Tax Implications of Business Transactions and Succession Planning for Self-Employed Individuals and

Calculating Business Income for Tax Purposes

Mr. Duncan has asked you to calculate the company’s income from a business for tax purposes for the year ended June 30.
Question 2
Donna is married to Don and they have two children, Danielle, age 25, and Susan, age 15. Donna earns $250,000 annually while Don earns $100,000. Danielle works full time and earns $30,000 annually while Susan is still in high school and doesn’t have any income. Donna has been looking for ways to pay less tax and a friend of hers has suggested that she take advantage of the lower tax brackets of her husband and children. With $100,000 of extra cash in her bank account she is considering the following options and would like your advice as her accountant. Assume the following combined tax rates:
Donna 53%
Don 41%
Danielle 25%
Susan —
Transaction with Don (husband):(1) Loan the $100,000 to her husband at 0% interest. He would invest it in a bond earning 3%.
(2) Give the $100,000 to her husband. He would invest it in a bond earning 3%.Transaction with Susan (minor child):
(3) Loan the $100,000 to her 15-year-old daughter at 0% interest. She would invest it in a bond earning 3%.
(4) Give the $100,000 to her 15-year-old daughter. She would invest it in a bond earning 3%.
Transaction with Danielle (adult child):
(5) Loan the $100,000 to her 25-year-old daughter at 0% interest. She would invest it in a bond earning 3%.
(6) Give the $100,000 to her 25-year-old daughter. She would invest it in a bond earning 3%.
REQUIRED:
Provide your advice to Donna about the tax implications of each transaction and let her know what you would do.
Question 3
Kingston Carpets Inc. (‘‘Kingston’’) has been operating a retail carpet business out of the same location for the past 18 years. It has been very successful in gaining business from the local developers, who use Kingston almost exclusively to provide their flooring. In addition, Kingston is used extensively by the area insurance adjusters for carpet replaced due to fire and other damages. This business did not come to Kingston overnight. The owners, Andy and Sue Greene, have always spent much of their time promoting their business to these markets. Both Andy and Sue are avid golfers. They each belong to a
different golf club, in order to be members at the clubs where most of their customers play. They find that golf is an activity that has paid off, since they have conducted a significant amount of business through their contacts at the golf clubs. They will often use these clubs for lunch and dinner meetings with customers, as well as for the company’s
seasonal holiday party.
Last year, the company bought a building across the street from its original retail store. The previous owner had been leasing out the building and had not spent much money on repairs over the last five years. As a result, while Kingston paid a relatively low price for the property, it has had to spend a considerable amount on repairs over the past year. Prior to this purchase, Kingston had been leasing its space.
To maintain their image of success, Sue and Andy both drive expensive cars and often entertain customers at their cottage or on their boat. This approach seems to work, and their customers are always asking when the next outing will be. Besides treating their customers well, Sue and Andy also treat their employees well. All employees belong to the group benefit plan that provides extended health care, dental, life insurance, and disability coverage. Because of the low coverage from the company’s group life and disability insurance, Andy and Sue have had the company take out individual policies on both of them. The beneficiary on the life insurance policies is the company, and on the disability policies the beneficiaries are Andy and Sue. One of their valued employees was recently divorced and during the divorce her family
home was sold. In order to keep her concentrating on business, Andy and Sue had the company loan her enough to buy a house. The loan was secured by the house and no interest was charged. At that time, the company did not have enough cash to make this loan so it had to borrow the funds at prime plus 1/2%. In addition to all of this, Andy and Sue have been actively involved in a number of charitable and political activities and have made donations to both. Even these activities have turned into business opportunities. Last year, they gave a donation to a local charity and shortly thereafter they received an order for the new carpet that was to go in the charity’s offices.
REQUIRED:
Advise Sue and Andy on the tax implications of their situation and that of Kingston
Carpets.
Our client, Silvia Fields, is the self-employed operator of a VIP delivery service. Three years ago, Silvia purchased her only asset, a van, for a cost of $24,000. The van has been used 100% for business deliveries since it was purchased. The UCC balance in Class 10 at the beginning of this year is $14,280. On March 1, Silvia sold the van for $10,300 and leased a new van for $400 a month.
REQUIRED:
Please draft the contents of a letter to Sylvia explaining the income tax implications of the disposition of the van.