Question

Please read carefully what is required and answer all the sections. if you cannot solve, leave to someone who can.Thanks.

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. 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 detailed calculation of the capital gain and income tax supported and explained with authority from the tax code. Use the Capital Gains Tax Worksheet to calculate Bob's income tax. I am looking for a step by step calculation and explanation of the long term capital gain, income tax, and after-tax proceeds from the sale of Bob's land.  Also, please note the long term capital gains tax rate is 20% and there is a 3.8% tax on net investment income that applies.

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 which is an S Corporation and the tax effect whether it is salary, dividends, or cash withdrawal. Looking for a summary discussion of the income tax consequences to Bob and to his business of taking a salary vs. a cash distribution

Answer 1

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.