MBA 650 Southern New Milestone 1 Bob Jones Automotive Gallery Project You are currently working at a mid-sized certified public accounting firm. Your clien

MBA 650 Southern New Milestone 1 Bob Jones Automotive Gallery Project 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 Running Head: FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION
Company Name
Your Name
Date
NOTE: This template is provided only as a guide to organizing and completing your report
submission. Follow appropriate APA styling when finalizing this document. Replace highlighted
text with your content where appropriate, otherwise delete it.
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Running Head: FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION
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Table of Contents
Final Project Milestone One- Module Three
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Financial Performance and Health
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Organizational Context
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Recent Financial Performance
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Current Financial Health
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Final Project Milestone Two – Module Five
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Success Factors and Risks
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Final Project Milestone Three – Module Seven
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Projections
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Final Project Submission – Module Nine
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Business Opportunities
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Executive Summary
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Appendix (if applicable)
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Appendix I
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Appendix II
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Running Head: FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION
References
Should be on separate page, all in an APA format and listed in alphabetical order
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Running Head: FINANCIAL PERFORMANCE AND HEALTH OF AN ORGANIZATION
Appendix (if applicable)
Appendix I
Appendix II
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Running head: TAX 650 FINAL PROJECT MILESTONE ONE
Tax 650 Final Project Milestone One
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TAX 650 FINAL PROJECT MILESTONE ONE
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Tax 650 Final Project Milestone One
A. Computation of the Property Disposition Capital Gains and Taxation of Gross
Income
Bob Jones reveals that he owns a land valued at $9,000,000, which he purchased in 1966
for $450,000. Therefore, to determine whether Mr. Jones has a capital gain or loss, the selling
price of the land ($450,000) is deducted from its current value ($9,000,000).
Proceeds from the sale of land
$9,000,000
Less: Cost of land
$450,000
Capital Gain
$8,550,000
Table 1: Computation of property disposition capital gains
Capital gain
$8,550,000
401 (k) fund
$690,000
Taxable income from business
$300,000
Interest income
$20,000
Dividend income
$6,000
Total Gross Income
$9,566,000
Table 2: Computation of taxation of gross income
MEMORANDUM
TO: Bob Jones Automotive Gallery
FROM: Ibukun Idowu
DATE: April 26, 2020
SUBJECT: Tax Consequences of the Possible Sale or Exchange of the Land
Tax Consequences of the Sale or Exchange of the Land Consistent with Capital Gain Rules
Capital gain or loss often result from the sale or exchange of a capital asset. According to
Hoffman et al. (2017), “capital assets are defined in the Code as any property held by the
taxpayer other than certain items including accounts receivables, inventory, and depreciable
TAX 650 FINAL PROJECT MILESTONE ONE
3
property or real estate used in a business” (p. 3-35). Capital gain is earned when the amount
realized from a sale exceeds the cost, whereas capital loss is earned when the amount realized
from a sale is less than the cost of the property. Capital gains always have different tax rates,
such as 0%, 15%, 20%, 25%, or 30% (Orem, 2020). Nonetheless, the tax consequences of selling
or exchanging land consistent with capital gain rules would involve taxing the income as a net
long-term gain instead of an ordinary income.
Initially, the gain would appear on Form 4797 before being transferred to Schedule D
(Internal Revenue Service [IRS], 2019a). The selling expenses, closing costs, surveys, appraisals,
and brokers’ fees also affect the gain; thus, they should be added to Mr. Jones base property
expense. However, this would significantly lower his capital gain (IRS, 2019b). Besides, to
offset tax liability, Mr. Jones needs to commence his business, and any amount he spends on the
business would be deducted. Section 195 also allows him to subtract up to $10,000 of his start-up
cost for the taxable year immediately. Mr. Jones also has the option of gifting his daughter a
portion of the sales to help reduce his adjusted gross income for the following year. The sale or
exchange of the land would be recorded on Form 8949.
After-Tax Effects on the Client’s Cash Flow Based on the Sale of Land
According to Publication 544, Sales and Other Dispositions of Assets, Mr. Jones can sell his land
and invest the proceeds in his new business. He would be taxed 20% of the capital gain resulting
from the sale. Thus, he would pay $1,710,000 in taxes and remain with $6,840,000 to invest (see
table 3).
