Advance Tax

The owners of The Car Wash have asked you to prepare their tax return. Their financial statements are audited by a local certified public accountant (CPA) firm, and they have provided them to you as a reference. A copy of the Income Statement and Balance Sheet have been reproduced below. In your discussion, you obtained the following pieces of additional information to prepare the tax return:

• Name of business owner:Tim Smith, SSN:123-45-6789
• Tim Smith’s address:8765 Warner Street, Huntington Beach, CA 92605
• Name of business owner:Jack Dillard, SSN: 987-65-4321
• Jack Dillard’s address:4321 Courtyard Place, Huntington Beach, CA 92605
• Business Name:The Car Wash
• Business address:1046 Broadway Street, Huntington Beach, CA 92605
• Business description:Self-Service Car Wash
• Employer Identification Number:99-8877665
• Date the business started:January 1, 2008
• Business will file its return using the cash basis of accounting

Income Statement

December 31, 20XX

Revenue:
Service Revenue	$254,603
Expenses:
Advertising	2,520
Depreciation	31,250
Insurance	7,260
Interest expense	36,204
Licenses and fees	7,260
Miscellaneous	4,074
Office expense	8,911
Salaries and wages	67,460
Payroll taxes	9,444
Employee benefits	1,349
Professional fees	1,210
Repairs and Maintenance	20,674
Telephone	900
Travel	1,500
Utilities	27,752
Net income before taxes	26,835

 

Balance Sheet

	January 1, 20XX	December 31, 20XX
Assets
Cash	$28,638	$64,979
Buildings and other depreciable assets	555,000	555,000
Accumulated depreciation	(62,500)	(93,750)
Total assets	521,138	526,229
Liabilities and equity
Loans	183,757	167,962
Mortgage	233,229	227,280
Equity investment	160,000	160,000
Retained earnings	(55,848)	(29,013)
Total liabilities and equity	$521,138	$526,229

 

Deliverable Length: Prepare the tax return for your client, addressing the following 2 scenarios:

• Scenario 1: The Car Wash is a corporation.
• Scenario 2: The Car Wash is a limited liability company (LLC).

Obtain the appropriate tax return forms at the following Web site and save them to your computer:

www.irs.gov

Instructions for how to prepare the applicable forms are available at the same Web site. You may directly input text and numbers on to these forms using Reader. The forms do not self-calculate. Once complete, upload your tax return to the submitted assignments.

Complete all of the requested attachments for the applicable tax return.

Assume the following:

• The initial investment for each owner was $80,000. Each owner has an equal interest in the business.
• A $30,000 salary was paid to each owner. A part-time employee was paid $7,460.
• The loans and mortgage are long-term obligations.
• The annual tax depreciation on the car wash building is $47,453.
• The $555,000 property was depreciated for tax purposes using a 15-year recovery period, half-year convention (HY) and the Modified Accelerated Cost Recovery System (MACRS) depreciation method.
• Assume no change in the tax depreciation when calculating whether the alternative minimum tax applies.
• The organization does not have any carry forward net operating losses or tax credits.
• The organization does not qualify for any current year tax credits.

Assume the following for a corporation:

• The corporation made estimated payments of $3,000 in 2010.
• Assume the business owners want to receive any applicable refunds.
• Only common stock has been issued.

Assume the following for a partnership:

• The salary paid to each owner is a guaranteed payment.
• Partnership profit, losses, and capital are shared 50/50.
• The loans and mortgage are both recourse debt.
• Neither owner is a LLC member-manager.
• The K-1 should reflect the partner’s capital account according to the United States’ Generally Accepted Accounting Principles (U.S. GAAP).

Part II

Deliverable Length: At least 700 words

Your client has been informed that an S corporation is a popular business form and wants to know more about it. Please write a professional memo to your client responding to his inquiry. Be sure to at least discuss the following items:

• What is an S corporation?
• When is it advisable to be taxed as an S corporation?
• How does an organization become an S corporation?
• If The Car Wash is a corporation, can they be taxed as an S corporation?
  • Why or why not?
  • What criteria must be met?
• If The Car Wash is a LLC, can it be taxed as an S corporation?
  • If so, what does it need to do to elect S corporation status?
• How would The Car Wash report and pay tax if it is an S corporation?