Self-Employment & Farming
Included In Taxable Income Mr. Hawk, a factory assembly line worker, received the following benefits from his employer: 1) Medical Insurance plan policy: $250; 2) Christmas bonus $125; 3) Reimbursement for college undergraduate physics course during the current year under a nondiscriminatory written plan: $450; 4) $40,000 nondiscriminatory group term life insurance policy: $475; 5) Membership in a local health club: $550 How much is includible in Mr. Hawk's income for the current year? A) $675; B) $925; C) $1,050; D) $1,125
Answer (A) is correct. Benefits received from an employer are compensation for services and included in gross income unless provided otherwise. The IRC excludes from gross income contributions to accident or health plans (a medical insurance plan) made by an employer on behalf of the employee. The IRC provides for the inclusion in gross income of the cost of group term life insurance paid by the employer, but only to the extent that such cost exceeds the cost of $50,000 of such insurance provided the plan is not discriminatory. Hence, the cost of Mr. Hawk's group term life insurance is not included in gross income. The IRC provides an exclusion of payments up to $5,250 per year made to reimburse an employee for educational expenses to cover expenses for undergraduate and graduate courses. Therefore, the reimbursement for the physics course is excluded. There is no provision excluding Christmas bonuses or memberships in off-premises health clubs so $675 ($125 bonus + $550 membership) is includible in gross income.
Please select one of the following four choices: The federal Social Security Act: A) Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions. B) Provides for a deduction for Social Security taxes paid by the employee that is available against his or her federal income tax. C) Does not apply to self-employed persons. D) Excludes professionals such as accountants, lawyers and doctors
Answer (A) is correct. The definition of wages on which contributions are based includes all remuneration for employment [Sec. 3121(a)]. Bonuses and commissions are wages and are used in the calculation of the employer-employee contributions.
Compute Gross Income Tax Mr. T has been a night watchman at Y Company for 10 years. During the current year, he received the following payments from Y Company: 1)Salary: $15,000; 2) Hospitalization insurance premiums $3,600; 3) Required lodging on Y's premises for Y's convenience as a condition to T's employment: $2,400; 4) Reward for preventing a break-in: $1,000; 5) Christmas ham (value) $15; What amount is includible in Mr. T's gross income in the current year? A) $16,000; B) $16,015; C) $17,400; D) $15,000
Answer (A) is correct. The hospitalization insurance premiums paid by Mr. T's employer are excluded from gross income under Sec. 106. Since Mr. T was required to live on Y's premises both for Y's convenience and as a condition for his employment, the cost of such lodging is excluded from gross income under Sec. 119. The Christmas ham is excluded from gross income under Sec. 132 as a de minimis fringe. Therefore, Mr. T's salary of $15,000 and the reward of $1,000 are the only items included in gross income as compensation for services rendered (Sec. 61).
Net earnings from self-employment Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 2017, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum's 2017 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 2017, Baum recorded the following information: Business expenses - 1) Optics COGS: $35,000; 2) Optics rent expense: $28,000; 3) Liability insurance premium on Optics: $5,250; Other expenditures: 4) Baum's self-employment tax: $29,750; 5) Baum's self-employment health insurance: $8,750; 6) Insurance premium on personal residence. In 2017, Baum's home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During 2017, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year.: $2,625 7) Qualified 2017 mortgage interest on a loan to acquire a personal residence: $52,500; 8)Annual interest on a $70,000 5-year home equity loan. The loan was secured by Baum's home, obtained on January 2, 2017. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use.: $3,500 9) Points prepaid on January 2, 2017, to acquire the home equity loan: $1,400 10) Real estate taxes on personal residence: $2,200; 11) Estimated payments of 2017 federal income taxes: $13,500; 12) Local property taxes on the car value, used exclusively for personal use: $300 What amount should Baum report as 2017 net earnings from self-employment? A) $252,000; B) 260,196; C) $243,250; D) $273,000
Answer (B) is correct. The net profit or (loss) from self-employment is the gross business receipts reduced by the business expenses. The net profit or (loss) therefore should be $281,750 ($350,000 gross business receipts - $35,000 cost of goods sold - $28,000 rent expense - $5,250 liability insurance premium). Line 4 on Schedule SE requires the tax preparer to multiply the net profit or (loss) by 0.9235 ($281,750 × 0.9235 = $260,196). The net earnings from self-employment should be $260,196.
