Chapter 13 - Homework HOMEWORK 1: Use Part II of Form 2106 to figure car expenses for the following. Use both the standard mileage rate and actual expenses to determine which is better for the taxpayer and enter that amount on the correct line of Part I of Form 2106. Barry B. Breene (055-48-0801) purchased a new car on January 6, 2008 for $27,000. In 2008, he drove 28,000 total miles. 22,400 miles were for business use in his job as an engineer. 11,000 of his business miles were driven from January 1, 2008 to June 30, 2008.The round trip commute to Barry’s office is 10 miles and he drove 3,200 commuting miles in 2008. He paid $3,080 for gas, oil, repairs, and insurance. Barry kept records and receipts for all his expenses. Barry wants to elect out of the special depreciation allowance.
Chapter 13 - Homework Homework 1
Chapter 13 - Homework HOMEWORK 2: Using the information provided, prepare a 2007 tax return for the following taxpayer. Andrew L. Jackson (born 1/4/1962) lives with his son John (311-45-9561, born 5/5/1992). Andrew’s wife died in 2007 and he has not remarried. On his joint return in 2007 his itemized deductions were $13,450. Their 2007 state income tax deduction was $1,689 and the sales tax deduction they could have taken was $765.
Chapter 13 - Homework In March 2008, Andrew was in a car accident. He had paid $24,000 for his Subaru on February 4, 2006. The FMV of the car before the accident was $17,000. The FMV after the accident was $11,000. His insurance paid him $4,000. Andrew is a manufacturer’s representative. In 2008, he traveled away from home on business and had the following expenses: Airfare - $830 Meals - $320 Entertainment - $55 Hotel bill - $600 Car rental - $250 Parking fees - $12
Chapter 13 - Homework Andrew also had the following expenses: Doctor’s bills - $650 Health insurance - $2,000 Prescription drugs - $300 Life insurance - $1,500 Health club dues - $300 Church contributions - $600 (no one contribution over $250) Tax preparation fee - $140 Legal fees related to his wife’s death - $400 Safe deposit box fee to store his stock certificates-$120 United Way contribution - $25 per month Car loan interest - $800 Gifts to 3 clients - $190 Business cards - $45 Tuition for a course at an eligible educational institution to qualify for a new job- $400 Union dues - $300
Chapter 13 - Homework Andrew received an expense allowance of $500 for his travel expenses under his employer’s accountable plan (shown with code L in box 12 of his W-2 form). He did not receive a meal or entertainment allowance.
Chapter 13 - Homework If tuition had been for a course that qualified as a business expense, all three methods for taking an education deduction (lifetime learning credit (F8863), business expense (F2106) and tuition and fees (F8917, covered in Chapter 16) should be explored to see which gives the largest refund.
Chapter 14: Profit or Loss from Business Chapter Content • Self-Employment • Schedule C: Background Information • Schedule C: Income • Schedule C: Expenses • Schedule C: Profit (Loss) Calculation • Business Use of Your Home • Form 8829, Expenses for Business Use of Your Home • Schedule SE: Self-Employment Tax • Key Ideas Objectives • Learn About Self-Employment • Understand How to Use Schedule C • Be Able to Determine If You Can Take a Home Office Deduction • Be Able to Complete Form 8829 • Understand How to Calculate Self-Employment Tax Using Schedule SE
Profit or Loss from Business A. You are SELF-EMPLOYED if you: 1. Carry on a business or trade as a sole proprietor 2. Are an independent contractor 3. Are a member of a partnership 4. Are in business for yourself in any other way. B. An activity qualifies as a business if your primary purpose for engaging in it is for income or profit and you are involved in the activity with continuity and regularity. C. A sole proprietor owns a business alone and has not incorporated. D. An independent contractor is actually a sole proprietor.
Profit or Loss from Business E. Report income and expenses on Schedule C unless partnership. 1. If your net earnings from self-employment are at least $400, you must file a return. 2. Total profit (or loss) is entered on line 12 of Form 1040 (be sure self-employment income is reported on Schedule C first before entering on Form 1040) 3. Self-employed farmer uses Schedule F. Form 1040, Page 1
Profit or Loss from Business Statutory Employee F. A statutory employee is a person who is treated partly as an employee and partly as being self-employed. 1. Treated as employee for social security and Medicare purposes. 2. Treated as being self-employed for income tax purposes. 3. Box 13 of W-2 checked.
Profit or Loss from Business Presumption of Profit • An activity is presumed carried on for profit if it produces a profit in at least 3 of the last 5 tax years, including the current year. • Activities that consist primarily of breeding, training, showing or racing horses are presumed to be carried on for profit if they produced profit in 2 of the last 7 tax years, including the current year. • If your activity is not carried on for profit, your deductions and losses may be limited.
