Final Submission: Memorandum With Appendix In Module Nine, you will complete all necessary tax forms according to Section III of the critical elements. You will then submit a comprehensive memorandum

Milestone One – 2-1 Final Project: Business Entity, Accounting Method, and Tax Laws
Name – Yvonne Saunders-Batchue
Institution - Southern New Hampshire University
June 04, 2019

Abstract

This paper will select the accounting method that should be used to interpret the business transactions and for tax reporting. It will also summarize the tax law that pertains to the entity selected.

S corporations

Business Entity

An S corporation is generally a business entity that offers most tax advantages while still preserving your ownership flexibility. An S corporation also called the subchapter, or small business corporation is a tax code that was enacted into law by Congress in 1958. The S corporation was created to encourage and support creating small and family businesses, while eliminating the double taxation that conventional corporations are subjected to. Considering the nature of Bob's activities, it is recommendable for Bob to form an S corporation. S corporation comprises the different attractive tax reductions and still supplies the entrepreneur with a decrease in liability from the company (Jones & Rhoades-Catanach, 2013). Following an S corporation, the profits, and losses from the business are reassigned to the shareholders. Accordingly, Bob would not be required to tolerate the whole taxation obligations and failures experienced in the company itself. Besides, an S corporation is suited for businesses with a few shareholders who are applicable in this case with Bob and the daughter being the principal shareholders.

Accounting Method

Bob is encouraged to utilize S corporation, as his type of business does not have stock, which makes it proper and more comfortable to use the cash accounting method for which is more straightforward, contrasted with the accrual accounting technique (Schenk, 2015). The cash accounting technique only accounts for incomes that were received and expenses that have been paid out; this makes it possible for the company to create tax savings based on what has been received by the company and what has been paid out (Jones & Rhoades-Catanach, 2013).

Since the wages are subjected to the FICA taxes with a 13.3 % income tax rate and a maximum of 15 % tax rate on capital gains tax compared to a lump sum 35% ordinary income tax (Schenk, 2015), the owner has to pay themselves a salary commensurate to the fair value compensation for the market while additional income such as a capital gains income, are accounted for.

In the case of tax savings, due to the presence of the Social Security and Medicare taxes, the corporation does not have to pay taxes on dividends; rather, the high amount of distributions means a less tax obligation on the Social Security and Medicare taxes. The pass-through method of taxation reduces the chances of double taxation because of the deliveries to the shareholders and not the owners (Schenk, 2015). Regardless of the tax savings and limited liability, S corporation have a few shortcomings. Case in point, they are liable to various legal requirements, which must be followed, and therefore, it infers higher legal and expenses administration costs. In as much there is a limited liability, the owners are personally responsible for any negligence. They are required to document the articles of consolidation and hold general shareholders gatherings. These costs are, however, lower than that of C corporations (Schenk, 2015). For example, while C corporation is liable to file returns quarterly, S corporations are required to make annual filings. There will also be the presence of additional expenses, such as worker's compensation and unemployment insurance coverage for each employee. Another disadvantage is the issue of rigid profit allocations. For instance, the founder's distribution can only be 50%. The profits and losses are also apportioned according to the proportion of shares that are held (Jones & Rhoades-Catanach, 2013). Irrespective of the tax savings and limited liability, S corporation have a few shortcomings. The situation in point, they are accountable to many legal requirements, which must be followed, and therefore, it infers higher valid and expenses administration costs. In as much there is a limited liability, the owners are personally accountable for any carelessness. They are required to document the articles of consolidation and hold general shareholders gatherings. These costs are, however, lower than that of C corporations (Schenk, 2015). For example, while C Corporation is liable to file returns quarterly, S corporations are required to make annual filings. There will also be the existence of extra expenses, such as worker's compensation and unemployment insurance coverage for each employee. Another disadvantage is the issue of inflexible profit distributions. For instance, the founder's distribution can only be 50%. The profits and losses can also be distributed according to the proportion of shares that are held (Jones & Rhoades-Catanach, 2013). In the future, if the business grows, it is easier for the industry to convert into a c corporation.

Tax law

The shareholders of the S corporations report the incomes and losses of their corporation in their tax returns. While an S corporation is not taxed on its profits, the owners of an S corporation are taxed on their proportional shares of the S corporation's profits. Bob will be required to file IRS form 2553 and form 1120S U.S. salary assessment form for S corporation. The Form 1120-S documents the business incomes and expenses. The K- I schedule reports the amount that should be recorded by the shareholder's income tax returns (Jones & Rhoades-Catanach, 2013).

References:

Article Title What is an S corporation and How to Form One | S corporations | Benefits of an S corporation, Document Filing Services, https://www.incfile.com/what-is-s-corporation/ June 01, 2019

Schenk, D. H., (2015). Federal Taxation of S corporations. Law Journal Press.

Shay, S. E., (2014). Theory, Complications, and Policy: Daniel Shaviro's Fixing U.S. International Taxation. Jerusalem Review of Legal Studies, jlt037.

S corporation - Wikipedia. https://en.wikipedia.org/wiki/S_corporation