Schedule C Dr. Merry, a self-employed dentist, incurred the following expenses: 1) Investment expenses: $ 700; 2) Custodial fees related to Dr. Merry's Keogh plan: $40; 3) Work uniforms for Dr. Merry and Dr. Merry's employees: $320; 4) Subscriptions for periodicals used in the waiting room: $110; 5) Dental education seminar: $1,300. What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business? A) $2,430; B) $1,770; C) $1,620; D) $1,730
Answer (D) is correct. A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. Dr. Merry's deductible business expenses include work uniforms, subscriptions, and the dental education seminar. Thus, total deductible expenses on Schedule C equal $1,730 ($320 + $110 + $1,300).
FICA All of the following individuals who perform services for a business are subject to taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) except: A) Part-time employee; B) Director of corporation; C) Officer of a corporation; D) Office Manager
Employers are subject to both FICA and FUTA. Self-employed persons are subject to self-employment taxes but not unemployment taxes. The director of a corporation is a self-employed individual, not an employee, so (s)he is not subject to FUTA.
Charles, who is a self-employed attorney, files a joint return. He reported AGI of $60,000 and taxable income of $46,800 in 2016 and paid a tax liability of $12,000 after credits. In 2017, he expects his AGI to increase by about 25%. In setting up his estimated tax payments so as to avoid any penalty for underpayment of his 2017 liability, Charles should
Pay quarterly installments of 25% of $12,000. - This answer is correct. There is a penalty for the underpayment of estimated taxes. The taxpayer can avoid the imposition of the penalty for underpayment of estimated taxes by paying quarterly installments that would equal or exceed the lesser of 90% of the current year's tax liability or 100% of the prior year's tax liability if AGI was not greater than $150,000 in the prior year. Thus, Charles could avoid the penalty by paying quarterly installments of 25% of $12,000, his prior year's tax liability.
Under state law, which of the following statements most accurately reflects the liability of a CPA who fraudulently prepares a client's tax return?
The CPA probably is liable to any person who suffered a loss as a result of the fraud. - This answer is correct. The distinctive feature of fraud is scienter, that is, intentional misrepresentation or reckless disregard for the truth (sometimes found in gross negligence). Because fraud involves intentional wrongdoing, the courts permit all foreseeable users of an accountant's work product to sue for damages proximately caused by the fraud.
Alt Partnership, a cash-basis, calendar-year entity, began business on October 1, 2017. Alt incurred and paid the following in 2017: Legal fees to prepare the partnership agreement: $12,000 Accounting fees to prepare the representations in offering materials: $15,000 Alt elected to amortize costs. What was the maximum amount (ignoring any immediate expensing allowed) that Alt may deduct on the 2017 partnership return?
$200 - This answer is correct. Organization expenses are incurred in the formation of the partnership. The partnership may elect to amortize organization expenses over a period of not less than 180 months. The fees related to preparing the partnership agreement are organization expenses, but the expenses related to the issuance or sale of partnership interests (syndication fees) are specifically excluded. The partnership may recognize a maximum of 3 months of amortization expense this year, or $200 ($12,000 ÷ 180 × 3).