Profit or Loss from Business Hobby G. A hobby is not considered a business because the activities are not carried on to generate a profit. 1. Report hobby income on line 21 (Other Income) of Form 1040 2. Hobby expenses are reported as miscellaneous deduction on Schedule A.
Profit or Loss from Business Schedule C
SCHEDULE C Schedule C is a two-page form which may include expenses that require you to attach other forms and schedules. • Form 4562, Depreciation and Amortization. • Form 8829, Expenses for Business Use of Your Home. • Schedule SE, Self-Employment Tax, Schedule C is divided into sections: • Background information (A-H) • Income (Part I, lines 1-7 and Part III, Cost of Goods Sold, lines 33-42) • Expenses (Part II, lines 8-27 and Part V, Other Expenses, line 48) • Profit or Loss Calculation (lines 28-31) • Information on Your Vehicle (Part IV, lines 43-47b)
SCHEDULE C Background Information A. If you own more than one business, complete a separate Schedule C for each one. 1. A business code is entered on line B and can be found in the instructions of Schedule C in Appendix E 2. Your Employer Identification Number (EIN) (if any) is entered on line D a. Do NOT enter your SSN b. Obtain an EIN by sending in Form SS-4.
SCHEDULE C Satish J. Patel (093-62-7357) owns a tax preparation business called Many Happy Returns located at 1040 Liberty Lane, Chicago, IL 60621. The EIN of Satish’s business is 16-3863117. The business code for tax preparation is 541213. The Schedule C lines A-E for Satish Patel is as follows:
SCHEDULE C B. Report your accounting method on line F. 1. With cash method, report income when you receive it; deduct expenses when paid 2. With accrual method, report income in year sales occur (even if collected in later year); deduct expenses in year incurred (even if not paid until later year) 3. Hybrid method is combination of cash method and accrual method.
SCHEDULE C Income (Part I of Schedule C) C. Gross income is reported on line 7 of Part I of Schedule C. 1. Gross receipts or sales (line 1) are the total revenue of business from sales and services. 2. May receive Form 1099-MISC reporting non- employee compensation (box 7) which is entered on line 1.
SCHEDULE C 3. Returns and allowances (line 2) are amounts covering any returned products or allowances and rebates from sales price made to customers. 4. Cost of goods sold (line 4) is determined by completing Part III of Schedule C a. Basically difference between inventory at end of year and inventory at beginning of year with adjustments for purchases, labor costs, materials and supplies and other costs b. To determine value of good sold, FIFO means product purchased first is considered sold first c. To determine value of good sold, LIFO means product last purchased is considered sold first 5. Gross profit for service business is usually equal to gross receipts.
SCHEDULE C – Problem 1 Gary owns a retail furniture store. In 2008, he purchased two identical tables, one for $850 and the other for $1,050. He bought the $850 table first. He sold one of the tables in 2008. The inventory method that Gary uses determines which table he sold. Which inventory method is Gary using if the second table purchased was the one sold? a. FIFO b. LIFO
SCHEDULE C – Problem 1 Gary owns a retail furniture store. In 2008, he purchased two identical tables, one for $850 and the other for $1,050. He bought the $850 table first. He sold one of the tables in 2008. The inventory method that Gary uses determines which table he sold. Which inventory method is Gary using if the second table purchased was the one sold? b. LIFO Gary is using the LIFO method because the $1,050 table was the last purchased so it is the first sold.
SCHEDULE C Expenses (Part II and Part V of Schedule C) D. Expenses are reported on Part II and V of Schedule C. 1. Most expenses are deductible. a. Ordinary expenses are common and accepted in your type of business. b. Necessary expenses are appropriate and helpful to your business. 2. Advertising costs (line 8) include classified ads, business cards, mailers, television spots, and promotional brochures. 3. Car and truck expenses (line 9) are costs paid to operate a vehicle for business purposes. a. Also enter on Form 4562 (depreciation) if required to file one. b. Take standard mileage rate 50.5 cents per mile driven Jan 1 thru Jun 30 and 55.5 per mile driven Jul 1 thru Dec 31 or actual expenses.
SCHEDULE C 4. Deduct commissions and fees other than contract labor on line 10. 5. Contract labor (line 11) amounts paid to independent contractors. 6. Depletion (line 12) is deduction for exhaustible natural resources. 7. Depreciation and section 179 expense deduction (line 13) are covered in Chapter 12. 8. Employee benefit programs (line 14) includes payments made for employees for accident and health insurance, term life insurance, and dependent care assistance programs. 9. Insurance (line 15) costs related to operation of business are deductible. 10. Interest (line 16) on any loans used to finance business is deductible.