Kim and Brendan, who are longtime friends, have decided to buy a golf equip- ment store and go into business together as equal partners. Kim reports his income by calendar year, and Brendan uses a fiscal year that ends September 30. One attraction of owning the golf equipment store is that the business is seasonal and will let them take long vacations. The peak revenue months are June and July. The owner gives them the following information:
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June and July 12
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12-Month Period
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Current year
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$200,000
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$500,000
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1st preceding year
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280,000
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700,000
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2nd preceding year
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325,000
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850,000
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Write a memo to Kim and Brendan discussing each alternative below:
a. If Kim and Brendan form a corporation, what options, if any, do they have in choosing their tax year and method of accounting?
b. If Kim and Brendan form a partnership, what options, if any, do they have in choosing their tax year and method of accounting?
c. If Kim and Brendan form an S corporation, what options, if any, do they have in choosing their tax year and method of accounting?
In each of the following problems, identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.