Week 3 Writing Assignment – Part 3

 This week’s assignment is to complete Part 3 of the portfolio project and to submit the final versions of Part 1 and Part 2 of the project for a completed Portfolio Project.Please prepare a hypothetical tax calculation based on the different type of entities given the same amount of taxable income. 

• What would the client tax liability look like if the entity was a C Corp, an S Corp, or a sole proprietorship?
• Prepare a hypothetical tax return, using software, as either a C or S Corp based on your determination of which would be better for this client. 

Company Background

Florida Chocolate Inc. was first opened as a sole proprietor in 2

0

x2 under the name Alexandria’s Chocolates. The company produced 4 specialty chocolate products using an old family recipe, which only the owner, Alexandria Vierra, knows. The company started as a small home based business.

In 20×4 Alexandria decided to expand the business, opened a factory in Ft. Lauderdale Florida and converted the business to a corporation named Florida Chocolate Inc. Due to the huge success of the business she decided to expand to Europe in 20×6, opening another factory in England. This factory is run by Alexandria’s brother Nelson. The third factory was opened in Brazil in 20×9 and is run by Alexandria’s sister Laura.

Project Information:

Alexandria contracted you as her accountant and is seeking advice on switching from a sole proprietorship to a corporation in 20×3.

Portfolio Project Requirements:

This project is split into four (4) parts with one (1) part due each week of the course.

· Part 1 and Part 2 will provide opportunities to receive feedback.

· See Rubric: “Weekly Portfolio Project Rubric”

· Part 3 will encompass all Parts 1-3.

· See Rubric: “Portfolio Project Rubric”

· Part 4 will require a presentation of Part 1-3, including any additional requirements as indicated.

· See Rubric: “Presentation Rubric”

Based on your readings, use of technology, research of literature, and other sources complete the following: 

Part 1:

This week’s assignment will be a draft of Part 1 of the portfolio project. The final version of Part 1 of the project is due, along with Part 2, in their final versions, with Part 3 as the Portfolio Project for this class.

Please prepare a minimum 2 page memo on the below to your client.

· Describe the four different legal entities recognized by the US tax system and the fundamental differences in the characteristics across business entities.

· Include the pros and cons of transitioning from a sole proprietorship to a corporation.

· Based on the readings, choose several topics that you would like to explain to your client to pinpoint the advantages or disadvantages of switching from a sole proprietor to a corporation.

· Discuss the principles of ethical and professional conduct relating to corporate, business, and trust taxation supported by standards/practice.

Part 2:

This week’s assignment will be a draft of Part 2 of the portfolio project. The final version of Part 2 of the project is due, along with Part 1, in their final versions with Part 3 as the Portfolio Project for this class.

Please use the provided excel template to calculate the below:

Alexandria has also requested that you compute the income tax provision for Florida Chocolate Inc. as of December 31, 20×3. The company’s income statement for 20×3 is provided below:

Florida Chocolate Inc.
Statement of Operations
							at December 31, 20×3
Net sales	$ 20,000 ,000
Cost of sales	12,000,000
Gross profit	8,000,000
Compensation	500,000
Selling expenses	750,000
Depreciation and amortization	1,250,000
Other expenses	1,000,000
Total operating expenses	3,500,000
Income from operations	$4,500,000
Interest and other income	25,000
Income before income taxes	$ 4,525,000

You have identified the following permanent differences:

Interest income from municipal bonds
$

10,000

Nondeductible stock compensation
5,000

Nondeductible fines
1,000

Florida Chocolate Inc. prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

EOY

Deferred

Taxes

BOY

Current

EOY

EOY

Deferred

Year

Cumulative

Deferred

Temporary Differences

Taxes

Change

T/D

20,000

10,000

Florida Chocolate Inc.
Temporary Difference Scheduling Template
	BOY		Current				EOY
Taxable				Deferred		Year		Cumulative
	Temporary Differences			Taxes		Change		T/D
Accumulated depreciation	(1,050,000)	(500,000)	(5,500,000)	(1,155,000)
Deductible
Taxes
Allowance for bad debts	21,000		10,000	110,000	23,100
Prepaid income	0		20,000	4,200
Deferred compensation	10,500	60,000	12,600
Accrued pension liabilities	105,000	100,000	600,000	126,000
Total	136,500	140,000	790,000	165,900

a. Compute Florida Chocolate Inc.’s current income tax expense or benefit for 20×3.

b. Compute Florida Chocolate Inc.’s deferred income tax expense or benefit for 20×3.

c. Prepare a reconciliation of Florida Chocolate Inc.’s total income tax provision with its hypothetical income tax expense of 21 percent in both dollars and rates.

Part 3:

This week’s assignment is to complete Part 3 of the portfolio project and to submit the final versions of Part 1 and Part 2 of the project for a completed Portfolio Project.

Please prepare a hypothetical tax calculation based on the different type of entities given the same amount of taxable income.

· What would the client tax liability look like if the entity was a C Corp, an S Corp, or a sole proprietorship?

· Prepare a hypothetical tax return, using software, as either a C or S Corp based on your determination of which would be better for this client.

Submit the final Portfolio Project (Parts 1 through 3 in their final versions) for grading.

Part 4:

Please prepare a PowerPoint presentation that presents the previous three weeks’ findings as if you were presenting them to the client.

Writing/Presentation Requirements:

· The body of this paper in total should be 7-8 pages (not including cover page, abstract or references) but not more than 9 pages.

· Embed all software charts/tables/diagrams into the paper

· A minimum of 3 scholarly references in total are required from the KU Library, academic journals, professional journals, and/or appropriate authoritative references such as FASB Codification System, COSO, COBIT, Audit Standards, etc.

· Be sure to provide specific examples throughout your paper to back up your statements

· All research papers are submitted in APA format for sources and citations.

