How would The Car Wash report and pay tax if it is an S corporation?

The owners of The Car Wash have asked you to prepare their tax return. Their financial statements are audited by a local certified public accounting (CPA) firm, and they have provided them to you as a reference. A copy of the Income Statement and Balance Sheet have been reproduced below. In your discussion, you obtained the following pieces of additional information to prepare the tax return:

  • Name of business owner: Tim Smith, SSN:123-45-6789
  • Tim Smith’s address: 8765 Warner Street, Huntington Beach, CA 92605
  • Name of business owner: Jack Dillard, SSN: 987-65-4321
  • Jack Dillard’s address: 4321 Courtyard Place, Huntington Beach, CA 92605
  • Business name: The Car Wash
  • Business address: 1046 Broadway Street, Huntington Beach, CA 92605
  • Business description: Self-Service Car Wash
  • Employer identification number: 99-8877665
  • Date the business started: January 1, 2008
  • Business will file its return using the cash basis of accounting

Income Statement

December 31, 20XX

Revenue:
Service revenue

$254,603

Expenses:
Advertising

2,520

Depreciation

31,250

Insurance

7,260

Interest expense

36,204

Licenses and fees

7,260

Miscellaneous

4,074

Office expense

8,911

Salaries and wages

67,460

Payroll taxes

9,444

Employee benefits

1,349

Professional fees

1,210

Repairs and maintenance

20,674

Telephone

900

Travel

1,500

Utilities

27,752

Net income before taxes

$26,835

 

Balance Sheet

January 1, 20XX

December 31, 20XX

Assets
Cash

$28,638

$64,979

Buildings and other depreciable assets

555,000

555,000

Accumulated depreciation

(62,500)

(93,750)

Total assets

521,138

526,229

Liabilities and equity
Loans

183,757

167,962

Mortgage

233,229

227,280

Equity investment

160,000

160,000

Retained earnings

(55,848)

(29,013)

Total liabilities and equity

$521,138

$526,229

 

Part I

  • Adjust and make any changed to your IP4 tax returns based on faculty feedback. Include your finished and fully edited version for Part 1.

Part II

Deliverable Length: 800–1,100 words

Your client has been informed that an S corporation is a popular business form and wants to know more about it. Please write a professional memo to your client responding to his inquiry. Be sure to at least discuss the following items:

  • What is an S corporation?
  • When is it advisable to be taxed as an S corporation?
  • How does an organization become an S corporation?
  • If The Car Wash is a corporation, can they be taxed as an S corporation?
    • Why or why not?
    • What criteria must be met?
  • If The Car Wash is a LLC, can it be taxed as an S corporation?
    • If so, what does it need to do to elect S corporation status?
  • How would The Car Wash report and pay tax if it is an S corporation?

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