28.03.2023 - 01:28

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 comme

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 knowledgable 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 2014. 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 7/31/2015. 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 2014?

Answers (1)
  • Cep6ep
    April 9, 2023 в 08:40

    a. The advantages of operating as a partnership instead of a corporation are:

    1. Simplicity: A partnership is easier and less expensive to set up than a corporation. Partnerships do not have to file separate tax returns, and they are not subject to the same level of government regulation as corporations.

    2. Flexibility: Partnerships are very flexible in terms of how they are structured and how profits and losses are allocated among the partners. Partnerships can be either general partnerships, where all partners share equally in the profits and losses, or limited partnerships, where one or more partners are limited in their liability and/or participation in management.

    3. Tax advantages: Partnerships are not taxed at the corporate level. Instead, each partner reports their share of the partnership's income or losses on their individual tax return. This allows partners to avoid double taxation, which is a common problem for corporations.

    Based on the information provided, my recommendation as their CPA for business entity formation is for them to set up as a general partnership. The reason for this is that they both have equal ownership and participation in the business, and it is unlikely that they will need to limit the liability of any one partner. As for % allocation, I would recommend a 50-50 split since they both have equal ownership and participation in the business.

    b. Assuming they accept my recommendation for entity formation as a partnership, Bill and Kerry will recognize their share of the partnership's income or losses on their individual tax returns. Based on the information provided, it appears that they will have a net loss of $35,000 in 2014. Since they are a partnership, this loss will be allocated to each partner based on their ownership percentage, which is 50-50 in this case. Therefore, Bill and Kerry will each be able to deduct $17,500 ($35,000 x 50%) on their individual tax returns. Additionally, they will need to report any income that they receive from the partnership on their tax returns, which will be reported on a Schedule K-1 that the partnership will provide to each partner.

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