Question

You are working as an accountant at a mid-size CPA firm. One of your clients is Bob Jones.

Bob’s personal information is as follows:

DOB: October 10, 1952

SSN: 444-00-4444

Marital Status: Single

Home Address: 5100 Lakeshore Drive, Pensacola, FL 32502

Bob has a very successful used car business located at 210 Ocean View Drive in Pensacola, Florida. Last year, you filed a Schedule C for Bob that had $1,200,000 in taxable income. The business will have an income growth rate of 10% per year over the next several years. Bob’s personal wealth, including investments in land, stocks, and bonds, is about $14,000,000.Last year, he reported interest income of $20,000 and dividend income of $6,000. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for$450,000. The stocks and bonds have a tax basis of $1,200,000 and they are currently worth $5,000,000. All of the investments have been owned for more than a year. In addition to his investments, Bob paid $140,000 for his home in 1972 and it is now worth $600,000.The used car business is currently valued at $53,000,000 including the land and building, which are worth $41,000,000. Bob’s tax basis in the land and building is$2,000,000 and $400,000, respectively. The inventory is worth $12,000,000, with a cost basis of $10,000,000; the remaining assets, which include office furniture and equipment, make up the remainder of the business’s total value. The office furniture and equipment are fully depreciated.Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandy—his daughter—in the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away

.Mandy’s personal tax information is as follows:

Mandy Jones

DOB: June 30, 1990

SSN: 999-99-9999

Marital Status: Single

Home Address: 5990 Langley Road, Pensacola, FL 35203

You will need to describe the tax and limited liability effects on a chosen business entity should Bob decide to reduce the amount of tax paid per year, as well as the protection of personal assets should there be a possible claim against the company’s assets.Prepare a memorandum to the client, recommending atype of business entity, including an appendix of supporting IRS tax schedules and forms.

F.Create a detailed tax planning proposal explaining how the client’s family can experience tax savings should the client pass away. Cite relevant governing rules and regulations.

G.Illustrate a strategic plan that addresses the need for a will in handling the estate. Detail what happens to the business, land, and investments consistent with tax codes and regulations. Consider extending the plan to address the client’s estate tax, trust,and charitable contributions while minimizing estate tax.

H.Recommend estate planning strategies consistent with tax codes and regulations for the purpose of reducing the taxable estate. Be sure to include gifting property to heirs in your response.

I.Illustrate the best course of action if the client decides to leave the business in three years. Provide some advice to him should he decide to gift the business to his daughter or transfer the assets or common stock to her, depending on the business entity you have selected.

J.Illustrate the best course of action if the client wishes to sell the business. Consider the tax consequences with regard to capital gains and losses, ordinary income issues, and selling an existing operating business.

Answer 1

A.

According to the given info the recommended business activity is doing business as Partnership firm instead of Sole proprietor. The reasons for recommedation of Partnership firm is the risk of liability increases when the business is growing.

B.

Cash Basis: Correct profit for the year cannot obtained

Accrual basis: This method is follows based on the business is near future will not discontinue. If business is not a going conern this basis is not applicable.

The cost to prepare the returns are same as the business is same as the business is same but need to file two returns. So In the cost for one more return may be expensive.

The tax benefits are here is the income is splitted between personal and company. Now personal income of Bob is taxable in his hands and the business income is taxable in the firm.So the tax benefits which are avaiable to both the individual and company can take.

C.

If we do business as sole proprietor the Balance sheet all the assets of Business and personal assets arese shown while preparing. Because of that it is difficult to segregate both personal and Profession and because he is more than 65 years he cant run indeprently run the business. So if forms partnership firm the other partners will take the decision and doin the help.

-------------------------------

-------------------------------