Strategy Tax Planning

Case Study #3 - Tax Planning, Business

Ben Franklin, Inc. ("BFI") is a C Corporation that was incorporated in 2018 and manufactures bifocal lenses. BFI is located in California. BFI is owned 60% by Ben with the remaining 40% split equally between his two kids: George and Abraham. The CFO of BFI is unhappy with the current tax provider and has engaged your firm, CPP LLP, to prepare the tax provision journal entries as BFI is undergoing an audit of its financial statements for the year 2020. In addition, BFI has requested you to review their tax profile and see if there are any planning that could be done for the 2021 returns. If BFI likes the ideas presented, BFI will engage your firm to take over the tax return compliance as well.

The ultimate plan for the shareholders of BFI is to sell BFI to a private equity group by the year 2025 and they would like to minimize their tax liability in the interim and upon an ultimate sale in the best way possible. You scheduled a meeting with the CFO on May 13^th to present your ideas and provide recommendations on planning options to consider. The CFO has limited time and has requested your presentation be no longer than 20 minutes as he has a lot of meetings to attend on the 13^th. The CFO requested the presentation format be Microsoft Powerpoint and that all members of the engagement team present during the meeting.

To prepare for this meeting, you had a preliminary fact gathering phone call with the CFO. During your phone call, you learned that BFI elected to be a C Corporation because Ben's friend, TJ, recommended it to him because of Qualified Small Business Stock benefits. Although Ben trusts TJ, since forming the C Corporation Ben and his sons have heard about other entity types, S Corps and LLCs, and are curious about how those entities are taxed and if being a C Corporation is still the most advantageous for them. Further, the CFO informed you that Ben and his sons have not taken any dividends from BFI since inception as they prefer to keep all the cash in the business for the time being to support the growth of the business. However, they do pay themselves a reasonable salary of $250K a year and the overall wage cost for the business is approximately $4M a year. The CFO said the Company expects to continue to remain profitable, and the 2021 financial data can be used as an estimate for 2022 - 2025 for projection purposes. Lastly, the CFO informed you that Ben and his sons would like the CPA to handle their personal tax returns as well. As Ben is planning on retiring in the next year, he is curious as to what options there are to pass his ownership in the business to his sons in a tax efficient manner as Ben has heard gift and estate taxes can be very costly. In addition to Ben's ownership interest in the business, he also owns a variety of assets such as stocks, bonds, etc. with readily fair market value of $20M.

The CFO has indicated that he would like to see a forecast of what his 2021 tax liability is expected to be using the current tax methods and entity structure in place, and then would like to discuss what planning can be done to reduce the federal and state tax liability. Further, the CFO indicated since he has very minimal tax knowledge, he would like to receive supporting calculations for any tax planning recommendations so he can review them after the meeting. The CFO has also requested that an estimate of the amount of fees the implementation of the tax planning will cost so he can include the expense in his 2022 cash flow budget.

Other Facts

You sent a request list to BFI to gather preliminary data for your analysis and you received the following information:

BFI is an accrual method taxpayer and has had gross receipts of $5M, $8M, and $15M the past 3 years.

BFI's book to tax reconciliation for the 2020 return and 2020 FS (excluding the tax provision entry, which CPP LLP is engaged to calculate). See attachment.

BFI's 2021 forecasted FS. See attachment

Copy of BFI's 2020 tax return. You noted the following:

The Company does not currently claim any income tax credits.

The Company only files income tax returns in California.

The California returns reflected 100% sales apportionment to the state of California.

The Company had purchased $2M of equipment used in its manufacturing business during 2020. The Company elected to not claim bonus depreciation.

The Company has net operating loss carryforwards from 2019 of $8M for federal and $6M for California remaining.

The Company plans on expanding its California operations by increasing headcount and investing in a new warehouse where the Company will conduct research and development activities for a new quadfocle product not yet created.

BFI's state apportionment information. You noted the following:

Out of the $15M in sales in 2020, $8M in were shipped to Nevada and $4M were shipped to Texas. The remaining sales were to California customers.

BFI has one employee located in Nevada, a customer service representative, and one employee in Texas, a sales representative. BFI does not have any more employees in any other states.

The Company expects to be able to sell for $75M in 2025. However, the Company is unsure if this is the path they want to pursue if the tax liability will be significant. For any projection purposes, assume tax basis at the time of sale is $10M.

Question 1: Please Review the 2021 tax profile.

Note: Please put Computations, Accounting Articles, and Needed Tables to present Integrity for reviewing 2021 based on a persuasive Tax Plan Strategy.

Question:2 Find the prediction for 2025, articles, and computation based on Strategy Tax Planning for persuasive with some persuasive explanation completely (based on all information mentioned in the Case Study). Also, please show computations and bring Accounting articles with Debit and credit)

Note: If you select each kind of Tax Plan strategy, please present the assumption and calculate the tables and Accounting Articles step by step to persuade for predict the year 2025.

* Please consider all relative Information in the case study for answering the questions.