So this engine didn't run at all, even with fresh gasoline? Did it have old gas in it?
You may not need a new coil--test to see if it has a spark.
For my flywheel, I wire wheeled the rust off on the sides, in the very center (making sure to keep clear of the fan blades) and the backside. It still looked rusty when I was done but I wasn't trying to go all out on something that'll be hidden once reassembled. It was fairly smooth though, when I was done, especially for cast iron. I used a small steel wire toothbrush to knock off the flaky rust in between the fan blades. When I was satisfied that there was no loose or flaky rust remaining, I "painted" it with Rust Converter and nothing more.
Basically you're just cleaning everything and inspecting for damage.
I wouldn't start thinking about replacing major components like the valves unless they are totally toast at this point.
If you don't have a Dremel moto-tool, it might be a good time to invest in one as it is a dream to port and polish the head with one.
Soak the gas cap with penetrating oil overnight, or over several nights and then try to work the cap off with large Vise-Grips or channel-lock pliers.
First let me say thank you for the reply, always appreciated.
No... when I initially got it, it didn't run at all. But supposedly was running prior to being removed from the tiller? He said it'd been sitting "AWHILE".
It actually does have spark. I figured that out early on while trying to start it.

I just thought it may be in my best interest to replace it?.. If it's cheap enough that is? Which, on a side note, is something I've taken note of lately....Parts for these little engines are SOOO CHEAP! I mean billet rods for $60 w/bearings!!?? WOW! (Keep in mind fellas I just built and boosted an engine for my car and I'm not at all used to these kinds of prices) Ok, back to the topic.
Okay this is great to hear because I really wasn't prepared to replace the flywheel. I just wanted to clean it up, and like you said, throw some rust inhibitor on it or what not. So a wire wheel sounds like a great idea.
I am, but I'm not.... What I mean is; yes, I mainly just want to clean and inspect. But while I'm in there I do plan to modify it... slightly. I've been doing a good bit of research and I'm thinking of getting some different timing keys, a billet rod, MAYBE a valve job, and definitely PnP'ing the ports and head (especially after seeing those casting flaws). Now the only reason I had said I may need new valves was because, when I did my car engine the intake and exhaust ports looked very similar to the condition of these and it turned out that some of the valves not only had pitting but were rusted completely through! So depending on their condition, you know?
I don't have an electric Dremel rotary tool... I do however have a pretty decent variety of pneumatic rotary tools (die grinders, angle grinders, etc..) and tons of different carbides for doing automotive PnP work. My concern though is that these may be too much tool for the job? If you have a specific Dremel that you recommend (that's not uber expensive) I'd really appreciate it? I'm not sure it'll get a ton of use outside of this particular motor so I don't want to get the biggest craziest Dremel out there if I don't have to?
And lastly that darn gas cap! So it's actually not rusted on... It's spinning in place!!? Darn thing just WON'T thread off!? But I will try your vise grip suggestion, because cutting it seemed like a good idea at first but then I remembered there was GAS in it

Oh! That reminds me, earlier you'd asked if there was fuel or if I'd tried fresh fuel... No, I never put any fresh fuel in. BUT there sounds like there's still some old fuel in it? Who knows though that could just be water/condensation?
Again, Hellion, thx for your replies and suggestions. Plz lmk about the Dremel you'd recommend? And I'll give those suggestions a try asap and keep you all updated!