100%(1)1 out of 1 people found this document helpful
This preview shows page 7 - 10 out of 13 pages.
proprietorship and partnership, owners are personally liable for any debts or liabilities of thebusiness. in a regular corporation, the business must pay its own taxes as a separate entity.Ownership InterestAccording to the case, Bob intends to give his daughter 40 percent of the companyleaving him with 60 percent. One of the great benefits of an S corporation is that Bob can freelytransfer any interest to his daughter without triggering adverse tax consequences. 26 U.S. Code §1361 - S corporation defined, states that members of a family will be treated as 1 shareholder.The ownership interest of the owners determines their incomes from the profits of the business.By transferring the 40 percent, of the incomes and losses of the business to his daughter, she willthen be accountable for that amount on her personal tax returns. This will also allow for a greatertax exemption for Bob.The Cash or Accrual Accounting Method
Running head: Memorandum with AppendixP a g e | 8As mentioned previously, I think forming an S Corporation is best for Bob’s business.Under 26 U.S. Code § 1366 - Pass-thru of items to shareholders, losses and deduction cannotexceed the shareholder basis in stock or debt of the business. This allows S corporations to avoiddouble taxation on the corporate income. [IRS8] As an S Corporation, Bob can file his taxreturns using both the accrual and cash basis method. The choice of accounting method can alternet income or loss for the period and the final figure that flows through to the owner’s taxreturns. But because Bob’s business will have complex data and inventories for his car business,it’s best for him to use the accrual method. He can automatically recognize revenue once itsincurred. Tax Effects on Cash FlowAs previously mentioned, Bob currently has land that was purchased in 1966 that is nowworth $9,000,000. If Bob decides that he wants to sell his land for income for his future carbusiness. The land will be taxed at the maximum rate of 20 percent since it has been held formore than one year and because Bob is in the highest tax bracket 39.6 percent. Based on his taxrate from his long-term capital asset, we can determine the capital gain or loss in the transactionand how much he would be taxed. The taxation on the sale of land calculations is shown below.Taxation on Sell of LandCurrent Land Value:$ 9,000,000 -Cost of Land 1966:$ (450,000)Total Capital Gain on Land:$ 8,550,000 Tax Rate20%Total Tax from Sale$ 1,710,000
Running head: Memorandum with AppendixP a g e | 9It’s important to note that in publications 544, when you dispose of property, you must fileone or more of the below mentioned forms to account for the sale and other assets. Schedule D (1040) - Capital Gains and LossesForm 4797- Sales of Business Property.