· Please remember to run your documents through Plagiarism Check to review the percentage taken from other sources prior to uploading here for final grading and the final plagiarism check.

· Please use the Writing Center as needed

· View the grading rubric

Technology/Collaborative Activity:

· You will be using various software to create the exhibits to your paper

· You will be presenting your findings from the project to the class using the voice-over feature in PowerPoint. Please be sure the audio is clear and the file is in the Week 4 Presentation discussion board.

· You will be collaborating with other classmates on their presentations and answering any questions about your own presentation.

2

Simple Heart

Valery Salazar

Keiser University

Gregory Gosman, C.P.A

Corporate, Business, and Trust Tax

February 12, 2023

MEMO

To: Our Valued Client

From:

Tax Professional

Date:2/2/2023

Re: Four Different Legal Entities Recognized by the US Tax System

This memo is intended to provide an overview of the four different legal entities recognized by the US tax system and the fundamental differences in the characteristics across business entities, as well as the pros and cons of transitioning from a sole proprietorship to a corporation. Additionally, the principles of ethical and professional conduct relating to corporate, business, and trust taxation will be discussed.

The four legal entities that are recognized by the US tax system are sole proprietorships, partnerships, corporations, and limited liability companies (LLCs) (Greenman et al., 2021). These entities differ in terms of the way they are taxed, the way they are managed, and the level of liability that owners have for the debts of the business.

A sole proprietorship is the simplest and most common business structure. One person owns and manages them, and that person is liable for all financial obligations. A sole proprietorship may be set up quickly and easily, with no additional paperwork or registrations needed at the state level. [Title of book] (Lidstone, 2021). They are also relatively inexpensive to operate, as the owner does not have to pay any taxes on the business’s profits. The downside of a sole proprietorship is that the owner is personally liable for any debts or legal claims against the business.

Similarly, to how one person may own and operate a sole proprietorship, two or more individuals can own and operate a partnership. However, each partner is personally liable for any debts or legal claims against the business (Hatfield, 2019). Partnerships also do not require any special filing with the state and are relatively inexpensive to operate. The upside of a partnership is that the profits are split between the partners, which can be beneficial for tax purposes.

Corporations are more complex than sole proprietorships and partnerships, as they are distinct authorized organizations from their proprietors. This means that the owners are not personally liable for any of the business’s debts or legal claims (Lidstone, 2021). Corporations are also more expensive to set up and operate, as they require special filing with the state and must pay taxes on their profits. The upside of a corporation is that the owners can benefit from limited liability protection, which can be beneficial in certain situations.

In many ways, limited liability companies (LLCs) combine the best features of corporations and partnerships. As separate and distinct entities from their owners, the owners cannot be held liable for the business’s debts or legal claims. Creating and running an LLC also has a low financial impact (Uzoka, 2023). If the business owner has a higher marginal tax rate than the firm, then more of the business’s profits will be subject to that higher rate.

When considering whether to transition from a sole proprietorship to a corporation, there are several factors to consider. One of the main advantages of transitioning to a corporation is the limited liability protection afforded to the owners. This implies that the proprietors are never individually accountable for any of the company’s liabilities or legal demands, which might give more security in certain circumstances (Lidstone, 2021). Corporations can benefit from certain tax advantages, such as the ability to deduct business expenses from taxable income.

However, there are also some potential disadvantages of transitioning to a corporation. Corporations are more expensive to set up and operate than sole proprietorships, as they require special filing with the state and must pay taxes on their profits. Additionally, the owners of the corporation must comply with certain legal requirements, such as holding annual meetings and filing annual reports.

The principles of ethical and professional conduct relating to corporate, business, and trust taxation are based on standards and practices that are set forth by the Internal Revenue Service (IRS) (Pfeifer & Yoon, 2019). These standards and practices include the obligation to accurately report income and other taxable items, the responsibility to pay taxes in a timely manner, and the requirement to keep accurate records of all financial transactions (Pfeifer & Yoon, 2019). Additionally, tax professionals must adhere to certain ethical codes of conduct, such as acting in the best interests of their clients and treating them with respect.

In conclusion, it is important to understand the four different legal entities recognized by the US tax system, as well as the fundamental differences in the characteristics across these entities. Additionally, when considering a transition from a sole proprietorship to a corporation, it is essential to weigh the pros and cons of such a move. Tax professionals must adhere to certain ethical and professional standards when dealing with corporate, business, and trust taxation.

I appreciate your taking the time to read this. Should you have additional concerns or would want to pursue this matter deeper, please get in touch with us.

Sincerely,

Tax Professional

References

Greenman, C., Esplin, D., Johnston, R., & Richards, J. (2021, July 7).
Understanding Ethics in the Varying Segments of the Accounting Profession. Papers.ssrn.com. https://ssrn.com/abstract=3882222

Hatfield, M. (2019). Professionally Responsible Artificial Intelligence.
Arizona State Law Journal,
51, 1057. https://heinonline.org/HOL/LandingPage?handle=hein.journals/arzjl51&div=33&id=&page=

Lidstone, H. K. (2021). LLC or Inc.? Entity Selection for a Small Business.
SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3938182

Pfeifer, M. G., & Yoon, S. J. (2019). IRS weapons against aggressive tax planning1.
Trusts & Trustees,
25(1), 69–74. https://doi.org/10.1093/tandt/tty170

Uzoka, N. C. (2023). ADOPTING A LIMITED LIABILITY PARTNERSHIP FOR THE LEGAL PROFESSION: A CRITICAL REVIEW FROM NIGERIA’S PERSPECTIVE.
LAW and SOCIAL JUSTICE REVIEW,
3(2). https://nigerianjournalsonline.com/index.php/LASJURE/article/view/2969