Question

I need quality work. 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

Answer 1

A.salary information and ownership interests:

Option 1: Sole proprietorship

Option 2: LLC (both are general partners)

Option 3: LLC(Mandy is a limited partner)

	option1	option2	option3
Bob's interest and salary	100%	60%$,180,000	60%,$180,000
Mandy's interest and salary	0%,$70,000	40%,$70,000	40%,$70,000

0ption1:

mandy's tax liability:

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:

Maximum 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 scenario, the total tax liability that Bob and Mandy would face would be $547,063.24.

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

Despite small tax savings with the sole proprietorship, it would be detrimental to continue as such, as the unlimited personal liability Bob would face as a sole proprietor could potentially cripple both Bob’s Used Cars business, as well as Bob’s personal finances. Choosing between Scenario 2 and Scenario 3 really depends on Bob’s goals and wishes for Mandy’s participation in the business. While Scenario 3 comes with a slightly less expensive tax liability, if it was important for Mandy to actively participate in the business, clearly option 2 would be the strategy to choose.

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

TAXATION 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%

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

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

ANNUAL TAX LIABILITY

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

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