Business Income or Loss (Tax course)

Schedule C, Part II - Expenses

Business Use of Home If a portion of the taxpayer's home is used exclusively for business, or if the taxpayer has a day care business, a deduction may be allowed for a portion of the expenses of the home, including depreciation, mortgage interest, and real estate taxes. Except for mortgage interest expense and real estate taxes, the home expenses are limited to the net income of the business; however, the unallowed expenses are carried forward to the next year.

Schedule C, Part II - Expenses

Business Use of Home (continued) Starting in tax year 2013, there is a safe harbor which may be used in lieu of actual expenses. The maximum deduction if the Simplified Method is used is $1,500, which is if 300 square feet were used exclusively for the business for the entire year at a rate of $5 per square foot. The maximum is reduced if the square footage is less than 300 in any month. There are other rules that pertain to this safe harbor, but they are beyond the scope of this unit.

In Drake Software, depreciation is calculated using which screen:

4562

Schedule C, Part III - COGS (continued)

Cost of Goods Sold For some taxpayers, there are three methods of accounting available: cash, accrual, and other. Businesses that maintain an inventory for sale must use an accrual accounting system so that there is a proper matching of sales and cost of sales. To determine the cost of goods sold, prepare Part III of Schedule C. First, select the method used to value the inventory on line 33. Then, answer the question on line 34, "Was there any change in determining quantities, costs or valuations between opening and closing inventory?" Next, complete lines 35 through 42. Start with the beginning inventory, add all the costs associated with the inventory, and then deduct the ending inventory.

Schedule C, Part I - Income

Information about the Business The top section of Schedule C is for information about the business. Items A through J include the following items about the business; name, address, business code, EIN, method of accounting, material participation in the operation of the business, whether the business was started in 2016, if any payments were made in 2016 that would require filing Form 1099, and, if the taxpayer was required to file, did he or she file the appropriate 1099 forms.

The amortization code section on screen 4562 is used for:

Intangible property

Schedule C, Part I - Income

Part I - Income Enter gross receipts or sales on line 1, marking the box if this Schedule C is for a "Statutory Employee" (reported on Form W-2). Complete the remainder of Part I to arrive at gross income.

Schedule C, Part II - Expenses

Part II - Expenses Business expenses are reported on lines 8 through 27. Line 27 is the total of other expenses reported in Part V, Other Expenses. Expenses for business use of the home are reported on Line 30. Health insurance and retirement contributions for the proprietor are not deductible on Schedule C but may be a deduction from gross income on page 1 of Form 1040. Expenses that may need supporting forms or schedules include: Line 9, "Car and truck expenses" (supporting schedule), Line 12, "Depletion," Line 13 "Depreciation" (Form 4562), line 24B, "Deductible meals," and business use of home (Form 8829).

Schedule C, Part II - Expenses

Total Expenses and Net Profit or Loss Line 28 - Total expenses before business use of the taxpayer's home. Line 29 - Tentative profit or (loss) This is the business income less expenses but not including the expenses for the business use of the home. Line 30 - Expenses for business use of home The allowed expenses are limited to the tentative profit. Any expenses above the amount of the tentative profit can be carried forward. The exception to this is real estate taxes and mortgage interest. These are deductible in the current year even if they cause expenses to exceed the amount of the tentative profit. Line 31 - Net profit or (loss) See the requirements for net loss on line 32. If there is a profit, information will flow to Form 1040, line 12, and Schedule SE, line 2.

Schedule C, Part III - Cost of Goods Sold

Inventory Inventory includes what a company sells to generate revenue. Inventory also includes raw materials, work in process, and any costs directly associated with inventory except shipping to customers. It also includes indirect costs associated with inventory. Indirect costs are overhead costs that are indirectly associated with inventory. For tax purposes, these costs are referred to as §263A costs. A discussion of when §263A is required and how to calculate these costs is beyond the scope of this course. For tax purposes, inventory is valued at cost, the lower of either cost or market, or some other method. Manufacturers generally need some kind of cost accounting system to determine the cost of inventory. A description of cost accounting systems is beyond the scope of this course.