Proceeds from the sale of land
Less: Cost of land
$9,000,000
$450,000
Capital Gain
$8,550,000
Less: Tax on the long-term gain of capital (20%)
$1,710,000
TAX 650 FINAL PROJECT MILESTONE ONE
After-Tax Effect on Client’s Cash Flow
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$6,840,000
Whether the Client and His Child Should Take a Salary or Cash Distribution
The decision to take a salary or cash distribution relies on the type of business entity that
Mr. Jones would select. For example, if he chooses a corporation, he would be forced to take a
salary together with his daughter up to the maximum allowable by the IRS. Since salaries are
deductible for corporations, taking a salary would prevent Jones and his daughter from double
taxation. Besides, by utilizing Form 2553, Mr. Jones can select a combination of limited liability
company and the S-corporation. S-corporations are always classified as pass-through entities;
thus, they are not subjected to income tax since the deductions, income loss, and credits are
shifted to shareholders (IRS, 2017). Under this combination, Mr. Jones business will be
considered as an S-corporation; hence, he would enjoy the benefits of pass-through and avoid
double taxation. Therefore, I recommend that Mr. Jones and his daughter should choose Scorporation, which would allow them to take a salary.
TAX 650 FINAL PROJECT MILESTONE ONE
References
Hoffman, William H., Young, James C., Raabe, William A., Maloney, David M., & Nellen,
Annette. (2017). South-western Federal Taxation 2018: Individual Income Taxes.
Boston, MA: Cengage Learning.
Internal Revenue Service. (2017, December). Form 2553: Election by a small business
corporation. Internal Revenue Service. Retrieved from https://www.irs.gov/pub/irspdf/f2553.pdf
Internal Revenue Service. (2019a). Form 4797: Sales of business property. Internal Revenue
Service. Retrieved from https://www.irs.gov/pub/irs-pdf/f4797.pdf
Internal Revenue Service. (2019b). Schedule D: Capital gains and losses. Internal Revenue
Service. Retrieved from https://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Orem, T. (2020, April 7). 2019-2020 Capital gains tax rates – and how to calculate your bill.
Nerdwallet. Retrieved from https://www.nerdwallet.com/blog/taxes/capital-gains-taxrates/
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Running head: CASH AND ACCRUAL ACCOUNTING
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CASH AND ACCRUAL ACCOUNTING
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Cash-basis and accrual accounting methods
The accrual and cash basis methods of accounting are methods acceptable by the
International Financial Reporting Standards (IFRS) for the preparation of financial statements.
The two methods differ in the time revenues and expenses are recognized in the books of
accounts. Accrual accounting accounts for expenses and revenue when incurred and earned
respectively even if cash has not been exchanged. Accrual accounting enables tracking of cash
owed to and by the business. Cash-based accounting is a more popular accounting method that
records revenue and expenses when payment is received or paid. The method tracks cash flow
and hence excludes accounts payables and receivables.
Selecting the appropriate method of accounting relies on the size of the business and the
availability of an accounting professional who has expertise in bookkeeping, financial reporting,
and taxation. The cash basis accounting method is suitable for small businesses that have less
complex processes and transactions (Gnanarajah, 2015). A business may choose one of the
methods or hybrid method that accounts for short-term financial activities using cash basis
method and long term activities using accrual basis. Stipulations of the Internal Revenue Code
requires businesses whose 3-year average gross receipts exceed 5 million dollars to use accrual
accounting for tax purposes with an exemption of personal services corporations, subchapter S
corporations, and farm corporations (Gnanarajah, 2015). Although the accrual concept is
complicated, it is more suitable for the client as it provides consistent matching of revenue and
expenses, offers an accurate representation of the client’s revenues, expenses, assets, and
liabilities. The cash basis does not conform to Generally Accepted Accounting Principles
(GAAP) requirements and may distort the profitability and financial position of a business
CASH AND ACCRUAL ACCOUNTING
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(Gnanarajah, 2014). I would, therefore, recommend the accrual method of accounting for the
client as it is more reliable in operational and financial decision-making.
The sale of inventory is accounted for using the accrual method. Therefore, the earnings
and expenses incurred during the sale of inventory should be recorded in the financial year of the
sale, regardless of whether or not payment has been received. Internal Revenue Service (2019),
however, provides an exemption for inventory goods whereby recording payment can be
postponed to the following financial year. Revenue recognition under the accrual principle
requires revenue to be recognized when earned and expenses to be deducted in the year they are
incurred (Internal Revenue Service, 2019). If the client prefers cash-basis accounting, however,
revenues earned from the sale of goods will be realized when the payment has been collected.
