Analyzing Tax Scenarios

Analyzing Tax Scenarios

#1

The tax obligation for the Donna case stems from both income and interest attached to the investment. Investment in common stock shares is a tax obligation on the generated gains, while the bond investment would involve evaluating the acquired interest upon maturation. Nonetheless, the implication of interest would involve making a tax cut upon completing the established calculation period. A similar approach would manifest in the personal loan with interest reflected as the item of taxation (Madrian et al., 2017). Primarily, personal loans do not attract taxation obligations when offered without an interest obligation.

The decision to file for bankruptcy absorbs the company tax obligation through a possible discharge option—however, the case of Donna points to the concerns attributed to the year of the bankruptcy filing. As a result, Donna has an active obligation to meet her tax obligations from her annual salary due to the concept of separate entities in addressing her obligations to her company (Chopra et al., 2018). Regarding Racing, the final year would benefit from the discharge option associated with the declaration of bankruptcy.

References

Chopra, C. P. A., Ding, O., Doshi, S., Lad, C. P. A., & Sun, S. Y. (2018). Summaries for the 2017 IRS-SJSU Small Business Tax Institute. The Contemporary Tax Journal, 7(1), 8.

Madrian, B. C., Hershfield, H. E., Sussman, A. B., Bhargava, S., Burke, J., Huettel, S. A., & Rick, S. (2017). Behaviorally informed policies for household financial decisionmaking. Behavioral Science & Policy, 3(1), 26-40.

#2

Dr. Jennie has several options to consider as ideal models for her business. Among them include a sole proprietorship, a partnership, or a limited company. Under a sole proprietorship model, she will own the therapy center due to meeting all the tax obligations through her filings. Adopting a partnership would have outcomes relatable to the sole proprietorship model. However, she will share the tax obligations with both the input of the partner and the adopted income division model. Adopting a limited company approach would elevate the venture to an autonomous entity with a tax obligation (Fellows et al., 2016). In either of the three cases, the associates will have a tax obligation from the incomes associated with their operations. As a result, the ideal adjustments in the tax obligations would tend to future on Dr. Jennie.

References

Fellows, M. L., Heinecke, G., & Sugin, L. (2016). Foreword: We Are What We Tax. Fordham Law Review, 84(6), 2413.

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Analyzing Tax Scenarios

Answer each discussion separately

#1 Donna Kirkpatrick formed Racing Cars Corporation early this century with an investment of $5 million in cash, for which she received $4 million in common stock and $1 million in bonds bearing interest of 9% with maturity in 2015. In 2007, Donna lent another $1 million on a personal note with 2% interest. This year Racing Cars becomes insolvent after Donna tries to take the first turn at an unauthorized speed of 250 mph, destroying the last car owned by Racing. Sponsors pulled all of their support, and Donna had to send pitiful termination letters to the pit crew and staff. Racing Cars Corporation has to file bankruptcy. During the last two years, Donna was paid an annual salary of $10 million. Donna wants you to consider the above information and explain to her the possible tax positions of Racing in the last year of business. She also wants to know her personal tax situation considering the worthless stock she now uses as floor mats in her new pickup.

Analyzing Tax Scenarios

For discussion: How would you handle this tax situation?

#2 You are a CPA, and you have built a rather large tax client base. A new client, Dr. Jennie Smith, comes in for an appointment at the office. She is starting up a new patient therapy center which will include three other psychiatrists, an administration person, and a bookkeeper/insurance person.

For discussion: What are the implications and consequences of suitable forms of business for Dr. Smith and her associates?