Bob Jones has a small repair shop that he has run for several years as a sole proprietorship. The proprietorship uses the cash method of accounting and the calendar year as its tax year. Bob needs additional capital for expansion and knows two people who might be interested in investing in the business. One would like to work for the business. The other would only invest.
Bob wants to know the tax consequences of incorporating the business. His business assets include a building, equipment, accounts receivable, and cash. Liabilities include a mortgage on the building and a few accounts payable, which are deductible when paid. Assume that Bob’s ordinary tax rate is greater than 25%.
Required:
Write a memorandum to Bob explaining the tax consequences of the incorporation. As part of your memorandum examine the possibility of having the corporation issue common and preferred stock and debt for the shareholders’ property and money.