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 Two Final Project: Tax Effects and Ownership Interest

Name – Yvonne Saunders-Batchue

Institution - Southern New Hampshire University

June 20, 2019

Memorandum

______________________________________________________________________________

Title: Tax Effects and Ownership Interest

Requested By: Mr. Bob Jones

Submitted By: Yvonne Saunders-Batchue

Date Submitted: June 20, 2019

FACTS: Bob owns a successful used car business, located at 210 Ocean View Drive in Pensacola, Florida. The company will have an income growth rate of 10% per year over the next several years. Bob’s wealth including investments in land, stocks, and bonds, is about $14,000,000. The business valued $53,000,000, including the land and building. The client's, salary is $180,000 per year and $70,000 per year for his daughter Mandy’s salary. Bob desires to embrace his daughter in the business as a proprietor by transferring 40% of the company to her.

Questions and Answers:

(D) Explain the tax effect of providing $180,000 per year for the client’s salary and $70,000 per year for his daughter’s salary if they withdraw cash from the business or pay dividends as appropriate.

Under Sec. 1368, an S corporation’s distribution of cash or property may bear three possible tax consequences to the recipient shareholder, a tax-free reduction of the shareholder’s basis in the corporation’s stock (Nitti, 2014).

1. Taxable dividend

2. Gain from the sale of the stock (generally resulting in capital gain).

3. These options are not mutually exclusive; a single distribution may result in two or even all three of those consequences.

The amount $180,000 should be divided to pay both the salaries and the dividends because the amount is what the business entity is liable for being that it benefits from the services rendered to it by the workers. Again, it is the amount that the government is fully aware of based on the financial audit that is done on companies. It is what the company files to be accountable for all its transactions.

However, the daughter will continue to earn her salary of $ 70,000 without paying the taxes because based on the federal tax requirement, her salary (income) is much lower in the income tax bracket than that found in the company. It gives her an advantage to receive the salary without being taxed as the entity she works for has already been taxed. Her tax, therefore, is already covered in that paid by the company she works for. She will continue to have her salary that is considered reasonable because various tax schemes that are used are from the IRS form 2553 and or 1120 of the S Corporation.

(E) Justify the percentage of ownership the client’s daughter should have in the company in the type of business entity recommended. Consider the tax law about the recommendation and how the decision will affect the daughter’s tax return.

Following the policies and stature of the company, it is evident that the percentage ownership will just be retained at 40%. It automatically implies that the salary that it offers its clients should be reasonable then, as in most cases, it will tend to protect its workers from the sole proprietorship tax.

References:

Determining the Taxability of S Corporation Distributions .... https://www.thetaxadviser.com/issues/2014/jan/nitti-jan2014.htmlI, By Tony Nitti, CPA, MST, January 1, 2014,

IRS. (n.d.). S Corporations. Retrieved from IRS: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation

Determining the Taxability of S Corporation Distributions .... https://www.thetaxadviser.com/issues/2014/jan/nitti-jan2014.html