Question

If you cannot solve the entire sections just leave for someone who can. please not waste my question.

You are currently working at a mid-sized certified public accounting firm. Your client is Bob Jones. Bob, age 60 and single, 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 dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 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, age 23 and single.  

Required:

A. Prepare a memorandum to the client, recommending a type of business entity, including an appendix of supporting IRS tax schedules and forms.

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 that is needed to provide the funds necessary to start the business. Consider including 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.

Answer 1

Answer:-

A). Pay data and proprietorship interests:

Option (1): Sole proprietorship

Option(2): LLC (both are general partners)

Option (3): LLC(Mandy is a limited partner)

	option(1)	option(2)	option(3)
Bounce's advantage and compensation	100%	60%$,180,000	60%,$180,000
Mandy's advantage and pay	0%,$70,000	40%,$70,000	40%,$70,000

0ption1:

Mandy's duty risk

salary -$70,000

less: Standard deduction:6,300

Taxable Income:63,700

tax rate:25%

tax liabailty:15,925

BOB'S TOTAL TAX LIABILITY

Income from Business $1,250,000.00

Social Security Portion of SE Tax:

Most extreme Amount of Earnings Subject to the Social Security Tax $118,500.00

x Tax Rate for Social Security Portion of SE Tax 12.40% $14,694.00

Medicare Portion of SE Tax: 92.35% of Net Earnings $1,154,375.00

x Tax Rate for Medicare Portion of SE Tax 2.90% $33,476.88

TOTAL SELF-EMPLOYMENT TAX LIABILITY $48,170.88

Less 50% of SE Tax 50% $24,085.44

ADJUSTED GROSS INCOME (AGI) $1,224,914.56

Less Standard Deduction $6,300.00

TAXABLE INCOME $1,219,614.56

CALCULATING THE TOTAL TAX LIABILITY

Taxable Income $1,219,614.56 x Tax Rate 39.60%

TOTAL INCOME TAX LIABILITY $482,967.37

+ Self-Employment (SE) Tax Liability $48,170.88

BOB'S TOTAL TAX LIABILITY $531,138.24 In this situation, the aggregate expense risk that Bob and Mandy would face would be $547,063.24.

In the same way, do it for option 2 and 3

In spite of little assessment reserve funds with the sole proprietorship, it is inconvenient to proceed all things considered, as the boundless individual obligation Bob would look as a sole proprietor could conceivably handicap both Bob's Used Cars business, and additionally Bob's own accounts. Picking between Scenario 2 and Scenario 3 truly relies upon Bob's objectives and wants for Mandy's cooperation in the business. While Scenario 3 accompanies a somewhat more affordable assessment risk, on the off chance that it was imperative for Mandy to effectively partake in the business, obviously choice 2 would be the methodology to pick.

B) 25 TAXATION OF INVENTORY

Gain (Loss) x Ordinary Income Tax Rate = Tax Liability [(Sales Proceeds) - (Basis in Assets)]

x 39.60% = Tax Liability [ $12,000,000 - $5,000,000 ] x 39.60%

= Tax Liability $7,000,000 x 39.60% = $2,772,000

Tax assessment OF LAND AND BUILDING Gain (Loss) x Long-Term Capital Gain Tax Rate

= Tax Liability [(Sales Proceeds) - (Basis in Assets)] x 20.00%

= Tax Liability $41,000,000 - $2,400,000 x 20.00%

= Tax Liability $38,600,000 x 20.00% = $7,720,000

TOTAL TAX LIABILITY FROM SALE OF BUSINESS

$2,772,000 + $7,720,000 = $10,492,000

26 ANNUAL TAX LIABILITY CALCULATION TOTAL GAIN

Selling Price - Selling Expenses - Adjusted Basis of Property = Total Gain

$53,000,000 - $0 - $7,400,000 = $45,600,000

ANNUAL GAIN (Total Gain / Selling Price) x Annual Payment = Annual Gain

$45,600,000 / $53,000,000 x $1,200,000 = Annual Gain 86.04% x $1,200,000 = $1,032,453

GROSS PROFIT

Selling Price - Adjusted Basis = Gross Profit

$53,000,000 - $7,400,000 = $45,600,000

GROSS PROFIT PERCENTAGE

Gross Profit / Selling Price = Gross Profit Percentage

$45,600,000 / $53,000,000 = 86.04%

Yearly TAXABLE PROFIT Annual Payment x Gross Profit Percentage = Annual Taxable Profit

$1,200,000 x 86.04% = $1,032,453

ANNUAL TAX LIABILITY

Yearly Taxable Profit x Long-Term Capital Gain Tax Rate = Annual Taxable Profit

$1,032,453 x 20.00% = $206,491

(C.)On special of land the gain would be perceived as capital gain. Regardless of whether it is long haul capital gain or momentary capital gain it relies upon the holding time of land. In the event that arrive is held by Bob Jones for in excess of three two years, it is considered to be long term capital gain and if land is held by Bob Jones for less than 24 months, it is considered to be short term capital gain. Long term capital gain would be taxable @ 20% and short term capital gain would be taxable @ 15%.

D. In the event that the Client take compensation for himself and his little girl, he will be permitted conclusion of costs from benefit and misfortune account and diminish the assessments paid by him.

So, he should take salary for himself and his daughter. For cash distribution, the allowance of cash expense subject to the limitation.

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