14 May DESCRIBE THE TAX EFFECT ON THE RECOMMENDED BUSINESS ENTITY AND THE IMPACT IT WILL HAVE ON THE CLIENT€™S PERSONAL TAX RETURN.
Overview
The final project for this course is the creation of a memorandum with appendix (7–10 pages).
As an associate working in a privately held enterprise or working with privately held clients, it is imperative to be able to advise clients on the tax implications of
their financial investments. The ability to model the tax consequences of transactions and do cost benefit analysis is crucial.
For your final project, you will model the role of an associate working in a private consulting firm. You will demonstrate your ability to advise clients on whether
they should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. Additionally, using your tax research skills and understanding of
federal income taxation, you will have the opportunity to evaluate tax consequences from sales and distributions for their compliance with the Internal Revenue
Code and Treasury regulations.
The project is divided into four milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final
submissions. These milestones will be submitted in Modules Three, Five, Seven, and Eight. The final product will be submitted in Module Nine.
In this assignment, you will demonstrate your mastery of the following course outcomes:
Recommend an appropriate business tax entity based on the analysis of a tax situation for achieving favorable economic impact on the client’s taxable
income
Utilize appropriate tax forms and schedules that compute taxable income on individual tax returns and reflect versatility of thought, resulting in the best
economic solution for the individual taxpayer
Apply accrual and cash basis accounting best practices and moral reasoning in determining when business transactions may be reported for income tax
purposes
Assess the economic impact on taxable income for the business tax entity in relation to Internal Revenue Code and Treasury regulations and the optimum
desired outcomes for the client
Evaluate the tax consequences that result from sales or distributions of property for their compliance with IRS Circular 230, Internal Revenue Code , and
the American Institute for Certified Public Accountants and for advising the client
Prompt
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 o f $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.
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.
Memorandum
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 IRS code and 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 IRS code and 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.
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