Client Profile Bob Jones is a 60-year-old single man who has recently retired from IBM. He has $690,000 available
in his 401(k) fund, and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income. Bob's personal wealth—including investments in land, stocks, and bonds—is about $14,000,000. He reported an interest income of $20,000 and a dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1996 for $450,000. Bob has hired your firm for professional advice regarding whether he should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering transferring a possible 40% interest in his new business to his daughter Mandy, who is 23 years old and single. Other Considerations Bob has offered this info as possible deductions: Mortgage Interest: $19,250 Charitable Contributions: $22,500 Medical Expenses o Cosmetic nose job: $3,000 o Prescriptions: $1,710 o Over-the-counter medicines: $285 o Health insurance premiums: $5,800 o Doctor visits: $1,140 o Medical miles: 499 Real Estate Property Taxes: $8,000 Personal Property Taxes: $3,000 Credit Card Interest for Home Improvements: $1,800 Personal Legal Expenses: $5,000 Contribution to Major Political Party: $2,000 Miscellaneous Deductions o Tax preparation feed (personal return): $500 o Investment expenses: $3,100 You will recommend that Bob either takes a salary of $100,000 or a cash distribution of $180,000. Assume no federal income taxes will be withheld. The $300,000 net income already accounts for the salary expense Bob receives and the cash distribution, where applicable. Additional Data Business Tax ID #: 41-0000000 Business Name: Bob Jones Automotive Gallery Land Purchased: January 2, 1996 Sale Date: September 15, 2018 Personal Tax ID #: 500-00-1004 Personal Address: o 1234 Easy Street Pensacola, FL 32581 Phone: 850-123-4567
n this milestone, you must first
compute the property disposition capital gain and taxation of gross income for the client described in the final project data sheet, above.
Then, in a memorandum you write to the client, explain the tax consequences of the possible sale or exchange of the land. Base your explanation on your computations and relevant sections of the Internal Revenue code, including the impact on cash flow and salary or cash distributions. Specifically, the following critical elements must be addressed: A. Compute the property disposition capital gains and taxation of gross income. B. Identify the tax consequences on the sale or exchange of the land consistent with capital gain rules. Consider the selling expense, broker's fees, closing costs, appraisals, and surveys and the correct schedule form to complete. C. Describe the after-tax effects on the client's cash flow based on the sale of the land. Reference appropriate capital gains tax rules. D. Explain whether or not the client and his child should take a salary or cash distribution according to tax purposes and Internal Revenue Code and Treasury regulations. Consider the type of business and the tax effect whether it is salary, dividends, or cash withdrawal.