Which of the following apply to inventory?

Inventory can be valued at cost.

Lines A through J of the Schedule C include all the following information except:

Inventory valuation method

Schedule C, Part II - Expenses

Line 24a - Travel Enter travel expenses for lodging and transportation connected with overnight travel for business while away from the tax home. Your taxpayer's home is the general area of his or her main place of business or employment regardless of where the taxpayer's maintain the family home. The taxpayer cannot deduct travel expenses for the spouse, a dependent, or any other individual unless that person is an employee, the travel is for a bona fide business purpose, and the expenses would otherwise be deductible by that person. Do not include expenses for meals and entertainment on this line. Enter those expenses on line 24b.

Schedule C, Part II - Expenses

Line 24b Meals and Entertainment Enter the total deductible business meal and entertainment expenses that are properly documented. Include meal expenses while traveling away from home for business. The deductible portion of meals can be 100%, 80%, or 50%. Entertainment is usually 50% of the expense. Business meal expenses are deductible only if they are: Directly related to or associated with the active conduct of the trade or business Not lavish or extravagant Incurred while the taxpayer or his or her employee is present at the meal

Schedule C, Part II - Expenses

Line 24b Meals and Entertainment (continued) Nondeductible expenses The taxpayer cannot deduct any expenses paid to or incurred at a facility used for any activity usually considered entertainment or recreation, such as expenses at a yacht club. The taxpayer cannot deduct membership dues for any club organized for business, pleasure, recreation, or social purposes, for example, dues at a country club, golf or athletic club, or airline and hotel club. NOTE: This restriction does not include civic or public service organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards.

Schedule C, Part II - Expenses

Line 32 - Loss If there is a loss on line 31, select either box 32a or 32b. Select the box on line 32a if all investment is at-risk. Include the loss amount on Form 1040, line 12, and on Schedule SE, line 2, or on Form 1040NR, line 13. Select box 32b if the amounts are not subject to risk. Form 6198 must be completed and deductibility of the loss may be limited.

Schedule C, Part II - Expenses

Line 9 - Car and Truck Expenses Complete Part IV, "Information on your vehicle," if the taxpayer uses a personal vehicle in the business, claims a deduction on line 9, and is not required to file Form 4562. If the taxpayer uses the vehicle for hire, for example, a taxi cab, or if the taxpayer uses five or more vehicles simultaneously, such as a fleet operation, then actual expenses must be used. Other taxpayers who use their personal vehicle in their business have the option of using the business portion of actual expenses or the standard mileage allowance.

Schedule C, Part II - Expenses

Line 9 - Car and Truck Expenses (continued) To use actual expenses, calculate the percentage of business use and multiply the result by the total of the expenses to operate the vehicle. These expenses include, but aren't restricted to, fuel, oil change, repairs, tires, insurance, registration, and inspection. Any depreciation allowed on the vehicle is reported on line 13, "Depreciation." The business portion of a rented or leased vehicle cost is reported on line 20a, "Vehicles, machinery, and equipment," reduced by the income inclusion amount. If the standard mileage allowance is used for a vehicle, it should continue to be used for that vehicle. To use the standard mileage allowance for 2016: Multiply the business miles driven by .54 cents.

Schedule C, Part II - Expenses

Lines 15 through 17 Line 15 - Insurance Enter the expense for business insurance. This line should never include the owner's health insurance. Line 16 - Interest a. Mortgage. If there is a mortgage on real property used in the business (other than the taxpayer's main home), enter the amount from Form 1098 on line 16a. b. Other. If the taxpayer did not receive a Form 1098, enter the amount on line 16b. If the taxpayer paid more interest than is shown on Form 1098, see Pub 535 to find out if the taxpayer can deduct the additional interest. If so, enter the amount on line 16a. Line 17 - Legal and Professional Services Enter fees for tax or legal advice related to the business and for preparation of the business tax forms.

