548 Term Project pdf has the detailed instructions in it. The deliverables is the following:
Your primary deliverables are as follows:
• A Power Point (PPT) slide deck outlining your findings. Create up to 25 slides to illustrate the key points of your presentation.
1 Adapted from the 2020 Deloitte Tax Competition Quinn Parker and Taylor Parker are two family members behind a new business venture they are calling Modems for All. Quinn is also the CEO of Industrial Kitchens, Inc., a long-time Deloitte client. The new venture that they are starting will manufacture a new high tech modem that will provide reliable internet access at relatively low cost. They believe this advance in technology will help address the issue of internet access for school children who need to learn remotely. They are looking for advice on how they should structure this venture. Background Information Later in this file, you’ll find information regarding the projected earnings for Industrial Kitchens and Modems for All along with some personal tax information about the owners. For now, here’s an overview. Quinn Parker and Industrial Kitchens. Quinn Parker is the CEO of Industrial Kitchens, Inc., (IK) an S Corporation that is known worldwide for their high-quality, cutting edge industrial kitchen equipment used in restaurants. Industrial Kitchens is located in Smalltown USA. It is a family business that provides work for a substantial number of employees in the local area. Quinn’s great-grandfather started Industrial Kitchens 50 years ago, and the company has thrived and grown to $20 million in annual sales with profits typically hovering between $3.0 and $3.5 million. Taylor Parker. During the 2019 holiday season, Taylor Parker (the child of Quinn’s brother and a recent electronic engineering graduate) talked with Quinn about a project that Taylor had spent a considerable amount of time developing. With some assistance from a group of engineering friends, Taylor had developed a modern modem that would provide internet access across land lines or via a mobile phone. The modem would have a power booster that would make the technology viable in most remote areas. Taylor’s belief was that this modem would be the answer to providing inexpensive internet access to those who had not previously been able to afford it. Taylor wanted to meet with Quinn in a few months to talk about how to obtain financing to start producing the high-tech modem. By early 2020, Taylor had become even more convinced about the benefits of implementing the modern modem idea. Taylor felt that they had a distinct advantage in having already completed much of the development of the idea. As the COVID-19 pandemic emerged, access to the internet had frequently been in the news, especially with regard to education. Of special interest to Taylor was the possibility of addressing the critical issue of on-line access for elementary students. Taylor’s engineering collaborators had moved on to focus on other endeavors, so while they supported moving ahead with the idea, they were comfortable negotiating a sale of any rights they held in the technology. Industrial Kitchens and Modems for All (MFA). In early April 2020, Quinn realized that the social distancing rules being enacted due to the COVID-19 virus would negatively impact the business 2 of Industrial Kitchens. He did not believe that restaurants would be updating their equipment or opening until the virus was under control. The second quarter of 2020 was shaping up to be one of the worst in company history and Quinn had no confidence that business would improve in the short term. Accordingly, revised forecasts for the year showed a significant drop off in business, resulting in a small projected profit for the year. However, Quinn had a strong sense of responsibility to his employees and wanted to find a way to keep his employees working. It’s then that Quinn remembered his discussions with Taylor and thought the modem innovation was something that showed great promise given the essential role it could play with business, education and other activities moving to an online format. After discussions with his advisors and his sister, Diane Lincoln (another major shareholder in IK), Quinn approached Taylor about the possibility of financing the new business venture to pursue the manufacturing of the modems. Quinn was aware that pivoting his business to a new product was not without risk. He is not familiar with the technology needed to manufacture the modem and would be relying heavily on Taylor’s expertise. He expected to incur a number of costs associated with moving in this new direction including retraining, marketing and building a reputation in a new market. While all indications were that the demand for this type of modem would cause the business to be profitable very quickly, Quinn was concerned about possible disruption in the supply chain of raw materials especially considering the potential impact of COVID-19 on worldwide businesses. However, Quinn decided that it was worth the risk as not only would it solve a short-term problem during the COVID crisis, but it would also