Situation:

You are a tax partner in a regional CPA firm. One of your fellow partners requests you to assist

in a presentation to a new client, John Smith. John is a business executive with a scientific

background and is about to form a new business. John is a married taxpayer with three children.

He is currently in the 37% federal marginal tax bracket. John has approximately $200,000 to

invest in the new business. John plans to start a pharmaceutical consulting company. He has

developed a business plan and has obtained available financing of $ 1.2 M secured by his assets.

The business will be located in New Jersey or Pennsylvania with ten employees initially. John

projects a loss in the first year of operation of approximately $70,000 due to startup costs,

including marketing and business development. He is interested in protecting his personal assets

from the creditors of the business venture. John anticipates making $160,000 of fixed asset

purchases during the first year of operation. Three of Johns friends, Todd who is an attorney

with a scientific background, Scott, who is an IT specialist, and Kate, who is a marketing/public relations and program manager, will join the business venture. Todds contributions to the business venture will his legal services, business advice, and cash of approximately $20,000.

Scott will only contribute to his services. Kate will contribute $50,000 and her services to the

business. Since the business is projected to be profitable in year two, John may seek funding from outside investors for expansion in year three. He does not want a large number of investors.

When reviewing Johns prior year individual tax returns and supporting documents, you discovered an IRS notice regarding a math error on Johns 2017 Form 1040, which would result in a small payment of tax.

Requirements:

1. What advice would you give John regarding the IRS notice?

2. Based on the above facts and the recently enacted 2017 Tax Act, what tax planning advice would you give John?