SECA Tax

SECA (Self-Employment Contribution Act) is the self-employed taxpayer's equivalent to an employee's FICA withholdings. Self-employed taxpayers making $400 or more in net income from their business and who are subject to SECA must prepare Form SE and include the SECA tax on Form 1040, line 57. The amount subject to SECA tax is 92.35% multiplied by the net income from the business. The first $118,500 of self-employed income is taxed at 15.3%, however any net income above $118,500 is taxed at 2.9% plus $14,694. The taxpayer is allowed a deduction of 50% of the SECA tax. This deduction is reported on Form 1040, line 27. Statutory employees are not required to pay SECA tax.

Special Situations for Schedule C

Statutory Employees Statutory employees are workers who are treated as employees for payroll tax purposes but are treated as self-employed for income tax purposes. Statutory employees are discussed in the unit on Wages. Husband and Wife Joint Venture A husband and wife venture is a qualified joint venture in which the husband and wife are the only members of the venture and where both materially participate. On a Form 1040 filed jointly, they can elect to proportionally divide the income, expenses, gain, loss, and credits, and file separate Schedules C. Domestic Single-Member LLCs (SMLLC) use either Schedule C or elect to be taxed as a corporation. Starting in 2016 SMLLCs are only required to acquire an Employer Identification Number (EIN) if the business participates in a qualified retirement plan or are required to file employment, excise, alcohol, tobacco, or firearms returns, or are a payer of gambling winnings. If an EIN is required see instructions for Form SS-4.

Which of the following is a requirement for a taxpayer to be eligible to file Schedule C-EZ?

The taxpayer uses the cash method of accounting

When to Use Schedule C-EZ

The IRS provides a simplified version of Schedule C known as Schedule C-EZ, Net Profit from Business. This form can be used by some sole proprietors. The taxpayer is eligible to use Schedule C-EZ if he or she: Operated only one sole proprietorship business during the year Did not have an inventory at any time during the year Did not have any employees during the year Had total business expenses that did not exceed $5,000 Do not deduct expenses for business use of the home Use the cash method of accounting Did not have a net loss Do not have any prior-year unallowed passive activity losses for this business Are not required to file Form 4562, Depreciation and Amortization, for the year, which means that the taxpayer did not place any depreciable property into service for the first time this year. If the taxpayer does not meet all of these requirements, he or she must file Schedule C instead of Schedule C-EZ.

Purpose of Schedule C

The purpose of Schedule C is to report income and expenses of an unincorporated trade or business conducted as a sole proprietor or someone treated as a sole proprietor. For the activity to qualify as a trade or business, the primary purpose of the activity must be continuous and designed to make a profit. Generally, the net income from a trade or business is not only subject to income tax but also subject to self-employment tax (Self-Employment Contribution Act - SECA), if the net income is $400 or more. Self-employed individuals have several options for tax-favored retirement savings arrangements. A discussion of this topic, however, is beyond the scope of this course. Income and operating expenses are reported on page 1 of Schedule C. Click the "Schedule C" button below to view this schedule.

Summary

axpayers who are sole proprietors, or are treated as sole proprietors, report income and expenses of the business on either Schedule C or Schedule C-EZ. Expense for the business portion of the taxpayer's residence may be deductible as a home office deduction but is subject to special rules. Health insurance and retirement contributions attributable to the business owner are not a deduction on Schedule C, but may be deductible from gross income on page 1 of Form 1040, lines 29 and 28, respectively. If the taxpayer is subject to SE tax, the SE tax is added to the taxpayer's income tax. The taxpayer is entitled to a deduction from gross income of 50% of the SE tax, which is deducted on line 27 of the Form 1040. Other forms that may be required by taxpayers who prepare Schedule C include: Form 4562, Depreciation and Amortization, Schedule SE, Self-Employment Tax, and Form 8829, Business Use of the Home. Special rules or options apply to car and truck expense, travel, and meals and entertainment.

In what section of the Schedule C are 1099-MISC amounts entered?

part 1: Income

Use Schedule C to report income or loss from a business the taxpayer operated as a sole proprietor or to report wages as a:

statutory employee.