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
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 $10,000,000; 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.
Bob wants your professional advice regarding whether he should continue to operate as a sole proprietor or convert the business to a partnership, an S corporation, or a C corporation. Based on one of the business entities selected, Bob wants to include Mandy—his daughter—in the business as an owner and manager with a possibility of 40% interest. One of his concerns is what would happen to his business after he passes away.
Mandy’s personal tax information is as follows: Mandy Jones
DOB: June 30, 1990
Marital Status: Single
Home Address: 5990 Langley Road, Pensacola, FL 35203
Required: complete the appropriate tax schedules using the most current tax forms for the requirements below
A. Prepare Bob’s Form 1040 with the appropriate tax schedules and Mandy’s Form 1040 (based on the salary he wanted to pay her, $70,000 per year). Assume that you are filing the tax returns using sole proprietorship for the business entity and treating Mandy as an employee, regardless of your initial recommendation for this client.
B. Prepare the appropriate forms in the event that the client decides to convert the business to a partnership, an S corporation, or a C corporation based on your recommendation. Also, include the tax effect, if any, of the money that the client and his daughter are taking from the business for their personal expenses. Include the owners’ personal 1040 forms as well.
C. Justify your recommendation using schedules and tax forms you completed by explaining how the forms and schedules result in the best economic solution for the client consistent with IRS code and regulations
Make sure to use the appropriate and current tax forms from www.irs.gov