Assignment: TAX Project Guidelines
Overview
The final project for this course is the creation of a memorandum with appendix (7-10 pages).
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 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, age 60 and single, 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 dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 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, age 23 and single.
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. Memorandum
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, using moral reasoning, 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, completes the appropriate tax schedules and forms described below.
A. Prepare the appropriate page of Form 1040 and include the sale of the client's land on the appropriate tax schedule and form for the recommended business entity. Be certain to complete each tax schedule and form accurately and completely.
B. Prepare the appropriate schedule and tax forms to reflect taxable income based on your calculations and the disposition of asset. Be certain to complete each tax schedule and form accurately and completely.
C. Illustrate how creative problem solving and versatility of thought impact professional advice that you intended to result in the best economic solutions forthe 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. Memorandum, 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.
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. Memorandum, 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.
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. Memorandum, 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.
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.