Tax Case Study

Overview

The final project for this course is the creation of a memorandum with appendix (7–10 pages).
As an associate working in a privately held enterprise or working with privately held clients, it is imperative to be able to advise clients on the tax implications of
their financial investments. The ability to model the tax consequences of transactions and do cost benefit analysis is crucial.
For your final project, you will model the role of an associate working in a private consulting firm. You will demonstrate your ability to advise clients on whether
they should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. Additionally, using your tax research skills and understanding of
federal income taxation, you will have the opportunity to evaluate tax consequences from sales and distributions for their compliance with the Internal Revenue
Code and Treasury regulations.
The project is divided into four milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final
submissions. These milestones will be submitted in Modules Three, Five, Seven, and Eight. The final product will be submitted in Module Nine.
In this assignment, you will demonstrate your mastery of the following course outcomes:
? Recommend an appropriate business tax entity based on the analysis of a tax situation for achieving favorable economic impact on the client’s taxable
income
? Utilize appropriate tax forms and schedules that compute taxable income on individual tax returns and reflect versatility of thought, resulting in the best
economic solution for the individual taxpayer
? Apply accrual and cash basis accounting best practices and moral reasoning in determining when business transactions may be reported for income tax
purposes
? Assess the economic impact on taxable income for the business tax entity in relation to Internal Revenue Code and Treasury regulations and the optimum
desired outcomes for the client
? Evaluate the tax consequences that result from sales or distributions of property for their compliance with IRS Circular 230, Internal Revenue Code, and
the American Institute for Certified Public Accountants and for advising the client
Prompt
You are currently working at a mid-sized certified public accounting firm. Your client is Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has
$690,000 available in his 401(k) fund and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in
Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income.
Bob’s personal wealth including investments in land, stocks, and bonds is about $14,000,000. He reported an interest income of $20,000 and dividend income of
$6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000.
Bob has hired your firm for professional advice regarding whether he should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. He
is also considering transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and single.
Prepare a memorandum to the client, recommending a type of business entity, including an appendix of supporting IRS tax schedules and forms.
Specifically, the following critical elements must be addressed:
I. Memorandum
A. Recommend a type of business entity for the client to consider based on your tax research. Consider justifying your recommendation using the
code and regulations that relate to the business entity.
B. Differentiate between accrual accounting and cash basis. Based on the type of business and the client’s accounting system, what is the impact
when revenue is recognized?
C. Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual
reporting differs from cash basis.
D. Determine the economic impact on the client’s financial situation. Based on your decision, determine the potential tax liability, keeping in mind
appropriate Internal Revenue Code and Treasury regulations.
E. Identify the tax consequences on the sale or exchange of the land consistent with capital gain rules. Consider the selling expense, broker’s fees,
closing costs, appraisals, and surveys and the correct schedule form to complete.
F. Justify whether or not the client should choose a business entity that has limited liability protection. Be sure to include possible future liability
issues based on the potential economic impact and appropriate Internal Revenue Code and Treasury regulations.
G. Describe the tax effect on the recommended business entity and the impact it will have on the client’s personal tax return. Consider addressing
how the business entity affects the completion of the 1040 tax form.
II. Conclusion
A. Evaluate the economic impact on the client’s personal returns based on the recommended entity. Justify why the client would not choose the
other business entities by informing the client of the differences.
B. Justify your recommendation regarding the client’s daughter having an ownership interest. Provide details supporting the recommendation
taking into consideration the jargon and mechanics of the transaction.
C. Summarize, using moral reasoning, cash or accrual basis accounting systems in relation to the selected business entity. Consider how the
accounting system impacts revenue recognition, consistent with Internal Revenue Code and Treasury regulations.
D. Describe the after tax effects on the client’s cash flow based on the sale of the land that is needed to provide the funds necessary to start the
business. Consider including capital gains tax rules.
E. Explain whether or not the client and his child should take a salary or cash distribution according to tax purposes and Internal Revenue Code
and Treasury regulations. Consider the type of business and the tax effect whether it is salary, dividends, or cash withdrawal.
III. Appendix
Based on your recommendation to the client regarding proprietorship, taxable income, and sale of land, complete the appropriate tax schedules and
forms described below.
A. Prepare the appropriate page of Form 1040 and include the sale of the client’s land on the appropriate tax schedule and form for the
