The final project for this course is the creation of a memorandum with an appendix of supporting IRS forms and schedules.
Working as an accounting associate in a financial organization requires the ability to apply accounting knowledge in unique ways. Being able to identify issues and communicate them effectively with members of your team and clients is essential for any financial career working in a privately held enterprise or working with privately held clients.
In the final project, you will demonstrate your ability to communicate your tax efficient investment and business strategy recommendations to a client. Your proposed strategy could save the client and his family millions of dollars over time, so it is imperative that you utilize your tax research skills and maintain compliance with all governing rules and regulations.
The project will address the following course outcomes:
- Recommend appropriate taxable entities, based on comprehensive tax research, for new businesses resulting in optimum solutions that meet clients’ desired economic outcomes
- Evaluate tax consequences between liquidating and non-liquidating corporate distributions for identifying their impact on clients’ tax returns consistent with governing rules and regulations
- Apply best practices in accounting and moral reasoning for liquidating a business resulting in the best economic solution for the owner
- Illustrate solutions for addressing tax consequences resulting from gifts and inheritances, while maintaining compliance with governing rules and regulations.
- Prepare appropriate tax returns as they apply to various business entities that result in the best economic solution for clients
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
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 $5,000,000; 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:
DOB: June 30, 1990
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 a type of business entity, including an appendix of supporting IRS tax schedules and forms. Specifically, the following critical elements must be addressed:
A. Use logical reasoning based on your tax research to explain why the client should choose your recommended business entity. Consider referencing appropriate tax code and regulations.
B. Defend your business entity recommendation by describing the accounting method. Consider the advantages and disadvantages of the business entity based on the following:
1. Cash basis vs. accrual
2. The cost to prep the returns
3. The tax benefits
4. The limited liability protection
5. Employee benefits
C. Interpret the tax law pertaining to the type of business recommended and justify your recommendation using details consistent with tax law, code, and regulations.
D. Explain the tax effect based on providing $180,000 per year for the client’s salary and $70,000 per year for his daughter’s salary if they withdraw cash from the business or pay dividends as appropriate.
E. Justify the percentage of ownership the client’s daughter should have in the business based on the type of business entity recommended. Consider the tax law in reference to the recommendation and how the decision will affect the daughter’s tax return.
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.
A. Compare and contrast the advantages and disadvantages of the sole proprietorship, the partnership, the S corporation, and the C corporation as a tax vehicle that could meet the client’s need for accounting information about the business. Consider providing justification for why the client would not necessarily choose the other business entities.
B. Summarize the alternative involving the possibility of liquidating the business using rationale based on tax research, codes, and regulations.
C. Summarize the alternative of transferring the business activity, providing justification based on tax research, codes, and regulations.
III. Appendix: To further justify your professional advice regarding whether the client should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation, complete the appropriate tax schedules using the most current tax forms for the requirements below.
A. Prepare Bob’s Form 1040 with the appropriate tax schedules and Mandy’s Form 1040 (based on the salary he wanted to pay her, $70,000 per year). Assume that you are filing the tax returns using sole proprietorship for the business entity and treating Mandy as an employee, regardless of your initial recommendation for this client.
B. Prepare the appropriate forms in the event that the client decides to convert the business to a partnership, an S corporation, or a C corporation based on your recommendation. Also, include the tax effect, if any, of the money that the client and his daughter are taking from the business for their personal expenses. Include the owners’ personal 1040 forms as well.
C. Justify your recommendation using schedules and tax forms you completed by explaining how the forms and schedules result in the best economic solution for the client consistent with IRS code and regulations.
Guidelines for Submission: Submit your memorandum with standard formatting: 7–10 pages, double-spaced, in APA format, with one-inch margins, 12-point Times New Roman font, and an appendix containing electronic versions of the appropriate IRS tax schedules and forms.