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TCO C) Joe is a sole proprietorship. He desires to be taxed as acorporation. What does he need to do?

Write a letter to the IRS requesting the change
File Form 2553
File Form 8832
Simply file Form 1120

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Jean Keeling
Jean KeelingLv2
28 Sep 2019

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Joe Davis is thinking about starting a company to produce carvedwooden clocks. He loves making the clocks. He sees it as anopportunity to be his own boss, making a living doing what he likesbest. Joe paid $400 for the plans for the first clock, and he hasalready purchased new equipment costing $2,500 to manufacture theclocks. He estimates that it will cost $20 in materials (wood,clock mechanism, and so on) to make each clock. If he decides tobuild clocks full time, he will need to rent office andmanufacturing space. Which he thinks would cost $2,500 per monthfor rent plus another $200 per month for various utility bills. Joewould perform all of the manufacturing and run the office, and hewould like to pay himself a salary of $3,000 per month so that hewould have enough money to live on. Because he does not want totake time away from manufacturing to sell the clocks, he plans tohire two salespeople at a base salary of $1,100 each per month plusa commission of $6 per clock. Joe plans to sell each clock for$250. He believes that he can sell 300 clocks in December forChristmas, but he is not sure what the sales will be during therest of the year. However, he is fairly sure that the clocks willbe popular because he has seen similar items as a sideline forseveral years. Overall, he is confident that he can pay all of hisbusiness costs, pay himself, the monthly salary of $3,000 and earnat least $2,000 more than that per month. (Ignore incometaxes.)

A. Perform analyses to estimate the number of clocks Joe wouldneed to manufacture and sell each year for his business to befinancially successful:

1. List all of the costs described and indicate whether eachcost is (a) a relevant fixed cost, (b) a relevant variable cost, or(c) NOT relevant to Joe’s decision.

2. Calculate the contribution margin per unit and thecontribution margin ratio.

3. Write down the total cost function for the clocks andcalculate the annual breakeven point in units and in revenues.

4. How many clocks would Joe need to sell annually to earn$2,000 per month more than his salary?

For a would-be entrepreneur, selecting the proper form of business organization is a very important first step in the process. After some consideration and an assessment of your skills and education, you have decided to start a medical billing service that will provide services to providers in the local geographical area. Ideally, you would like to service physicians, dentists and hospitals.

Determine which of the three forms of business organization (sole proprietorship, partnership or corporation) would be the most appropriate for your new business. Why did you select the form of business organization that you chose? Identify at least three things that should be taken into consideration when making this selection. (4 points)

Based on the form of business organization that you selected, answer the following questions:

a. How easy or difficult is it to set up this form of business organization? (4 points)

b. What type of liability do you have in this form of business organization? (4 points)

c. What tax implications do you need to consider for this form of business organization? (4 points)

d. What will happen to the business if something happens to you, the business owner? (4 points)

Several years ago, your client, Brooks Robinson, started an office cleaning service. His business was very successful, owing much to his legacy as the greatest defensive third baseman in major league history and his nickname, “The Human Vacuum Cleaner.” Brooks operated his business as a sole proprietorship and used the cash method of accounting. Brooks was advised by his attorney that it is too risky to operate his business as a sole proprietorship and that he should incorporate to limit his liability. Brooks has come to you for advice on the tax implications of incorporation. His balance sheet is presented below. Under the terms of the incorporation, Brooks would transfer the assets to the corporation in return for 100 percent of the company’s common stock. The corporation would also assume the company’s liabilities (payables and mortgage). (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)


Balance Sheet
Adjusted Basis FMV
Assets
Accounts receivable $ 0 $ 5,000
Cleaning equipment (net) 25,000 20,000
Building 50,000 75,000
Land 25,000 50,000
Total assets $ 100,000 $ 150,000
Liabilities
Accounts payable $ 0 $ 10,000
Salaries payable 0 5,000
Mortgage on land and building 35,000 35,000
Total liabilities $ 35,000 $ 50,000

a. How much gain or loss does Brooks realize on the transfer of each asset to the corporation?

Realized gain/loss
Accounts receivable
Equipment
Building
Land
Total $0


b. How much, if any, gain or loss (on a per asset basis) does Brooks recognize?

Realized gain/loss
Accounts receivable
Equipment
Building
Land
Total $0

c. How much gain or loss, if any, must the corporation recognize on the receipt of the assets of the sole proprietorship in exchange for the corporation’s stock?

Gain or loss recognized -

d. What tax basis does Brooks have in the corporation’s stock?

Tax Basis $

e. What is the corporation’s tax basis in each asset it receives from Brooks?

Tax Basis
Accounts Receivable
Equipment
Building
Land
Total

f. How much if any gain or loss will Brooks recognize if he had taken back a 10-year note worth $25,000 plus stock worth $75,000 plus the liability assumption? (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

Realized gain/loss
Accounts receivable
Equipment
Building
Land
Total $0

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