TAX 650 Final Project Guidelines and Rubric Overview The final project for this course is the creation of a memorandum with appendix. 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 use of appropriate tax authority research is expected throughout the assignment, as its use is required by the Internal Revenue Service (IRS). 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 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. Milestones Milestone One: Gross Income and Capital Gains In Module Three, you will submit a draft of the gross income and capital gains, analyzing the following critical elements: I. Recommendation, Section E, and II. Conclusion, Sections D and E. You must compute the property disposition capital gain and taxation of gross income. In completing this assignment, consider the tax effect of salary dividends or cash withdrawal in accordance with Internal Revenue Code and Treasury regulations. This assignment will be submitted as a Word document. This milestone is graded with the Milestone One Rubric. Milestone Two: Revenue Recognition and Accounting Methods In Module Five, you will submit a draft of the revenue recognition and accounting methods, summarizing the following critical elements: I. Recommendation, Sections B, C, and D, and II. Conclusion, Section C. You will determine revenue recognition and the economic impact of the client’s financial situation. Based on your decision, determine the potential tax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations. This assignment will be submitted as a Word document. This milestone is graded with the Milestone Two Rubric. Milestone Three: Choice of Business Entity In Module Seven, you will submit a draft of the choice of business entity, analyzing the following critical elements: I. Recommendation, Sections A, F, and G, and II. Conclusion, Sections A and B. The short paper will communicate tax aspects of business entities to the client. This assignment will be submitted as a Word document. This milestone is graded with the Milestone Three Rubric. Milestone Four: Tax Forms In Module Eight, you will submit IRS draft tax forms, analyzing all of the critical elements in III. Appendix, sections A, B, and C. Based on your research, the tax forms and schedules will support your recommendation to the client. This assignment will be submitted as completed tax forms, which are provided to you in your textbook resource CD or on the IRS website. This milestone is graded with the Milestone Four Rubric. Final Submission: Memorandum With Appendix In Module Nine, you will submit a memorandum to the client, including an appendix with all IRS tax forms and schedules necessary to support your advice. It should be a complete, polished artifact containing all of the critical elements of the final project. It should reflect the incorporation of feedback gained throughout the course. This submission is graded with the Final Project Rubric. Deliverables Milestone One Two Deliverable Gross Income and Capital Gains Module Due Three Grading Graded separately; Milestone One Rubric Five Graded separately; Milestone Two Rubric Three Revenue Recognition and Accounting Methods Choice of Business Entity Seven Graded separately; Milestone Three Rubric Four Tax Forms Eight Graded separately; Milestone Four Rubric Final Submission: Memorandum With Appendix Nine Graded separately; Final Project Rubric Final Project Rubric 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. Critical Elements Recommendation: Business Entity Recommendation: Accrual Accounting vs. Cash Basis Recommendation: Revenue Recognized on the Sale Exemplary Meets “Proficient” criteria and details are justified using appropriate Internal Revenue Code and Treasury regulations relevant to recommended business entity (100%) Meets “Proficient” criteria and provides a full description of which entities require accrual and when it is optional (100%) Meets “Proficient” criteria and describes the installment method of reporting revenue (100%) Proficient Recommends a type of business entity for the client to consider that is based on tax research (90%) Needs Improvement Recommends a type of business entity but either the cited Internal Revenue Code and Treasury regulations are inaccurate or details are cursory (70%) Not Evident Does not recommend a type of business entity (0%) Value 6.4 Differentiates between accrual accounting and cash basis and identifies the impact of the revenue (90%) Differentiates between accrual accounting and cash basis and identifies the impact of the revenue, but the details are inaccurate or cursory (70%) Describes when revenue would be recognized and how the reporting differs but details are inaccurate or cursory (70%) Does not differentiate between accrual accounting and cash basis or does not identify the impact of the revenue (0%) 6.4 Does not describe when revenue would be recognized or how the reporting differs (0%) 6.4 Describes when revenue would be recognized and how the