recommended business entity. Be certain to complete each tax schedule and form accurately and completely.
B. Prepare the appropriate schedule and tax forms to reflect taxable income based on your calculations and the disposition of asset. Be certain to
complete each tax schedule and form accurately and completely.
C. Illustrate how creative problem solving and versatility of thought impact professional advice that you intended to result in the best economic
solutions for the client. Consider providing real-world examples to support your claims.
Milestones
Milestone One: Gross Income and Capital Gains
In Module Three, you will submit a draft of the gross income and capital gains, analyzing the following critical elements: I. Memorandum, section E, and II.
Conclusion, sections D and E. You must compute the property disposition capital gain and taxation of gross income. In completing this assignment, consider the
tax effect of salary dividends or cash withdrawal in accordance with Internal Revenue Code and Treasury regulations. This assignment will be submitted as a
Word document. This milestone is graded with the Milestone One Rubric.
Milestone Two: Revenue Recognition and Accounting Methods
In Module Five, you will submit a draft of the revenue recognition and accounting methods, summarizing the following critical elements: I. Memorandum,
sections B, C, and D, and II. Conclusion, section C. You will determine revenue recognition and the economic impact of the client’s financial situation. Based on
your decision, determine the potential tax liability, keeping in mind appropriate Internal Revenue Code and Treasury regulations. This assignment will be
submitted as a Word document. This milestone is graded with the Milestone Two Rubric.
Milestone Three: Choice of Business Entity
In Module Seven, you will submit a draft of the choice of business entity, analyzing the following critical elements: I. Memorandum, sections A, F, and G, and II.
Conclusion, sections A and B. The short paper will communicate tax aspects of business entities to the client. This assignment will be submitted as a Word
document. This milestone is graded with the Milestone Three Rubric.
Milestone Four: Tax Forms
In Module Eight, you will submit IRS draft tax forms, analyzing all of the critical elements in III. Appendix, sections A, B, and C. Based on your research, the tax
forms and schedules will support your recommendation to the client. This assignment will be submitted as completed tax forms, which are provided to you in
your textbook resource CD or on the IRS website. This milestone is graded with the Milestone Four Rubric.
Final Submission: Memorandum With Appendix
In Module Nine, you will submit a memorandum with an appendix to the client and all IRS tax forms and schedules necessary to support your advice. It should be
a complete, polished artifact containing all of the critical elements of the final product. It should reflect the incorporation of feedback gained throughout the
course. This submission is graded with the Final Product Rubric.
Deliverables
Milestone Deliverable Module Due Grading
One Gross Income and Capital Gains Three Graded separately; Milestone One Rubric
Two Revenue Recognition and Accounting
Methods
Five Graded separately; Milestone Two Rubric
Three Choice of Business Entity Seven Graded separately; Milestone Three Rubric
Four Tax Forms Eight Graded separately; Milestone Four Rubric
Final Submission: Memorandum With
Appendix
Nine Graded separately; Final Product Rubric
Final Product Rubric
Guidelines for Submission: Your memorandum must be 7 to 10 pages in length (plus a cover page and references) and must be written in APA format. Use double
spacing, 12-point Times New Roman font, and one-inch margins. Your memorandum must include an appendix containing electronic versions of the appropriate
Critical Elements Exemplary Proficient Needs Improvement Not Evident Value
Memo: Business
Entity
Meets “Proficient” criteria and
details are justified using
appropriate Internal Revenue
Code and Treasury regulations
relevant to recommended
business entity
(100%)
Recommends a type of
business entity for the client to
consider that is based on tax
research
(90%)
Recommends a type of
business entity but either the
cited Internal Revenue Code
and Treasury regulations are
inaccurate or details are
cursory
(70%)
Does not recommend a type of
business entity
(0%)
6.4
Memo: Accrual
Accounting vs. Cash
Basis
Meets “Proficient” criteria and
provides a full description of
which entities require accrual
and when it is optional
(100%)
Differentiates between accrual
accounting and cash basis and
identifies the impact of the
revenue
(90%)
Differentiates between accrual
accounting and cash basis and
identifies the impact of the
revenue, but the details are
inaccurate or cursory
(70%)
Does not differentiate between
accrual accounting and cash
basis or does not identify the
impact of the revenue
(0%)
6.4
Memo: Revenue
Recognized on the
Sale
Meets “Proficient” criteria and
describes the installment
method of reporting revenue
(100%)
Describes when revenue would
be recognized and how the
reporting differs for accrual
accounting vs. cash basis
(90%)
Describes when revenue would
be recognized and how the
reporting differs but details are
inaccurate or cursory
(70%)
Does not describe when
revenue would be recognized
or how the reporting differs
(0%)
6.4
Memo: Economic
Impact
Meets “Proficient” criteria and
addresses payroll tax issues and
self-employment tax
(100%)
Determines the economic
impact on the client’s financial
situation and potential tax
liability, and determinations are
consistent with Internal
Revenue Code and Treasury
regulations
(90%)
Determines the economic
impact on the financial
situation and potential tax
liability but either the
referenced Internal Revenue
Code and Treasury regulations
are inaccurate or details are
cursory
(70%)
Does not determine the
economic impact on the
financial situation and potential
tax liability
(0%)
6.4
Memo: Tax
Consequences
Meets “Proficient” criteria and
