100%(10)10 out of 10 people found this document helpful
This preview shows page 8 - 11 out of 15 pages.
income tax returns (with Schedule E attached)” [Fit181]. The LLC must file IRS Form 1065 withthe IRS and provide each member with a Schedule K-1. II. ConclusionEconomic Impact You have estimated that your expected taxable income will be $300,000. According to 26 U.S. Code § 162 “there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” [26U186]. As an LLC member Bob would not be considered an employee of the business and he would be required to his Social Security and Medicare taxes directly to the IRS himself. Each owner or member of the LLC would be considered self-employed and “subject to the self-employment taxreports the amount due on Schedule SE, which must be submitted annually with his or her tax return” [Fit181]. While having to report this income on his individual tax return be place Bob at a higher tax rate, Bob can offset this some by making eligible charitable donations.
Ownership Interest“If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation” [26U189]. Byforming the LLC, Bob would be able to incorporate an LLC Operating Agreement and allocate the 40% interest to his daughter Mandy. The purpose for this is to define the used car dealership’s management responsibilities and procedures for all members. This agreement wouldalso layout the rights of each member and the information related to the revenues and losses of the business. There could also be information concerning future buyout options for each member of the LLC. Cash or Accrual Accounting MethodOverall, while the cash basis method of accounting may be the simpler way to for a business owner to maintain their business records for revenues and income for the businesses fiscal year, this method of accounting could also provide a false look at the overall financial health and well-being of the business. This method could also be misleading to a potential investor by making it look as though the company is making a profit when in reality it has not[Mor18]. The accrual method of accounting requires for more bookkeeping for the company to account for such things as unearned revenue and any prepaid expenses for the company and it could also make it appear as though there is a cash flow shortage short term within the business itis still the method that provides a more accurate representation of the business [Mor18]. A businesses financial statement can only be audited if they are prepared using the accrual method
of accounting. Although the accrual method of accounting is more complex I think it is the best choice.