income tax returns (with Schedule E attached)” [Fit181]. The LLC must file IRS Form 1065 with
the IRS and provide each member with a Schedule K-1.
II. Conclusion
Economic 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 tax
reports 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].
By
forming 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 would
also 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 Method
Overall, 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 it
is 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.