reporting differs for accrual accounting vs. cash basis (90%) Critical Elements Recommendation: Economic Impact Exemplary Meets “Proficient” criteria and addresses payroll tax issues and self-employment tax (100%) Proficient Determines the economic impact on the client’s financial situation and potential tax liability, and determinations are consistent with Internal Revenue Code and Treasury regulations (90%) Meets “Proficient” criteria and comprehensively addresses all expenses including how best to report on the schedule (100%) Meets “Proficient” criteria and includes information about limited liability companies (100%) Identifies the tax consequences on the sale or exchange of the land consistent with capital gains rules (90%) Recommendation: Tax Effect Meets “Proficient” criteria and addresses the client’s after tax flow (100%) Describes the tax effect on the recommended business entity and the impact on the client’s personal tax return (90%) Conclusion: Economic Impact: Personal Returns Meets “Proficient” criteria and shows keen insight into the advantages and disadvantages of choosing appropriate business entities (100%) Evaluates the economic impact on the client’s personal returns based on the recommended entity and justifies response by including information about the other entities (90%) Recommendation: Tax Consequences Recommendation: Limited Liability Protection Justifies whether or not the client should choose a business entity that has limited liability protection and includes possible future liability issues consistent with Internal Revenue Code and Treasury regulations (90%) Needs Improvement Determines the economic impact on the financial situation and potential tax liability but either the referenced Internal Revenue Code and Treasury regulations are inaccurate or details are cursory (70%) Identifies tax consequences but details are either inconsistent with capital gains rules or cursory (70%) Not Evident Does not determine the economic impact on the financial situation and potential tax liability (0%) Value 6.4 Does not identify tax consequences (0%) 6.4 Justifies whether or not to choose a business entity that has limited liability protection but does not include possible future liability issues, possible future liability issues are not consistent with Internal Revenue Code and Treasury regulations, or details are either inaccurate or cursory (70%) Describes the tax effect on the recommended business entity and the impact on the client’s personal tax return, but details are irrelevant or cursory (70%) Evaluates the economic impact of client’s personal returns but does not provide justification or details lack relevance or are cursory (70%) Does not justify whether or not to choose a business entity that has limited liability protection (0%) 6.4 Does not describe the tax effect on the recommended business entity and the impact on the client’s personal tax return (0%) 6.4 Does not evaluate the economic impact of client’s personal returns (0%) 6.4 Critical Elements Conclusion: Ownership Interest Exemplary Meets “Proficient” criteria and uses appropriate voice for the audience (100%) Conclusion: Cash or Accrual Basis Accounting System Meets “Proficient” criteria and identifies the impact on revenue recognition consistent with Internal Revenue Code and Treasury regulations (100%) Conclusion: Tax Effects on Cash Flow Conclusion: Salary or Cash Distribution Appendix: Schedules and Tax Forms Appendix: Form 1040 Meets “Proficient” criteria and cites capital gains tax rules relating to gains and losses (100%) Meets “Proficient” criteria and includes the tax effect on salary, dividends, or cash withdrawal (100%) Proficient Justifies recommendation regarding the client’s daughter having an ownership interest using details supporting the recommendation (90%) Summarizes, using moral reasoning, cash or accrual basis accounting systems in relation to the selected business entity consistent with appropriate Internal Revenue Code and Treasury regulations (90%) Describes the after tax effects on the client’s cash flow based on the sale of the land that is needed to start the business (90%) Explains 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 (90%) Prepares the appropriate schedule(s) and tax form(s) for the recommended business entity accurately and completely (100%) Prepares the appropriate pages of Form 1040 accurately and completely, including relevant tax schedules and forms (100%) Needs Improvement Justifies recommendation regarding client’s daughter having an ownership interest but details either lack relevance or are cursory (70%) Summarizes cash or accrual basis accounting systems in relation to the selected business entity, but details either lack moral reasoning or are cursory (70%) Not Evident Does not justify the recommendation regarding client’s daughter having ownership interest (0%) Value 6.4 Does not summarize cash or accrual basis accounting systems in relation to the selected business entity (0%) 6.4 Describes the after tax effects on the client’s cash flow that are needed to start the business but details are either inaccurate or cursory (70%) Explains whether or not the client and his child should take a salary or cash distribution but details are cursory or not consistent with tax purposes and Internal Revenue code and Treasury regulations (70%) Prepares the appropriate schedule(s) and tax form(s) for the recommended business entity, but details are incomplete or inaccurate (70%) Prepares the appropriate pages of Form 1040, including relevant tax schedules and forms, but details are either incomplete or inaccurate (70%) Does not describe the after tax effects on the client’s cash flow that are needed to start the business (0%) 6.4 Does not explain whether or not the client and his child should take a salary or cash distribution (0%) 6.4 Does not prepare the appropriate schedule(s) and tax form(s) for the recommended business entity (0%) 6.4 Does not complete the appropriate pages of Form 1040 or does not include relevant tax forms and schedules (0%) 6.4 Critical Elements Appendix: Professional Advice Exemplary Meets “Proficient” and provides real-world examples to support claims (100%) Proficient Illustrates how creative problem solving and versatility of thought impacts professional advice intended to result in the best economic solutions for the client (90%) Articulation of Response Submission is free of errors related to citations, grammar, spelling, syntax, and organization and is presented in a professional and easy-to-read format (100%) Submission has no major errors related to citations, grammar, spelling, syntax, or organization (90%) Needs Improvement Illustrates how creative problem solving and versatility of thought impacts professional advice intended to result in the best economic solutions for the client but details are irrelevant or cursory (70%) Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas (70%) Not Evident Does not illustrate how creative problem solving and versatility of thought impacts professional advice intended to result in the best economic solution for the client (0%) Value 6.4 Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas (0%) 4 Total 100% Running Head: TAX 650- MILESTONE ONE TAX 650 Milestone One Tamara King Gross Income & Capital Gains Due Week 3 Southern New Hampshire 1 TAX 650- MILESTONE ONE 2 TAX 650 MILESTONE ONE A. Computation of property disposition capital tax gains Capital gains tax liability for 2016/2017 as from April 6, 2016 to April 5, 2017 if the asset land is disposed on sale or exchanged with another asset would be computed as shown below assuming that the property is disposed of on October 27, 2016. Capital gain or losses are reported on Form 8949. Sales and other dispositions of capital assets, summarized capital gains and deductible losses are reported on Form 1040 Schedule D. The tax rate of most net capital gain is no higher 15% for most taxpayers. Some or all capital gain may be taxed at 0% if you are in the 10% or 15% ordinary income taxation brackets. However, a 20% rate applies to the extent that taxpayer’s taxable income exceeds the threshold set for the 39.6% regular tax rate. To this end, therefore, the following computation is as follows: Gain on the asset= $9,000,000-$450,000 Total gain =$8,550,000 Applying tax bands to residential assets Residential asset taxed at basic rate ($32,000@18%)=$5,760 Residential asset taxed at higher rate ($8,506,900@28%)= $$2,381,932 Total residential assets tax= $2,387,692 before any reliefs have been applied Taxation of gross income TAX 650- MILESTONE ONE 3 Retirement benefit= $690,000 Interest income=$ 20,000 Dividend income=$6,000 Total gross income= $716,000 First slab= $9,275@10%= $927.5 Next = $28,375@15%= $4,256.25 Next= $53,500@25%= $13,375 Next =$99,000@28%= $27,720 Next= $223,200@33%= $73,656 Next= $1,700@35%= $595 Next =$300,950@39.6%$119,176.2 Total tax payable =$239,705.95 B. The sale or exchange of land consistent with capital gain tax would have tax consequences when considering expenses such as selling, broker’s fees, closing costs, appraisal and other expenses. The overall effect is that there would be reduced capital gain on the sale owing to such expenses incurred and consequently low capital gain tax paid on the exchange or sale provided that the expenses are allowable rather deductible in the computation of the capital gain tax C. The sale of land by the client has after-tax effects on its cash flow. Tax payable on the sale of land and other tax liability on income reduce the level of cash flow realized after the actual TAX 650- MILESTONE ONE 4 payment of the tax liability. Thus if the cash is paid before annual reports, the cash outflow equivalent to the amount of tax paid would decrease the level cash communicated in the financial statements at the end of the year. D. The question as to whether the client and the child should take a salary or cash distributions depends