100%(1)1 out of 1 people found this document helpful
This preview shows page 5 - 8 out of 13 pages.
property, capital gains can be taxed at 0 percent, 15 percent, 20 percent, 25 percent or 28 percent.[Tho16] Because Bob has had has land for over one year, he is subject to be taxed at themaximum rate of 20 percent.Limited Liability ProtectionIt would be best for the client to choose a business entity that has limited liabilityprotections. This type of protection will guard its shareholders from personal liabilities ofbusiness claims and debts. For example, if Bob’s business has limited liability protection, in theevent of an incident only the owner(s) involved who are responsible will face a lawsuit. But, ifthe entire business was being sued, then all the owners would be liable. Another example is ifBob’s business runs out of money and still has debts, the shareholders are not responsible to payoff those debts using their personal funds. Creditors are limited to the assets of the business andcannot pursue the personal assets of the partners. Tax EffectThere are many tax effects that would potentially impact the clients tax return. Scorporations have the advantage of avoiding double taxation compared to regular corporations.They do not pay federal taxes at the corporate level. S corporations report income on tax form
Running head: Memorandum with AppendixP a g e | 61120S, and schedule k-1. While shareholders report individual income on Form 1040 andschedule E. Under 26 U.S. Code § 1363 - Effect of election on corporation, taxable income of anS corporation shall be computed in the same manner as in the case of an individual, except that—(1) the items described in section 1366(a)(1)(A) shall be separately stated,(2) the deductions referred to in section 703(a)(2) shall not be allowed to the corporation,(3) section 248 (expenditures with limitations) shall apply(4) section 291 shall apply if the S corporation (or any predecessor) was a C corporation for anyof the 3 immediately preceding taxable years.Because this type of business entity is a pass-through entity, it’s important for the client tomake sure all gains and losses from the business are reported correctly on his 1040 tax form. Italso important to note that under 26 U.S. Code § 1366 - Pass-thru of items to shareholders, lossesand deduction cannot exceed the shareholder basis in stock or debt of the business. Thank you,NAME
Running head: Memorandum with AppendixP a g e | 7ConclusionEconomic Impact on The Client’s Personal ReturnsThe economy can have a major impact on the client income tax returns. According to thetax policy center, high marginal tax rates can discourage work, saving, investment, andinnovation, while specific tax preferences can affect the allocation of economic resources.According to Katzeff, the new U.S. tax code reform law contains seven federal income taxbrackets. But a key change lowers most individual income tax rates. The top marginal rate dropsto 37 percent from 39.6 percent. This will help Bob save more money on his federal incometaxes. Bob might choose this entity over other entities because it offers more protection. In a sole