provide an opportunity for expansion that is needed as Industrial Kitchens appeared to have limited growth potential in the future. Organization Form Decision: As the service providers to IK, Quinn and Taylor have asked us for advice as to how to structure the new business venture. They are considering several options. First, they can have Industrial Kitchens operate or own the entire business of manufacturing and selling the modems. They would conduct the new business under the trade name of Modems for All (MFA) or in a separate entity of the same name owned 100% by IK. Industrial Kitchens has an old warehouse that is in good repair that could be used for the manufacturing. They estimate they will need $2,500,000 to hire employees, purchase equipment and get the manufacturing up and running. That money is currently available in Industrial Kitchen so no loans will be needed. In addition, they determined they will pay $250,000 to purchase the rights of the modem technology from Taylor’s engineering friends. The second option would be to create a separate entity for the new modem company that will be called Modems for All (MFA). The new entity would lease the building space from Industrial Kitchens. Industrial Kitchens would make a special distribution of $2,500,000 in cash to its shareholders. Quinn is aware that all shareholders of IK have sufficient stock basis so that this distribution will be able to be accomplished tax free. As a result, the new company, MFA, would have the same ownership as IK (after the gift discussed below). 3 Each of the shareholders will invest their distribution into the MFA business. Diane Lincoln is single and believes she has more money than she can spend in her lifetime; accordingly, she has decided to gift 1/3 of her shares in IK (10% of the Company) to Taylor. Diane believes the timing is to her advantage, as the first quarter was a poor quarter and the share value is arguably at its lowest in recent years. Therefore, the gift of the shares will be done in advance of any distributions being declared. Diane is comfortable that no current gift tax will result from this gift. Quinn expects to be fully involved in both the business of IK and the business of MFA no matter how structured. Quinn, as well as each of the other shareholders in IK, have consistently had significant income, such that all are well into the top tax bracket. While both Quinn and Taylor would be fully involved and active in IK and MFA, the other investors would clearly be shareholders only. Quinn has supplied us with projected numbers for the two businesses for 2020. Please see attached Excel spreadsheet (Sch 3 forecast) Issues Summary Quinn and Taylor would like our advice on how to structure MFA. More specifically, they want to know which option will result in the greatest after-tax income in the current year. To gain an understanding of the implications of this decision, we need to compare the after-tax income depending on whether they decide to operate MFA as part of IK or as a separate C corporation. Steps to Complete 1. Start by completing the total federal income tax cost if Modems for All operates as part of Industrial Kitchens. Under this option, the operations will be combined and the organization will continue to operate as an S corporation. Information about the taxable income and deductions for the operations is included in the spreadsheet (attached at the end of this file). To complete this analysis, you will need to determine the income of the S corporation under the following two options: – Calculate the ordinary income of the S corporation if the company decides to depreciate the equipment without using any provisions that will accelerate the cost recovery (for example, bonus depreciation and/or Sec. 179). – Calculate the ordinary income of the S corporation if the company decides to use Sec. 179 and/or bonus depreciation. Once you’ve calculated the ordinary income of the S corporation, you will then need to: – Calculate the impact on the tax liability of the shareholders. This step will include the calculation of the qualified business income deduction for the shareholders. 2. Next, complete the total federal income tax cost if Modems for All operates as a separate C corporation. Under this option, IK will continue to operate as an S corporation, while MFA will 4 operate as a C corporation. To calculate the after-tax income, you will need to consider the effects of each. This step will involve the following: – Calculate the ordinary income of the S corporation and the related tax liability for the shareholders, including the effect of the qualified business income deduction for the shareholders. – Calculate the taxable income and the tax liability for Modems for All as a C corporation. To complete this analysis, you will need to determine the income of the C corporation under the following two options: – Calculate the taxable income of the C corporation if the company decides to depreciate the equipment without using any provisions that will accelerate the cost recovery (for example, bonus depreciation and/or Sec. 179). – Calculate the taxable income