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
SSN: 444-00-4444
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.
Guidelines
You will submit a draft explaining the tax effects of salaries if cash is withdrawn from a business. You must also explain the tax consequences of paying the owners based on the taxable entity selected for the business, as well as the tax consequences for each individual's personal tax returns. This assignment will address Section I, Parts D and E of the critical elements of the final project.
Specifically, the following critical elements must be addressed:
1. Memorandum
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.
Guidelines for Submission: Your paper must be submitted as a 2- to 3-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format.