proprietorship and partnership owners are personally liable for any debts or

Proprietorship and partnership owners are personally

This preview shows page 7 - 10 out of 13 pages.

proprietorship and partnership, owners are personally liable for any debts or liabilities of the business. in a regular corporation, the business must pay its own taxes as a separate entity. Ownership Interest According to the case, Bob intends to give his daughter 40 percent of the company leaving him with 60 percent. One of the great benefits of an S corporation is that Bob can freely transfer 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 will then be accountable for that amount on her personal tax returns. This will also allow for a greater tax exemption for Bob. The Cash or Accrual Accounting Method
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Running head: Memorandum with Appendix       P a g e  |  8 As 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 cannot exceed the shareholder basis in stock or debt of the business. This allows S corporations to avoid double taxation on the corporate income. [IRS8] As an S Corporation, Bob can file his tax returns using both the accrual and cash basis method. The choice of accounting method can alter net income or loss for the period and the final figure that flows through to the owner’s tax returns. 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 its incurred. Tax Effects on Cash Flow As previously mentioned, Bob currently has land that was purchased in 1966 that is now worth $9,000,000. If Bob decides that he wants to sell his land for income for his future car business. The land will be taxed at the maximum rate of 20 percent since it has been held for more than one year and because Bob is in the highest tax bracket 39.6 percent. Based on his tax rate from his long-term capital asset, we can determine the capital gain or loss in the transaction and how much he would be taxed. The taxation on the sale of land calculations is shown below. Taxation on Sell of Land Current Land Value: $ 9,000,000 - Cost of Land 1966: $ (450,000) Total Capital Gain on Land: $ 8,550,000 Tax Rate 20% Total Tax from Sale $ 1,710,000
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Running head: Memorandum with Appendix       P a g e  |  9 It’s important to note that in publications 544, when you dispose of property, you must file one or more of the below mentioned forms to account for the sale and other assets. Schedule D (1040) - Capital Gains and Losses Form 4797- Sales of Business Property.
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