Question

You are a tax advisor; and your client wants to open a new business.

• Provide an example of a hypothetical business that the client wants to start.
• Explain the different business formation options to your client, recommend the optimal choice, and explain the tax advantages of your recommendation.

Assume the client in the scenario above has significant investments in the stock market.

• Discuss the impact of the investments in the stock market on the initial business formation selection.
  • Support your position with examples of tax advantages.

Answer 1

Answer Discussion

In this case, it has been considered as the Business will be in the nature of sole proprietorship

As a a sole proprietor the individual (Mr.X) must file annual return with the IRS to report business income and expenses (for this Mr.X has to use Schedule C (or if eligible a simplified Schedule C-EZ) which is a part Form 1040 .If Ms.X don't have any employees, then he can operate under his own Social Security Number. However if he wants to hire an employee he must get Employee Identification Number (EIN) from IRS.

If the business is profitable, he will owe self employment taxes, which covers the employee and employer share of Social Security and Medicare Taxes. Ms. X can pay income and self-employment taxes through quartely estimated tax benefits. Mr. X has to collect sales taxes on the goods and services he sell and to turn over the collections to the state, as well as to report collections sales tax returns.

Since he has significant investments in the stock market, he has to abide by capital gain tax laws and regulations.

*IRS=Internal Revenue Service