on the tax consequences or effects according to Treasury regulations and internal revenue code. A cost-benefit analysis done on this matter may reveal the balance between the costs that would come with the decision and the benefits as well. To the extent that benefits of cash distribution and salary outweigh costs associated with taxation, the decision to distribute cash should be considered. Some of the effects of making this decision would be rates. Perhaps it may be higher if the child received qualifying dividends or capital gain distributions. There are certain deductions the client cannot take e.g. additional standard deductions if the child is blind, deductions for the penalty of early withdrawal of the child’s savings. Other effects would be child tax credit, education tax credit, credit for child and dependent care expenses and deductions for student loan interest. In my opinion and according to the IRS, the client may take cash distributions to take advantage of child’s deductions and credits and thus lower the overall tax liability to be paid by the client. The Recommendations are as follows: First of all if we calculate the total assets that Bob has in his disposal. These are $69,000+300,000+$14,000,000+$20,000+$6,000=$14,395,000 which is a high amount and the TAX 650- MILESTONE ONE 5 decision should be prudent in deciding on his investments. Now below are all the available options he has: Sole proprietor: This have the advantages of easy to start it up, profits are owned by the one person and can easily wind up the business. However, it has the disadvantages of being taxed as an individual, limited management, unlimited liability and the life of the business is limited. For the case of C corporation: It has the advantages of attracting top employees, limited liability, continuity of the corporation is long term duration and enjoyment of fringe benefits. However, it has the disadvantages that the corporation is taxed at a corporate level which means that there is double taxation. Moreover the corporation is governed by federal statutes and thus there is too much rules governing distribution of dividends. Hence, based on the above analysis, then the best kind of business to for Bob to begin is the S corporations. If would own an S corporation then can elect to receive the Subchapter S recognition from the Internal Revenue Service (IRS) to become the S corporation. S corporation owns some advantages of protections that most of big companies receive. For instance you can raise capital without necessarily going public. Moreover, it doesn’t file for separate taxes like other corporations and still you can protect your business. Advantages TAX 650- MILESTONE ONE 6 Tax savings: The Corporation does have to file separate tax charges. Thus would be able to reduce the taxation burdens on the firm. The losses or income are passed to the owners instead of being taxed at corporate level hence avoids double taxation. Protection: For S corporation, it will be protected by the tax laws and the company’s act laws. In the similar way like other corporation they are protected from liability. They have limited liability which will help in the protection of the assets of the company. Easy of conversion: The owner of S corporation can easily change it to C corporation since there will not be huge restrictions on termination of the corporation. It will help in saving the owner the time wasted in following the formal termination of the firm. Disadvantages Strict formation: Forming S corporation requires that some person, some organizations or estates to be S corporation. These strict rules in formation would be disadvantage. Experts indicate that if individual wants to begin a company based on taxation benefits, then in that scenario S corporation is the best choice. I concur with them and have a belief that the S corporation is the best choice. This will offer the owners a chance of various advantages which does not only create individual value but also creates value to the corporation. An entity will be faced with several issues in its operations. Thus to guarantee its future operations that will affect its existence, and then a limited liability company will be the best choice. For a limited company, its assets will be protected against any possible risks of operations. Also the continuity of the firm will basically depend on the economic risks. Bob TAX 650- MILESTONE ONE 7 wants to transfer some part of the business to Mandy in the future, then it will be advisable for the protection from the possible risks in the long run. As per IRS, for tax purposes it treats the limited liability firms to be separate from their owners. It can be treated as partnership or corporation. If the limited liability company chooses to file its tax returns in Form 8832 then it will be treated as a corporation. Generally, majority of the owners of United States firms prefer the Limited Liability corporations (LLC) since there is advantage in tax