Also, if the company is delinquent in taxes or refuses to pay, the federal government can go after the owner’s personal assets to satisfy the obligation 26 US § 6321. If Bob conducts business fairly his personal assets will be protected and kept separate from his business. G. Tax Effect As stated in section 701 in the U.S. Internal Revenue Code, a partnership is not subject income tax, but the partners are liable for income tax only in their separate or individual capacities. An LLC classified as a partnership must file an information
Bob’s Used Cars Analysis 10 return on IRS form 1065, which reports the partnership’s income, gains and losses. Each member will receive a schedule K-1 showing their share of income, credits and deduction, which will allow the members to include on their individual returns on form 1040. All expenses that are necessary and ordinary for the business or trade to operate are deductible expenses under 26 US § 162. However, expenses cannot exceed Bob’s taxable income. Profit, losses, and gains, for an LLC classified as a partnership are reported on schedule E on the 1040 form. LLC’s do not receive salaries and cannot deduct salary expenses. Instead, each member receives guaranteed payments based on their ownership percentage and must pay self- employment taxes on the compensation received. II. Conclusions A. Economic Impact on Personal Return The tax effects of having to report business income on your personal return can be heavy. Especially if income generated in a given year pushes the owner to the highest marginal tax rate of 39.6% for an individual. However, with the new TCJA Tax Reform law Section 199A of the Internal Revenue Code, all pass-through entities qualify for a 20% tax deduction. This is a below the line deduction that reduces tax liability. Bob’s choice to include his daughter will also help to distribute the income giving him a lower AGI. With the new standard deductions in mind, Bob should still be able to lower his tax liability by charitable cash contributions, (up to 50% of AGI). Utilizing business expenses, along with personal deductions that are allowed on an individual’s return; there are ways to offset revenue to have the lowest taxable income possible. Bob will be able to transfer the 40% of the business to
Bob’s Used Cars Analysis 11 Mandy under 26 U.S. Code Chapter 12 – Annual Gift Tax Exclusion and significantly reduce the tax burden on the current proceeds from his land sale along with Mandy’s tax obligation. The process will allow a $15,000 per year gift tax exclusion or a lifetime exemption. (The Balance, 2019) B. Ownership Interest Upon formation of the Limited Liability Company, an LLC operating agreement is written to define the business’ operating terms. While an operating agreement is not a requirement for forming an LLC in many states, it serves the important purpose of keeping the company operating smoothly and efficiently, with minimal misunderstandings and disputes. The operating agreement outlines the company’s management procedures and the responsibilities of the members. Since Bob intends
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- Taxation in the United States