comprehensively addresses all
expenses including how best to
report on the schedule
(100%)
Identifies the tax consequences
on the sale or exchange of the
land consistent with capital
gains rules
(90%)
Identifies tax consequences but
details are either inconsistent
with capital gains rules or
cursory
(70%)
Does not identify tax
consequences
(0%)
6.4
Memo: Limited
Liability Protection
Meets “Proficient” criteria and
includes information about
limited liability companies
(100%)
Justifies whether or not the
client should choose a business
entity that has limited liability
protection and includes
possible future liability issues
consistent with Internal
Revenue Code and Treasury
regulations
(90%)
Justifies whether or not to
choose a business entity that
has limited liability protection
but does not include possible
future liability issues, possible
future liability issues are not
consistent with Internal
Revenue Code and Treasury
regulations, or details are
either inaccurate or cursory
(70%)
Does not justify whether or not
to choose a business entity that
has limited liability protection
(0%)
6.4
Memo: Tax Effect Meets “Proficient” criteria and
addresses the client’s after tax
flow
(100%)
Describes the tax effect on the
recommended business entity
and the impact on the client’s
personal tax return
(90%)
Describes the tax effect on the
recommended business entity
and the impact on the client’s
personal tax return, but details
are irrelevant or cursory
(70%)
Does not describe the tax effect
on the recommended business
entity and the impact on the
client’s personal tax return
(0%)
6.4
Conclusion:
Economic Impact:
Personal Returns
Meets “Proficient” criteria and
shows keen insight into the
advantages and disadvantages
of choosing appropriate
business entities
(100%)
Evaluates the economic impact
on the client’s personal returns
based on the recommended
entity and justifies response by
including information about the
other entities
(90%)
Evaluates the economic impact
of client’s personal returns but
does not provide justification or
details lack relevance or are
cursory
(70%)
Does not evaluate the
economic impact of client’s
personal returns
(0%)
6.4
Conclusion:
Ownership Interest
Meets “Proficient” criteria and
uses appropriate voice for the
audience
(100%)
Justifies recommendation
regarding the client’s daughter
having an ownership interest
using details supporting the
recommendation
(90%)
Justifies recommendation
regarding client’s daughter
having an ownership interest
but details either lack relevance
or are cursory
(70%)
Does not justify the
recommendation regarding
client’s daughter having
ownership interest
(0%)
6.4
Conclusion: Cash or
Accrual Basis
Accounting System
Meets “Proficient” criteria and
identifies the impact on
revenue recognition consistent
with Internal Revenue Code
and Treasury regulations
(100%)
Summarizes, using moral
reasoning, cash or accrual basis
accounting systems in relation
to the selected business entity
consistent with appropriate
Internal Revenue Code and
Treasury regulations
(90%)
Summarizes cash or accrual
basis accounting systems in
relation to the selected
business entity, but details
either lack moral reasoning or
are cursory
(70%)
Does not summarize cash or
accrual basis accounting
systems in relation to the
selected business entity
(0%)
6.4
Conclusion: Tax
Effects on Cash Flow
Meets “Proficient” criteria and
cites capital gains tax rules
relating to gains and losses
(100%)
Describes the after tax effects
on the client’s cash flow based
on the sale of the land that is
needed to start the business
(90%)
Describes the after tax effects
on the client’s cash flow that
are needed to start the
business but details are either
inaccurate or cursory
(70%)
Does not describe the after tax
effects on the client’s cash flow
that are needed to start the
business
(0%)
6.4
Conclusion: Salary
or Cash Distribution
Meets “Proficient” criteria and
includes the tax effect on
salary, dividends, or cash
withdrawal
(100%)
Explains whether or not the
client and his child should take
a salary or cash distribution
according to tax purposes and
Internal Revenue Code and
Treasury regulations
(90%)
Explains whether or not the
client and his child should take
a salary or cash distribution but
details are cursory or not
consistent with tax purposes
and Internal Revenue code and
Treasury regulations
(70%)
Does not explain whether or
not the client and his child
should take a salary or cash
distribution
(0%)
6.4
Appendix: Form
1040
Prepares the appropriate page
of Form 1040 accurately and
completely, including the sale
of the client’s land on the
appropriate tax form and
schedule
(100%)
Prepares the appropriate page
of Form 1040 on the
appropriate tax form and
schedule, but details are either
incomplete or inaccurate
(70%)
Does not complete the
appropriate page of Form 1040
and does not include the sale of
the client’s land on the
appropriate tax form and
schedule
(0%)
6.4
Appendix: Schedule
and Tax Form
Prepares the appropriate
schedule and tax form
accurately and completely,
reflecting taxable income based
on calculations and the
disposition of asset
(100%)
Prepares the appropriate
schedule and tax form
reflecting taxable income but
details are incomplete or
inaccurate
(70%)
Does not prepare the
appropriate tax form reflecting
taxable income
(0%)
6.4
Appendix:
Professional Advice
Meets “Proficient” and
provides real-world examples
to support claims
(100%)
Illustrates how creative
problem solving and versatility
of thought impacts professional
advice intended to result in the
best economic solutions for the
client
(90%)
Illustrates how creative
problem solving and versatility
of thought impacts professional
advice intended to result in the
best economic solutions for the
client but details are irrelevant
or cursory
(70%)
Does not illustrate how creative
problem solving and versatility
of thought impacts professional
advice intended to result in the
best economic solution for the
client
(0%)

 

 

 

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