treatment and the protection from the liability attack of business. This decreases the chances of the business from being a target of other firms. TAX 650- MILESTONE ONE 8 References (2016). Retrieved 27 October 2016, from https://www.irs.gov/pub/irs-pdf/p929.pdf Publication 544 (2015), Sales and Other Dispositions of Assets. (2016). Irs.gov. Retrieved 27 October 2016, from https://www.irs.gov/publications/p544/ch02.html#en_US_2015_publink100072491 Sale or Trade of Business, Depreciation, Rentals. (2016). Irs.gov. Retrieved 27 October 2016, from https://www.irs.gov/help-resources/tools-faqs/faqs-for-individuals/frequently-askedtax-questions-answers/sale-or-trade-of-business-depreciation-rentals (2016). Retrieved 27 October 2016, from http://web.williams.edu/Economics/wp/gentrydesai_gentry_corp_cap_gains_11_23.pdf Running head: TAX 650 MILESTONE 1 TAX 650 Milestone II Tamara King Southern New Hampshire University TAX 650 MILESTONE 2 TAX 650 Milestone II Accrual Accounting and Cash Basis The main difference between accrual and cash accounting lies in the timing of sale and purchases when recorded in accounting books. Accrual accounting recognizes expenses and revenue when earned, while cash account recognizes expenses and income when there are paid, and there is an exchange of cash. Therefore, cash accounting only recognizes revenue when cash is received, while accrual accounting reports revenue and expenses when earned regardless of payment date (Goel, 2016). For example, if a company sells a product and invoice the customer on November 2, the accrual accounting will record the revenue on the same day. However, a customer might pay the amount due on December 31. For cash accounting, the amount will be recognized on December 31. Therefore, cash accounting is a bit easier since it accounts for expenses or revenue after it has been paid. This is mostly applicable to small businesses. On the other hand, accrual accounting applies to large companies since it helps create a long-term overview of business earning. In terms of taxes, in cash accounting, the company is not taxed on the amount that has not been received. However, in accrual accounting, the company pays taxes for the amount owed. Question 2 The principle of revenue recognition requires revenue to be recognized when it is earned and realized. In this aspect, for revenue to be recognized, the buyer and the seller have to enter into an agreement, which includes the amount to be paid and other services to be provided (Goel, 2016). On realization, a cash payment has to be collected or received. This approach works similarly to cash accounting, where the payment must be received before revenue is recognized. For example, if a company sells a product and the company and the buyer enters into an TAX 650 MILESTONE 3 agreement that the full amount will be paid after 30 days, in cash accounting, the company will not recognize this transaction as revenue until the payment is made. For accrual accounting, the revenue or the expenses is recognized after the product transaction regardless of the effect on the cash account. Question 3 Accrual accounting is essential in determining the financial standing of the taxpayer. When the taxpayer makes a transaction, the revenue is recognized immediately in accrual accounting. In cash accounting, the taxpayer has to wait for payment before recognizing the revenue. As a taxpayer, the approach is to evaluate the best ways to reduce tax liability in order to reduce the operating cost. The accrual accounting method provides this option since the taxpayer can request suppliers and vendors to send an invoice within the specified timeframe, which will reduce the taxpayer's taxable income (Tanyi, Klaus & Burton, 2020). For Bob's case, the method can allow him to create a timeframe where he should offset his taxable income by maximizing the expenses. Question 4 The cash accounting method is simple and helps the business owner recognize revenue generated quickly. The technique is also essential in the analysis of the cash flow of a business. However, this accounting method is only applicable to small businesses since the Internal Revenue Code restricts large entities such as corporations, partnerships, and limited liability companies (Tierney Jr, 1964). However, there is an allowance on using the method if an entity listed above has less than 5 million-dollar sales in the last three years. On the other hand, the accrual accounting method is more complex. However, proper accounting, budgeting, and auditing can help business entities enjoy more benefits. TAX 650 MILESTONE 4 References Goel, D. (2016). The earnings management motivation: Accrual accounting vs. cash accounting. Australasian Accounting, Business and Finance Journal, 10(3), 48-66. Tierney Jr, J. E. (1964). The Internal Revenue Code and its Relationship to Generally Accepted Accounting Principles. Marq. L. Rev., 48, 181. Tanyi, P., Klaus, J. P., & Burton, H. (2020). Tax-Related Accounting