Imagine that you are a Certified Public Accountant (CPA) with a new client who needs an opinion on the most advantageous capital structure of a new corporation. Your client formed the corporation in question to provide technology to the medical profession to facilitate compliance with the Health Insurance Portability and Accountability Act (HIPAA). Your client is very excited because of the ability to secure several significant contracts with sufficient capital. Research the advantages and disadvantages of debt for capital formation versus equity for capital formation of a corporation.
1 - Prepare a formal letter to the client using this six (6) step tax research process:
1. Determine the facts;
2. Identify the issues;
3. Locate applicable authorities;
4. Evaluate these authorities;
5. Analyze the facts in terms of applicable authorities;
6. Communicate conclusions and recommendations to others.
2 - Compare the tax advantages of debt versus equity capital formation of the corporation for the client. Recommend to the client whether he / she should use debt or equity for capital formation of the new corporation, based on your research. Provide a rationale for the response.