18-6 Amy and JeffBarnes are going to operate their florist shop as a partnership or as an S Corporation. Their mailing address is 5700 Richmond Highway, Alexandria, VA 22301. After paying salaries of 100,000 to each of the owners, the shop’s annual earnings are projected to be about 150,000. The earnings are to be invested in the growth of the business. Write a letter to Amy and Jeff advising them of which of the two entity forms they should select.
18-8 Coleman, a married taxpayer, is going to establish a manufacturing business. He anticipates that the business will be profitable immediately due to a patent he holds. He anticipates that profits for the first year will be about 300,000 and will increase at a rate of about 20% per year for the foreseeable future. He will be the sole owner of the business. Advise Coleman on the form of business entity he should select. Coleman and his wife will be in the 39.6% Federal income tax bracket.
18-18 Laurie Gladin owns land and a building that she has been using in her sole proprietorship. She is going to incorporate her sole proprietorship as a C Corporation. Laurie must decide whether to contribute the land and building to the corporation or to lease them to the corporation. The net income of the sole proprietorship for the past five years has averaged 250,000. Advise Laurie on the tax consequences. Summarize your analysis in a memo for the tax file.
18-40 Gail and Harry own the GH Partnership. They have conducted the business as a partnership for 10 years. The bases for their partnership interests are as follows: Gail Harry 100,000 150,000 GH Partnership holds the following assets: Asset Basis FMV Cash 10,000 10,000 Accounts Receivable 30,000 28,000 Inventory 25,000 26,000 Building 100,000 150,000 Land 250,000 400,000 The straight-Line Method has been used to depreciate the building. Accumulated depreciation is 70,000 Gail and Harry sell their partnership interest to Keith and Liz for 307,000 each. a. Determine the tax consequences of the sale to Gail, Harry, and GH partnership. b. From a tax perspective, should it matter to Keith and Liz whether they purchase Gail and Harry’s partnership interests or the partnership assets from GH Partnership? Explain Discipline Parchment, Inc., is created with the following asset and liability contributions. Jake and Fran each receive 100 shares of Parchment common Stock. Shareholder Assets Basis Fair Market Value Jake Cash 100,000 100,000 Fran Land 40,000 120,000 The land is subject to mortgage of 20,000 that parchment assumes. a. Prepare a financial accounting balance sheet for Parchment. Discuss the relevance of conduit theory and entity theory in the creation of Parchment. b. Prepare a tax balance sheet for Parchment. Discuss the relevance of conduit theory and entity theory in the creation of Parchment. c. Assume that Parchment sells the land for 150,000 four months after Parchment was created. Discuss the effect of the sale on the financial accounting balance sheet and the tax balance sheet 2. Assume that Parchment in (1) elects S Corporation status at the time of its creation. Respond to A, b and C 3. Assume that Parchment in (1) is a general partnership rather than a corporation. Respond to a, b and c. Would your answer change if Parchment were an LLC that “checked the box” to be taxed as a partnership? Explain 4. Teal, inc., owns total assets of 100 million and it reports annual revenues of 700 million. Lavender, inc., owns total assets of 12 million and it reports annual revenues of 900,000. both Corporations have been in existence for three years. a. Explain why neither Teal nor Lavender computes an AMT liability for its first tax year. b. Explain why, in later years, Teal computes an AMT liability and Lavender is not required to do so. c. Do you think that this different tax treatment for Teal and Lavender is equitable? Explain your position.
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