Question

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You are currently working at a mid-sized certified public accounting firm. Your client is Bob Jones. Bob, age 60 and single, has recently retired from IBM. He has $690,000 available in his 401(k) fund and he is thinking of using that money to open a used car business that will be located at 210 Ocean View Drive in Pensacola, Florida. Bob has estimated that the business might make $300,000 in taxable income. Bob’s personal wealth including investments in land, stocks, and bonds is about $14,000,000. He reported an interest income of $20,000 and dividend income of $6,000 last year. The $14,000,000 includes land worth $9,000,000 that Bob bought in 1966 for $450,000. Bob has hired your firm for professional advice regarding whether he should operate as a sole proprietor, a partnership, an S corporation, or a C corporation. He is also considering transferring a possible 40% interest in his new business to his daughter Mandy, age 23 and single.

Required

Based on the decision of accrual vs. cash basis, describe when revenue would be recognized on the sale of inventory, and how the accrual reporting differs from cash basis.

Answer 1

s corporation and C Corporation are separate 61 different legal entity from its owner and can be formed by Ring prescribed form as per the statutory requirement. Both are corporate and need complying with the same statutory requirement. Both Corporation has to adopt bye laws, issue stock, holding shareholders and directors meeting, filing annual report and paying annual lees. Only difference is that the C Corporation has two level of taxation while s corporation has one level of taxation. C income earned as well as when the similar distributed the same to shareholders. In case of S corporation Accrual basis of accounting is mandatory for both s corporation and C Corporation. Coporation has to pay tax on income distributed among shareholders is not payable. For filling of income tax return S corporation C Corporation can use form 1120S and 1120 correspondingly Il accrual basis is followed then income on sale of inventory is accepted at the time of sale. On the other hand if cash basis is followed then income from sale of inventory will be recognizing when cash received beside sale.