Accrual reporting differs from cash basis in terms of time when incomes and expenses are
recorded.
Selecting the appropriate accounting method ensures that financial statements reflect an
accurate state of the business. The timing of revenue recognition determines when taxes will be
paid, which influences decision-making. All businesses are required to file tax returns
irrespective of the method of accounting used. The earlier the revenues and expenses are
realized, the earlier the tax liability is paid. The Internal Revenue Code provides that taxable
income should be computed per the accounting method regularly used by the business to
compute taxable income (Cornell Law School, n.d.). Computation of income for tax purposes
must use a method that accurately depicts the one’s income and expenses necessary for filing
correct returns (Internal Revenue Service, 2019). Changing the accounting method used to file
tax returns require approval from the IRS and changing the overall accounting system used
(Internal Revenue Service, 2019). Average gross receipts and type of business entity determine
CASH AND ACCRUAL ACCOUNTING
whether the client should use a cash basis or accrual accounting. The accrual and cash-basis
accounting methods are allowable aspects of accounting that offer different abilities in
monitoring economic position, financial activities, and tax liability of businesses.
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CASH AND ACCRUAL ACCOUNTING
5
References
Cornell Law School. (n.d.). 26 U.S. code § 446 – General rule for methods of accounting.
Retrieved from https://www.law.cornell.edu/uscode/text/26/446
Department of the Treasury: Internal Revenue Service. (2019, January). Accounting periods and
methods. Retrieved from https://www.irs.gov/pub/irs-pdf/p538.pdf
Gnanarajah, R. (2014, December 12). Cash Versus Accrual Basis of Accounting: An
Introduction. Retrieved from https://fas.org/sgp/crs/misc/R43811.pdf
Gnanarajah, R. (2015, April 24). Cash Versus Accrual Accounting: Tax Policy Considerations.
Retrieved from https://nationalaglawcenter.org/wpcontent/uploads//assets/crs/R44002.pdf
Running head: BUSINESS ENTITY MEMORANDUM
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BUSINESS ENTITY MEMORANDUM
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Business Entity Memorandum
In selecting the type of business entity based on tax regulations, code, and governance of
an organization, a limited liability company (LLC) is appropriate. The LLC is a business entity
that has both features of a partnership and a corporation. However, it is not categorized as either,
but the regulations apply when there is a significant decision to be made. For instance, when
choosing the mode of taxation, either as a partnership or a corporate. In most cases, business
owners choose the option of taxation as a partnership since it exempts the company from being
taxed as a separate entity. Thus, business profits are taxed through individual members’ income.
Moreover, the code and regulations that govern LLCs offer members protection from business
debts and exemption from daily operations and also provide ease of transition in case of
ownership transfers (Gitman et al., 2018). Therefore, LLC offers significant potential as a
business entity in the 21st era, where companies rely on partnerships for continuous growth and
competitive advantage.
With the option of LLC, it is essential to incorporate the aspect of limited liability
protection. Formation of LLCs comes with benefits such as access to financial resources,
increased marketability, and attraction of employees with specialized skills hence the potential to
accelerate economically. Thus, the need to have liability protection against cases such as
negligence, fraud, and criminal activities conducted by any stakeholder in the business. With
limited protection, such charges are directed to the company but not an individual member.
Further, internal revenue code and treasury regulations require LLCs to select their mode of
taxation. In the case of partnerships, the business is exempted from taxes as the tax deductions
are remitted through individual members’ income from the company. However, although
selecting the partnership option exempts the corporation from taxation, it must comply with
BUSINESS ENTITY MEMORANDUM
3
Internal Revenue Service (IRS) requirements to provide informational tax returns each year. The
IRS uses this information to balance the tax returns of each member, thus ensuring transparency
and accuracy (Everhart, 2018). Therefore, have limited liability protection is crucial to shield
members from any misconduct or violation of law by the management team.
