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:

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

PROPRIETORSHIP

Sole Proprietorships and Partnerships are both more straightforward, you will be held personally responsible for any failings on the business part. That means that if you cannot pay a supplier, they will be able to come after your personal assets.

If you're a sole proprietor, how much money you take out of your business is entirely up to you. By definition, as the sole owner of business, you are entitled to all profits. You are still liable for taxes and, because the government does not distinguish between you and your business, you are also liable for all business losses, liabilities and debts. The most straightforward business structure, it is also the most risky. However, if you're just starting out, it's a great way to test the waters and it doesn't require the initial costs, filling requirements and paperwork that partnership do.

To run a sole proprietorship you do not need to register as a sole proprietor.

As a sole proprietor your business is not taxed separate to you. While a sole proprietorship has the lower tax rate of all business structures and allow you to draw directly from the business, it's worth considering whether the risk and the potential financial burden is worth it, in the event that things do not work out.

PARTNERSHIP

A partnership is a business in which two or more people share ownership. Like a sole proprietorship, all partners share liability. The business is not its own entity, and as such, does not pay income tax. Rather, the partners do, including listing income, losses, gains and deductions on their personal tax returns.

When you initially start up a partnership, you should work with a lawyer to develop a legal partnership agreement. This will state how you intend to divide the profits, how you will dissolve the company (should the need arise), resolve disputes, change ownership and more.

In general partner will have individual accounts that allow them to draw from and invest in the business. These are called drawing accounts and capital accounts, respectively. When a partner draw from the business, he or she reduces the overall business equity. As such, it's important to keep record of expenses in order to reduce mistrust between partners.

Since Bob Jones is considered to transfer 40% of its interest in his new business to his daughter, so he has to form a partnership firm.

C. On sale of land the gain would be recognized as capital gain. Whether it is long term capital gain or short term capital gain it depends on the holding period of land. If land is held by Bob Jones for more than three 24 months, 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. If the Client take salary for himself and his daughter, he will be allowed deduction of expenses from profit & loss account and reduce the taxes 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.