Tax Planning Cases 107. William, Daniel, and Thomas are brothers who have decide

Question

Tax Planning Cases

107. William, Daniel, and Thomas are brothers who have decided to form an engineering firm. Although Thomas has an MBA degree and will function primarily as the firm’s financial expert, he has no formal tax knowledge. William and Daniel are bringing clients from their former firm, but Thomas anticipates that the new firm’s client base will not be large enough to avoid a tax loss for 3 years. After year 3, the firm’s profits should increase rapidly. By year 6, he anticipates that the firm will generate a substantial profit and employ 25 people. Because Thomas is unsure whether the firm should operate as an S corporation, partnership, or corporation, he has hired your accounting firm to guide him. Thomas is particularly concerned with how the form of organization would affect the

a. Pension plan the firm will adopt

b.Firm’s ability to compensate current owners and employees and attract new owners or employees

c. Total tax liability of the owners

d. Firm’s ability to distribute cash and/or property

Write a letter to Thomas explaining how the organizational form of the business affects each of the items he has mentioned.

Explanation / Answer

Following are the answers to the asked questions here:

i) Pension Plan:

Well, after studying the information given above, the best pension plan which will be most suitable for the said company will be SIMPLE IRA. Savings Incentive Match Plan for Employees (SIMPLE) IRA is suitable for many small businesses. If you have 100 or less employees who earns $5,000 or more on payroll, this plan could work for you.

ii) Ability to Compensate:

So, after going through every detail of the mentioned company, we can say that if the company goes according to the said plan, it is very much likely that it will be able to compensate current owners and employees and attract new owners or employees.

iii) Tax Liability:

The given information is an indicator to the fact that the new firm’s client base will not be large enough to avoid a tax loss for 3 years. So, it is evident that liability of tax upon the owners of the firm or the company will be imposed by the authorities.

iv) Ability to Distribute:

Given the plan of the firm in the next 6 years or so, it is very much likely that the firm will be able to distribute cash and property.

Regards.

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