I’m studying for my Accounting class and need an explanation.
You are currently working at a mid-sized certified public accounting firm. Your client is Bob Jones. 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. Using the supplied Data Sheet for Final Project document, prepare a memorandum to the client recommending a type of business entity, including an appendix of supporting IRS tax schedules and forms. Specifically, the following critical elements must be addressed: I. Recommendation A. Recommend a type of business entity for the client to consider based on your tax research. Consider justifying your recommendation using the code and regulations that relate to the business entity. B. Differentiate between accrual accounting and cash basis. Based on the type of business and the client’s accounting system, what is the impact when revenue is recognized? C. Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis. D. Determine the economic impact on the client’s financial situation. Based on your decision, determine the potential tax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations. E. 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. F. Justify whether or not the client should choose a business entity that has limited liability protection. Be sure to include possible future liability issues based on the potential economic impact and appropriate Internal Revenue Code and Treasury regulations. G. Describe the tax effect on the recommended business entity and the impact it will have on the client’s personal tax return. Consider addressing how the business entity affects the completion of the 1040 tax form. II. Conclusion A. Evaluate the economic impact on the client’s personal returns based on the recommended entity. Justify why the client would not choose the other business entities by informing the client of the differences. B. Justify your recommendation regarding the client’s daughter having an ownership interest. Provide details supporting the recommendation taking into consideration the jargon and mechanics of the transaction. C. Summarize cash or accrual basis accounting systems in relation to the selected business entity. Consider how the accounting system impacts revenue recognition consistent with Internal Revenue Code and Treasury regulations. D. 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. E. 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. III. Appendix Based on your recommendation to the client regarding proprietorship, taxable income, and sale of land, complete the appropriate tax schedules and forms described below. A. Prepare the appropriate schedule(s) and tax form(s) for the recommended business entity. B. Prepare the appropriate pages of Form 1040 including all relevant tax schedules and forms to reflect taxable income based on your calculations and the disposition of assets. C. Illustrate how creative problem solving and versatility of thought impact professional advice that you intended to result in the best economic solutions for the client. Consider providing real-world examples to support your claims. Guidelines for Submission: Your memorandum must be a 7- to 10-page Word document (plus a cover page and reference page). Inline (parenthetical) references and the Reference page must be written in APA format. Use double spacing, 12-point Times New Roman font, and one-inch margins. Your memorandum must include an appendix containing electronic PDF versions of the appropriate tax forms and schedules. View the article How to Insert a PDF Into Word on PC or Mac for a tutorial on how to embed PDF documents into Word. TAX 650 Data Sheet for Final Project Client Profile Bob Jones is a 60-year-old single man who 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 a dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1996 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, who is 23 years old and single. Other Considerations Bob has offered this info as possible deductions: • Mortgage Interest: $19,250 • Charitable Contributions: $22,500 • Medical Expenses o Cosmetic nose job: $3,000 o Prescriptions: $1,710 o Over-the-counter medicines: $285 o Health insurance premiums: $5,800 o Doctor visits: $1,140 o Medical miles: 499 • Real Estate Property Taxes: $8,000 • Personal Property Taxes: $3,000 • Credit Card Interest for Home Improvements: $1,800 • Personal Legal Expenses: $5,000 • Contribution to Major Political Party: $2,000 • Miscellaneous Deductions o Tax preparation feed (personal return): $500 o Investment expenses: $3,100 You will recommend that Bob either takes a salary of $100,000 or a cash distribution of $180,000. Assume no federal income taxes will be withheld. The $300,000 net income already accounts for the salary expense Bob receives and the cash distribution, where applicable. Additional Data • Business Tax ID #: 41-0000000 • Business Name: Bob Jones Automotive Gallery • Land Purchased: January 2, 1996 • Sale Date: September 15, 2018 • Personal Tax ID #: 500-00-1004 • Personal Address: o 1234 Easy Street Pensacola, FL 32581 Phone: 850-123-4567
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