PART 1

The following situation deals with the choice of business entity formation and its impact on taxable income to the owners. Please answer part A and B.

Bill and Kerry plan to open a limo service for the Miami Dade area after they buy and renovate two 15 passenger vans purchased recently at an auto auction in Delray Beach, Fl. Bill is a licensed commercial driver, but is not knowledgeable on business formations, and Kerry has experience as a bookkeeper. Kerry plans to keep her current job with Sunshine foods, inc. but will moonlight with the company when necessary. Their initial projections are that they will lose $35,000 in 2017. They have also paid cash for the two commercial vans ($10,000 each) and had to pay $1,000 to the port of Miami to receive a commercial permit valid through 7/31/2020.

To fund operations so far Bill has taken out a second mortgage on his personal residence for $70,000 and deposited the full amount into the company’s bank account. Kerry has not contributed any money to the company, but has offered to work on the company’s accounting books for ‘free’ until a point in time when the company has enough money to pay her.

a. List advantages for operating this business as a partnership instead of a corporation and state your recommendation as their CPA for business entity formation including % allocation. If your advice is a partnership (please also state whether you believe they should set up as a general or limited partnership in your opinion).

b. As the CPA for Kerry and Bill, what will Bill and Kerry recognize for taxes, assuming they accept your recommendation for entity formation as stated in part A in 2017?

PART 2

Thomas and his wife Diana have operated their own children’s daycare for the last three years. They also own the daycare facility, a building and the adjacent land located on 1322 Glades Road. They have a limited amount of working capital but do not forsee the need to make additional capital improvements in the near term. Their total business assets are about $250,000 with a $120,000 mortgage on the building as their only liability. In recent years they have not kept exact records, but have been able to withdraw any unneeded assets at the end of the year, which totaled approximately $50,000 in cash in 2013.

In 2013 they reported a net income of $85,000. In addition, Thomas has used his personal car for business travel and has charged the business mileage at the appropriate mileage when he has traveled to Miami for continuing educational credits and Diana has traveled to New York once each year for a trip with girlfriends and to attend a conference on childhood development. Although Thomas and Diana have never been sued, in recent months they have started to think about possible legal liability.

As a good friend of Thomas and Diana and a CPA, what is your opinion about incorporating the business going forward? List at least two reasons for or against incorporating, and any change the S-corp status would have on their taxable income from the company?

PART 3

Estates taxes : Good or bad for small business owners?

Supporters of the estate and gift tax argue that it provides progressivity in the federal tax system, provides a backstop to the individual income tax and appropriately targets assets that are bestowed on heirs rather than assets earned through their hard work and effort. However, critics argue that the tax discourages savings, harms small businesses, taxes resources already subject to income taxes, and adds to the complexity to the tax system. Critics also suggest death is an inappropriate time to impose a tax.

The above video is produced by the heritage foundation, and clearly biased against the estate tax in its current form. Now that you have studied the estate tax in more detail, state your opinion for or against the estate tax in its current form? Do you believe it is a necessary to generate income for the government? Or do you agree with the heritage foundation that the tax imposes an undue burden on small business owners?

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