Dear Team,
I just got off the phone with our client, Mia Way. She has asked us to perform some calculations for her and her new business. She would like us to determine if, based on the information she has provided us, using the cash method of accounting for her first year of operation is advantageous, and to please quantify the value of using the cash method for the first year, if there is value to using it. When we make this calculation, please use a 5% discount rate to compute the net present value.
Facts:
Mia started Mia Way PC in February 2022. It has billed clients $3,500,000 in services and incurred $800,000 in operating expenses at the end of the first calendar year (December 31). Also by the end of the calendar year, her company has collected $2,900,000 of its billings and paid $670,000 of its $800,000 of expenses. Mia anticipates she will collect the remaining outstanding bills and pay her remaining expenses by March 2023. She has adopted a calendar year for federal tax purposes. As I stated earlier, MiaWay may use either the cash method or accrual method of accounting for the first tax return. And we need to determine if using cash method is advantageous and if so, by how much.
Please create a client letter addressed to Mia Way, and conclude whether the cash basis of accounting is advantageous and by how much and include the calculation you used to arrive at your conclusion.
Thank you, team, in advance for your work on this task for Mia.
Tax Manager
Here is an example of a sample client letter, please follow a similar format
Dear Mr. Johnson, I hope this letter finds you well. Thank you for requesting my advice concerning the tax implications installing new greens at Highland Golf Club (Highland). To ensure a complete understanding between us, I am setting forth the pertinent information about the advice that I will be rendering. I use my judgment in resolving questions where the tax law is unclear or where conflicts may exist between the taxing authorities. Unless you instruct me otherwise, I resolve such questions in favor of Highland whenever possible. However, the opinion I express does not bind the Internal Revenue Service (IRS). Thus, I cannot guarantee the outcome in the event the IRS challenges my opinion. Highland remains responsible for any tax or related liabilities resulting from an adverse IRS or judicial decision. The law imposes various penalties when taxpayers understate their tax liabilities. Tax professionals also may be subject to penalties when an understated tax liability is based on a position that the professional recommends but has no realistic possibility of being sustained. A realistic possibility of success exists if the tax professional has a good faith belief that the position has at least a 1 in 3 chance of being sustained on its merits if challenged. The research I conducted was based on the federal tax laws applicable at the date of the installation of the new greens. It is my understanding that Highland restructured their golf course's greens after withstanding severe hurricane damage. The improvements included installing computer-controlled irrigation and drainage systems; the cost of $1,000,000 represents $250,000 of reshaping the greens and $750,000 for the equipment and installation. The prior cost of constructing the golf course's "natural" greens, without any dedicated irrigation system or other technology, was capitalized to the cost of the land and therefore has not been depreciated for either book or tax purposes. A deduction for depreciation is allowed under 167(a) for the deduction of depreciation that reflects the normal use of and wear and tear on a business's property. $1.167(a) - 2 distinguishes that 167 applies to land improvements but not to the cost of the land itself. Land has an unlimited useful life and is therefore not depreciated. Rev. Rul. 55-290 determined that the construction costs for golf course greens should be accounted for as land rather than as land improvements. However, this ruling does not address greens with an embedded technology. Rev. Rul. 2001-60, which modified and superseded Rev. Rul. 55-290, distinguishes between two types of golf course greens: "natural" greens with no belowground technology and "modern" greens with belowground irrigation or drainage systems. Rev. Rul. 2001-60 indicates that natural greens should continue to be accounted for per Rev. Rul. 55-290 and therefore not be depreciated. In restructuring its greens and adding below-ground irrigation and drainage systems, Highland has installed modern greens and replaced their previously natural greens. Rev. Rul. 2001-60 discusses the deterioration of the equipment associated with drainage systems used in modern greens (tiles, pipes, etc.) and goes on to define a 20-year useful life for these components of modern greens; in your case $750,000 will be depreciated. However, the costs of moving, grading and shaping the soil to install the drainage system should continue to be added to the value of the land and not be depreciated, consistent with 1.167 (a)-2 and Rev. Rul. 55-290. Therefore, $250,000 should be capitalized to the cost of the land. Per 168(b)(1). Highland should depreciate the drainage/irrigation equipment costs using MACRS (i.e., 200\% declining-balance depreciation). I am available to discuss this issue with you in greater depth at your convenience. Should you have any questions or concerns, please feel free to contact me at any time. Sincerely, Megan Manager Dear Mr. Johnson, I hope this letter finds you well. Thank you for requesting my advice concerning the tax implications installing new greens at Highland Golf Club (Highland). To ensure a complete understanding between us, I am setting forth the pertinent information about the advice that I will be rendering. I use my judgment in resolving questions where the tax law is unclear or where conflicts may exist between the taxing authorities. Unless you instruct me otherwise, I resolve such questions in favor of Highland whenever possible. However, the opinion I express does not bind the Internal Revenue Service (IRS). Thus, I cannot guarantee the outcome in the event the IRS challenges my opinion. Highland remains responsible for any tax or related liabilities resulting from an adverse IRS or judicial decision. The law imposes various penalties when taxpayers understate their tax liabilities. Tax professionals also may be subject to penalties when an understated tax liability is based on a position that the professional recommends but has no realistic possibility of being sustained. A realistic possibility of success exists if the tax professional has a good faith belief that the position has at least a 1 in 3 chance of being sustained on its merits if challenged. The research I conducted was based on the federal tax laws applicable at the date of the installation of the new greens. It is my understanding that Highland restructured their golf course's greens after withstanding severe hurricane damage. The improvements included installing computer-controlled irrigation and drainage systems; the cost of $1,000,000 represents $250,000 of reshaping the greens and $750,000 for the equipment and installation. The prior cost of constructing the golf course's "natural" greens, without any dedicated irrigation system or other technology, was capitalized to the cost of the land and therefore has not been depreciated for either book or tax purposes. A deduction for depreciation is allowed under 167(a) for the deduction of depreciation that reflects the normal use of and wear and tear on a business's property. $1.167(a) - 2 distinguishes that 167 applies to land improvements but not to the cost of the land itself. Land has an unlimited useful life and is therefore not depreciated. Rev. Rul. 55-290 determined that the construction costs for golf course greens should be accounted for as land rather than as land improvements. However, this ruling does not address greens with an embedded technology. Rev. Rul. 2001-60, which modified and superseded Rev. Rul. 55-290, distinguishes between two types of golf course greens: "natural" greens with no belowground technology and "modern" greens with belowground irrigation or drainage systems. Rev. Rul. 2001-60 indicates that natural greens should continue to be accounted for per Rev. Rul. 55-290 and therefore not be depreciated. In restructuring its greens and adding below-ground irrigation and drainage systems, Highland has installed modern greens and replaced their previously natural greens. Rev. Rul. 2001-60 discusses the deterioration of the equipment associated with drainage systems used in modern greens (tiles, pipes, etc.) and goes on to define a 20-year useful life for these components of modern greens; in your case $750,000 will be depreciated. However, the costs of moving, grading and shaping the soil to install the drainage system should continue to be added to the value of the land and not be depreciated, consistent with 1.167 (a)-2 and Rev. Rul. 55-290. Therefore, $250,000 should be capitalized to the cost of the land. Per 168(b)(1). Highland should depreciate the drainage/irrigation equipment costs using MACRS (i.e., 200\% declining-balance depreciation). I am available to discuss this issue with you in greater depth at your convenience. Should you have any questions or concerns, please feel free to contact me at any time. Sincerely, Megan Manager
