a better choice on Bob’s personal finances.Ownership InterestBob talked about wanting to give 40% of the company’s interest to his daughter at some point in the future. There are a few different ways he could go about this with each having differing tax implications. If Bob were to get part ownership to his daughter then he would have to worry about gift taxes that are in place. The daughter is above the age of 21 (23) and would have to worry about Bob paying the gift taxes for this gift if the fair market value of the shares reaches over the lifetime gift value allowed. (Section 2503)Another route Bob would be able to take is selling the shares to his daughter. The daughter wouldn’t have to pay Bob out of pocket, but instead, being paying for her shares through the company profits. A way that Bob could help himself and his daughter with future tax