1. Tax issues for Don and Steve to consider in their corporation: – Formation ex

1. Tax issues for Don and Steve to consider in their corporation:
– Formation expenses: The fees paid to the attorney for drafting the corporate charter, filing forms, and writing bylaws are considered start-up costs. They should determine whether these expenses can be deducted immediately or should be amortized over time.
– Depreciation of assets: They acquired inventory, furniture, display equipment, and office equipment. They need to determine the appropriate depreciation method and recovery period for each asset.
– Payroll taxes: Since they hired a sales staff and clerical personnel, they must ensure that they are correctly withholding and remitting payroll taxes, such as Social Security and Medicare taxes, and filing the necessary employment tax returns.
– Bonuses: The corporation accrued bonuses for Don and Steve. They should consider the timing of recognizing the expenses and the deductibility of the bonuses based on when they are paid.
– Estimated tax payments: The corporation made timely estimated tax payments throughout the year, which helps avoid penalties for underpayment of taxes. However, they should review the amounts paid to ensure they are sufficient to cover the tax liability.
– Tax planning for sales fluctuations: They experienced a decline in sales due to the closure of local golf courses. They should analyze their sales patterns and plan for fluctuations in future years to optimize tax planning and cash flow management.
– Tax reporting and compliance: The bookkeeper may not be knowledgeable about taxation, so Don and Steve should ensure that the corporation’s tax returns are accurately prepared and filed on time. They may need to engage a tax professional or provide training to the bookkeeper.
2. Income tax result from the $70,000 if Lemon is:
a. An LLC (with no election filed): In this case, the income of the LLC would flow through to Jonathan as the sole owner. The $70,000 long-term capital gain would be included in Jonathan’s individual tax return. Since Jonathan is in the 37% tax bracket, he would be subject to the 20% tax rate for net capital gains. Therefore, he would owe $14,000 ($70,000 * 20%) in income taxes on the long-term capital gain.
b. A C corporation: If Lemon is a C corporation, the $70,000 long-term capital gain would be taxed at the corporate level. C corporations have their own tax rates, which are separate from the individual tax rates. The corporate tax rate for long-term capital gains is generally lower than the individual tax rates. However, the exact tax rate would depend on the corporate taxable income and the applicable corporate tax brackets.