Mr. C, a calendar-year taxpayer, uses the accrual method of accounting. He pays his employees on the third day of each month. As of December 31 of the current year, accrued wages for the month of December were $30,000. Wages paid October 3 totaled $20,000; November 3, $25,000; and December 3, $22,000. Mr. C's fourth-quarter return, Form 941, should show total wages of
$67,000 - This answer is correct. Taxable wages and employment taxes are reported only when wages are actually paid. Employment taxes are imposed by a separate part of the Internal Revenue Code and have no relationship to the employer's method of accounting for income tax purposes. Therefore, accrued wages are not included on Form 941; only wages actually paid are included. Mr. C's fourth-quarter return should show total wages of: Paid October 3 - $20,000 Paid November 3 - $25,000 Paid December 3 - $22,000 Total wages in fourth quarter = $67,000
Sarah owns and operates a retail sporting goods business as a sole proprietor. Her store is located on the ground floor of a two-story building that she owns. Based on the following information regarding 2017, compute her net self-employment income (for SE tax purposes) to be put onto Schedule C for that year. Gross profit from sporting goods business: $100,000 Rental income from upper level (45%) of building: $20,000 Building depreciation expense: $10,000 Utilities for ground floor (Tenant pays own utilities.): $4,500 Depreciation on vehicles used in business: $3,000 Gain on sale of van used 100% in business: $2,000 Contributions to her Keogh retirement plan: $5,500 Sarah's health insurance premiums: $4,000 Mortgage interest on building: $10,000 Other expenses of running her sporting goods business: $11,500
$70,000 - This answer is correct. Net earnings from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The rental income is not self-employment income since rental property is not Sarah's ordinary course of business and she is not a real estate broker. Therefore, any rental expenses do not offset the self-employment income from the sporting goods business. Also, 100% of the health insurance premiums are deductible on Form 1040 as an adjustment but are not deducted against self-employment income. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Sarah's net self-employment income is computed as follows: Gross profits from sporting goods business $100,000 Building depreciation expense ($10,000 × 55%) (5,500) Utilities (ground floor only) (4,500) Listed property depreciation expense (3,000) Mortgage interest ($10,000 × 55%) (5,500) Other expenses (11,500) = Net self-employment income $ 70,000
On New Year's Eve, Hal sent three bottles of champagne to the three owners of the Day & Night Cleaners to thank them for their business during the year. Each bottle of champagne cost $75. Each of the owners took the champagne home. Earlier in the year, Hal had given a video game to the 10 year old son of one of the owners. The value of the game was $50. To show his appreciation to another customer for his business, Hal took the customer to a football game. The value of the tickets was $100. What is the total amount Hal can deduct as business gifts?
$75 - This answer is correct. Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 ($25 × 3 recipients) for business gifts. The ticket would be entertainment, not a gift, since he took the customer to the game. Up to $50 (i.e., 50%) is deductible as entertainment. If it were a gift, the limit would be $25. It could have been classified as a gift if Hal had not accompanied the customer. The gift to the son of the owner is considered given to the owner.
Self Employment Tax Calculation: Mr. and Mrs. B file a joint income tax return. Mr. B owns and operates a grocery store that had a net income of $15,000 in 2017. Mrs. B is a self-employed physical therapist, and her net income was $42,900. What is the total amount of self-employment tax Mr. and Mrs. B must report on their joint return for 2017?
The tax on self-employment income is imposed by Sec. 1401 on all taxpayers whose net earnings from self-employment exceed $400 [Sec. 1402(b)]. For 2017, the tax is divided into two components: the Social Security and Medicare taxes, which are based on the net earnings from self-employment. The Social Security tax is imposed at a 12.4% rate up to a $127,200 maximum. The Medicare tax is imposed at a 2.9% rate, and there is no maximum. Taxpayers may reduce their tentative net earnings from self-employment by the product of the employer's portion of the self-employment tax rate (7.65%) times the tentative net earnings from self-employment [Sec. 1402(a)(12)]. The self-employment tax is computed separately for each spouse. Their taxes are Compute Mr. B Self Employment Tax: Tentative Net income: $15,000 Less: Employer's SE tax rate [$15,000 x 7.65%] = (1,148) Subtotal: Net Earnings From SE = (13,282) Multiply: Tax Rate: x 15.3% Self-employment tax = $2,119 Compute Mrs. B Self Employment Tax: Tentative Net income: $42,900 Less: Employer's SE tax rate [$42,900 x 7.65%] = (3,282) Subtotal: Net Earnings from SE: $39,618 Multiply: Tax Rate x 15.3% Self Employment tax = $6,062 The total self-employment tax for Mr. and Mrs. B is $8,181 ($2,119 + $6,062).
Given the following wage information, what are the total gross wages subject to Federal Unemployment Tax for the current year? Employee Wages Paid during the Current Year T: $ 4,200 E: $ 5,800 M: $ 22,900
Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes. The full amount of wages paid during the current year to employee T and employee E is taxable. Only $7,000 of the wages paid to M is subject to federal unemployment taxes. Thus, the total amount of wages paid in the current year that is subject to federal unemployment taxes is $17,000. Employee Wages Subject to Unemployment Tax T: $ 4,200 E: $ 5,800 M: $ 7,000 Total: $17,000