Your friend Millie is starting a new business venture with her best friend Bob, and you have agreed to provide tax consulting services on an as-needed basis. Millie and Bob plan to name the company Oh Gnome You Didnt (Gnome), although they havent yet decided on the type of legal entity for the business. The business plan is for Gnome to design and construct whimsical gnome gardens for its clientele. Millie will manage Gnomes operations full-time as an employee in exchange for reasonable compensation. Unfortunately, Bob has gnomophobia, better known as the fear of garden gnomes (its a real thing). Therefore, Bob intends to stay far away from Gnomes gnomes, and will not participate in Gnomes day-to-day operations. Millie would prefer to incorporate Gnome as a C-corporation because the new 21% corporate tax rate is much lower than her individual marginal tax rate of 35%. Bob would also like to incorporate Gnome, but he wants to avoid double taxation on shareholder distributions; therefore, his preference is for Gnome to make an election to be an S-corporation in its initial tax year. Millie and Bob are currently modeling the after-tax return impact of choosing a C-corporation versus an S-corporation, and they have requested your assistance to help them understand some confusing tax rules. Their specific questions they need your advice on are as follows: 1. Weve heard something about a new tax law that lets you deduct 20% of your income, but weve also been told that the deduction isnt available to all businesses. Will Gnomes income qualify for this deduction if (A) it is a C-corporation or (B) it is an S-corporation? 2. Were also unsure about the 3.8% net investment income tax on individuals. Will either of us be liable for this tax if (A) Gnome is a C-corporation or (B) Gnome is an S-corporation? 3. Were worried about messing up the election if we decide that Gnome should be an S-corporation. When exactly does our S-corporation election have to be made if we want to ensure Gnome will be treated as an S-corporation beginning with its initial tax year? Supplementary Information Millie is a single taxpayer, and her adjusted gross income (AGI) is estimated at $100,000. Bob is married and files a joint tax return with his wife; together their AGI is estimated at $425,000. Facts The Facts section should ONLY include facts required for the reader to make an informed decision about the accuracy of your research conclusions. You should not include any facts that are inconsequential. When the facts include numerical details such as multiple dates or amounts, you should consider using a bulleted format or table layout to enhance comprehension of the details. Issue The Issues section is where you will list the questions your client has asked you to address. When there is more than one issue to resolve, using a numbering format is an effective way to organize the memo. Avoid creating issues that arent relevant to the matter at hand; but on the other hand, you should be all-inclusive with your issue identification. Conclusion The Conclusion section is where you will provide the solutions to the clients issues. If you used a numbered format in the Issues section, you should follow the same format. Do not provide conclusions for any issues not identified in the Issues section. You should INCLUDE the solution but EXCLUDE the reason for the solution. Example: if the solution to an issue is 4 and the computation was 8 + 12 7 + 32 41= 4, you would state The answer is 4 in the Conclusion section. The computation belongs in the Analysis section. Analysis The Analysis section is where you will defend your conclusion(s). You should analyze each issue separately; if you used a numbered format in the Issues section, you should follow the same format. Your analysis of each issue should begin with relevant Internal Revenue Code statutory/regulatory cites. If you require further support for your conclusion, you may then refer to weaker defenses (i.e. revenue rulings/procedures, court cases, IRS web site references, etc.)