Tax Research Problem

Edward Abramov, a professional novelist, is in the process of drafting his first best-seller

publication, which is expected to be released by the publisher in March 2022. Edward is

originally from Russia and he is also a US permanent resident. Edward's novel is co-authored

with Robert White, a more experienced novelist, who is a US citizen. Edward expects to

generate approximately $750,000 in revenues in 2022 from book sales, conferences, interviews

and awards. They expect to spend about $50,000 mainly in publisher fees and travel expenses

during 2022. Ed and Robert estimate that they will spending roughly $5,000 ($3,000 in research

and $2,000 in fees) in 2021 to publish the book, but they will not generate any revenues in

2021. Ed and Robert would like to form a business entity, in which they plan to go 50/50. Ed's

AGI was $45,000 and Robert's AGI was $110,000. Prior to this business venture, they both

recorded revenues and expenses from publishing in Form 1040 (Schedule C) as sole proprietors

in 2020. They are both actively involved in Publishing books, which is their main business

activity.

On February 1 2021, Edward and Robert come to you for some tax advice on what business

entity they should create to minimize their tax exposure. They are planning to incorporate their

business in Florida. Edward and Robert do not have much accounting/tax knowledge. Edward

would like to pay the least amount of taxes in future tax years. Robert mentioned he is a bit

worried that his book publication may generate controversy and potential lawsuits given that

he plans to reveal some "secrets" of people that he dealt with in the past. They would like to

make this business entity simple to manage and they are not considering adding more business

partners.

Assumption: According to the recent estimates given by U.S taxing authority, the average

compensation for a writer is in the range of $30,000-$50,000.

Questions:

Which form of business do you recommend Ed and Robert to start in these tax years and why?

What tax implication does this business entity entail? What are the potential advantages and

disadvantages of your advice for Robert and Edward? What tax forms will they be required to

file in 2021 and subsequent years?