One advantage of forming LLCs is the exemption from double taxation. The LLCs are
taxed as partnerships hence are not treated as separate entities from owners. The profits are
deducted from individual members’ income when they file their annual returns. By using the
business operating agreement that states the company’s tax structure, every member is required
to file taxes through the IRS schedule C form that the IRS uses to balance individuals’ income
and tax reports. Further, each member is required to complete the schedule C as well as a 1040
tax form. In addition, the LLC management is compelled to give each member a filled IRS
Schedule K-1 form (Form 1065), which enables the member to appropriately complete their
individual 1040 tax files (Mancuso, 2016). Therefore, taxation of LLC as a partnership exempt
member from double taxation hence saving their revenues.
Further, the formation of LLC offers significant potential to grow economically and gain
a competitive advantage. LLCs are not treated as a separate entity to owners hence exemption
from double taxation, which enables individual members to save and reinvest their profits.
Moreover, members of LLC have the advantage of saving a substantial sum of money for life
insurance and retirement funds without restricted limits, thus securing the future. Besides, the
partnership allows for members to lease personal legal assets in exchange for increment in shares
equivalent to the leased property as members are financiers of the business (Moll, 2017). These
avenues allow members to grow economically, thus increase in individual revenues. This type of
business venture is preferable as it provides limited liability protection as compared to a sole
BUSINESS ENTITY MEMORANDUM
4
proprietorship and general partnerships that are reliable for business debts and obligations. Also,
LLC attracts a larger pool of expertise and financial resources due to multiple shareholders
compared to sole proprietorships. Moreover, LLC exempts members from double taxation
compared to corporations that are taxed as a separate entity from owners (Mancuso, 2015). Thus,
LLC remains a suitable business entity compared to sole proprietorships, partnerships, and
corporations.
In addition, LLC allows for a smooth transfer of ownership to other members or selling
shares without affecting the company’s operations. The transfer is done through membership
consent, where members agree to admit a new person. In instances where a handover of
ownership is conducted without the approval, the new member-only receive the economic
benefits but lack any voting power. Thus, to ensure the implementation of rules and regulations
set, any transfer of ownership must comply with the operating agreement; otherwise, the
transferee has no voting rights (Mancuso, 2015). Therefore, although the transfer of shares is not
restricted or cause any financial loss, abiding by the business agreement aids in the swift
transition of full ownership.
LLC remains a suitable business entity due to its significant potential to offer economic
growth and competitive advantage. The LLC model provides both benefits of partnerships and
corporations. The partnership features offer the benefit of single taxation since the business is
considered as a separate entity as the owner. At the same time, the corporation characteristic
helps in the effective management of the company. Besides, LLC provides a platform for
resourcing financial resources and skill diversity from the members, thus gaining a competitive
edge. In addition, the LLC offers members a smooth transition regarding the transfer of
ownership. Therefore, LLC continuous to be a suitable business entity.
BUSINESS ENTITY MEMORANDUM
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References
Everhart, J. R. (2018). Unlimited tax liability: a common misnomer of limited liability company
taxation in the United States. Small Business Institute Journal, 14(1), 44-51.
Gitman, L. J., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B., & Hyatt, J. C. (2018).
Corporations: Limiting Your Liability. Introduction to Business.
Mancuso, A. (2015). Form Your Own Limited Liability Company: Create An LLC in Any State.
Nolo.
Mancuso, A. (2016). LLC Or Corporation?: Choose the Right Form for Your Business. Nolo.
Moll, D. K. (2017). Judicial Dissolution of the Limited Liability Company: A Statutory
Analysis. Transactions: Tenn. J. Bus. L., 19, 81.
Running head: TAX ASSESSMENT AND RETURNS
Tax Assessment and Returns
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TAX ASSESSMENT AND RETURNS
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Tax Assessment and Returns
The assessment in the ensuing report regards Bob Jones’s tax matters, including those
affecting his planned business. The rates used are based on the tax laws existing as at the end of
31st December 2019. The report recommends the form of business operation and the choice
between salaries and withdrawals. It also outlines business and individual tax forms and
schedules given Bob’s prevailing situation.
Given Bob’s existing condition, the report offers two primary recommendations. The
report endorses that Bob adopts a corporation form for his business. The limited liability protects
the vast personal savings held by the owner from the business’s obligations, especially given that
Bob’s retirement makes the prospect of risky investments distasteful. Besides, it is easier to
manage the 40% interests of Bob’s daughter when she participates as a shareholder.
Nevertheless, the legal form comes with the challenge of too much documentation.
The report also recommends Bob to take a salary instead…
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