Restatements and Tax Contingency Reporting. In Advances in Taxation. Emerald Publishing Limited. Running head: TAXATION 650 FINAL PROJECT Taxation 650 Final Project Milestone III Tamara King Southern New Hampshire University 1 TAXATION 650 FINAL PROJECT 2 Taxation650 Final Project Section A: Business Entity The first step in opening a business is evaluating the appropriate business entity and determining the impact on finance and personal life. In this case, the best business entity will be an S corporation or C corporation. However, an S corporation would be most preferable. According to IRS, S corporation is unique and separate from the owners, hence limiting liabilities to the owner and incorporating some partnership features (IRS, 2020). For federal tax purposes, an S corporation will pass losses, credit, income, and deduction to the shareholders. This is important since bob will avoid double taxation whereby the losses and flow through are reported in personal tax returns. Some of the necessary considerations of an S corporation is that there should be a maximum of 100 shareholders who are residents, and the file form of the IRS required is form 2553. Section F: Limited Liability Protection. An important aspect to consider during the formation of a business entity is legal ramifications. The legal rules and regulations help in determining the standards to be met in business dealing. By following the rules, one can avoid liabilities. Having an S corporation is vital because it helps protect the owners from liabilities arising from business transactions (Schenk, 2017). This means that personal assets cannot be acquired to finance business obligations. In case the business gets into a financial crisis, your personal assets cannot be used to boost the business's financial position. The next protection is on a legal lawsuit. The limited TAXATION 650 FINAL PROJECT 3 liability feature helps address this issue, and hence an owner cannot face personal suit caused by the business operation. Section G: Tax Effect An S corporation is considered a pass-through business entity. This feature is vital in the tax effect of the owners, who are the shareholders. As a shareholder of an S corporation, Bob will not be required to pay any self-employment taxes. The earning from the business in an S corporation are recorded in form 1040 schedule E. Also, there is a need to record your earnings in any other form mentioned in the shareholder's Schedule K-1 (Ratliff & Burns, 2017). However, some of the tax effects that will be noted include Medicare and social security taxes for employees' cases. Therefore, most of the taxes will be attributed to income and employees. Another category of taxes that the company needed to contribute to is the income tax withholding for employees and the federal unemployment tax. Conclusion Section Section A: Economic Impact on Personal Returns The economic impact on personal returns is an important aspect to consider throughout the business formation and operation. Therefore, there is a need to choose the best business entity to ensure high returns in personal terms and economic impact. There is also the need to evaluate the business's future performance, such as stability and flexibility towards the needed change. In this case, the S corporation will have the best economic impact on personal return since it will allow you to avoid double taxation (Schenk, 2017). This means that the income level will be high hence a positive impact on personal return. Also, the feature on the protection of personal assets is essential in this aspect. Any financial liability that the company faces are not transferred to the owner. Therefore, this does not affect the income or personal assets and TAXATION 650 FINAL PROJECT 4 employee or customer's personal lawsuit. Other forms of business are subjected to double taxation. If a business is unable to meet its obligation, the liability is transferred to the owner, and personal assets are used to finance the business. Section B: Ownership Interest. When starting a business, you will be the sole owner and hence in control of the business. However, when you decide to transfer some of the ownership, the business structure will change. This will require a new ownership agreement to be drafted. The daughter will own a certain percentage of the shares and hence the need to update the business tock ledger. The daughter is also required to sign consent on the new partnership in the article of corporation incorporation. TAXATION 650 FINAL PROJECT 5 References IRS, 2020. S Corporations | Internal Revenue Service. [online] Irs.gov. Available at: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations Ratliff, G., & Burns, F. X. (2017). Valuing S Corporations: An Extension of the S Corporation Economic Adjustment Model. Business Valuation Review, 36(4), 124-129. Schenk, D. H. (2017). Federal Taxation of S Corporations. Law Journal Press. 
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