Tax Research Client Memo (Federal Income Tax)

Tax Research Client Memo
Tax Research Client Memo

This outline focuses on you ability to deliver the Tax Research Client Memo (Federal Income Tax)

 FACTS:   Your client – “Eco-friendly Rubber Company”, is a newly formed S corporation registered on 1/8/2018 to do a business in the state of Colorado.  Client is in the business of manufacturing various products from recycled rubber materials. Products includes roofing materials, gardening materials, floor mats for automobiles and other specialty products for industrial and commercial use.  The business is highly capital intensive and therefore client has obtained a bank loan paying an annual interest @5%.  The total debt of the company is $20 million. The promoters have already put in about $2 million in equity.  Manufacturing machineries, building and business-related assets at cost are $20 million and cash in hand is $2 million to meet the working capital needs of the business.

Business incorporation expenses incurred from formation date till May 31st, 2018 were $100,000. These included feasibility study, legal expenses and other expenses to get the plans approved from EPA and other government licensing agencies.  First sale occurred on June 1st, 2018 for $1 million to supply roofing materials to Home Depot. Client expects year 2018 would be a good start with a revenue of $10 million, growing to $25 million in next year and $30 million in third year.

Promoters are family of engineers – father, son and daughter who have an extensive knowledge of the industry.  They intent to employ a team of a full-time professionals and want to pay a good compensation so that employees stay with them for a long time.  To date, they have about 20 people working for them. Ten of these are full – time employees; rest are contractors.

The books of accounts are maintained by a part-time accountant using Microsoft Excel.  Client doesn’t know which method of accounting they are using. Payroll is outsourced to a payroll service provider.  Checks are issued by the same accountant every two weeks and owners sign them matching with the invoices.

So far, no estimated income taxes were paid either by the company or its owners. Company has purchased five delivery trucks.   Client also purchased two luxury cars (BMWs) and it is being used it in their trade/business.  Owners are busy travelling within and outside the U.S. to expand the business, but they did not maintain any receipts of the travel.

Before December, the owners want to withdraw some money for personal expenses.  The owners want to give bonuses to employees and wants to put a retirement package in place. The owners also want to give some money to charity and wants to give Christmas gifts to the employees in December.

The owners need your help in explaining them all possible income tax ramification of the transactions, method of accounting and internal control measures for tax accounting and compliance.  They are not sure if deductions will be allowed for all these expenses or not.  They also want to know if there are any federal or state level credits.

Assume you are an independent person and fully compliant with the requirement of circular 230 and state CPA rules.  Fee is not an issue.


Please write a detailed professional memo for your client in a proper format. Please analyze the federal and State and local tax ramifications and advise your client. Please make sure to include in your research, primary and secondary authority on the issues.  You may also include a Court cases, if necessary.

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