Question

for 5 years, mandy has owned and operated a riverside bakery and cafe called Riverboats. the bakery is too small and mandy spoke to her landlord jim about expanding the business. mandy and jim spoke to abe, a real estate developer and he proposed an expansion to riverboats. mandy, jim and abe would like to be buisness partners but but they are not certain of the type of entity they should form. mandy and jim would like to contribute $1,000,000 in cash. in addition mandy will contribute bakery equipment and cafe furnishings at a value of $500,000. they each agree on a 40% interest in riverboats. abe has no money so he will contribute services for an exchange of a salary and 20% interest in riverboats. you are a highly priced accountant. please suggest the type of entity that would best work for the trio. what are the tax consequences of your selection and what issues might arrise later in the life of the entity?

Answer 1

In my opinion

Since the Business of Bakery named Riverboats is already in existence and running good, So it is better to expand the Bakery business

Tax consequences:

When you own a bakery, you have a multitude of expenses you must account for. A bakery owner is in the business of making baked goods like bread, donuts, cakes and a variety of desserts. Fortunately, the IRS recognizes all of these as business expenses that are deductible to you. You must understand which expenses are deductible and be sure not to deduct your expenses twice

Cost of Goods Sold

Baking supplies are considered part of the cost of doing business for a bakery. You may deduct raw materials like flour, sugar and other items you buy and then resell to customers as a packaged product. These raw materials are classified as a cost of goods sold expense. You must generally inventory these items and value them at the beginning and the end of the year. You may also calculate expenses related to storage of your supplies as well as the labor cost to produce your baked goods. Finally, you may deduct the overhead necessary to run the business.

Baking Equipment

Mixers, a wide assortment of spoons, whisks, baking sheets, proofing machines and other kitchen equipment are all deductible as business expenses. This deduction may be taken using IRS Form 4562 and depreciating under the MACRS depreciation model outlined by the IRS. Office furniture for your personal office would be depreciated over seven years while bakery equipment would depreciate over 15 years.

Electronics

Electronics include computers you use in the course of business. This category of expenses also normally includes your cash register and any software you use. You may depreciate the cost of the electronics or you may deduct the entire cost in the first year the equipment is placed into service. If you're deducting the entire cost of the equipment, use Schedule C on your 1040 tax return.

Licensing and Permits

Licensing and permits are normally required for bakeries in most states. Additionally, you must comply with the Occupational Safety and Health Administration (OSHA) regulations and obtain any permits required. All of these costs are deductible if you take the capitalization deduction when starting your business. Costs are deductible up to $5,000 as of the time of publication. For renewal of your permit and licenses, you may take the deduction on Schedule C as an ordinary business expense

The issues that may arise later regarding the Share of interest in entity

And regarding the salary of Abe and the business has to work based on expertise of mandy only so it may have the issues of growth and maturity