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SELF-EMPLOYED BUSINESS INCOME SCHEDULE C
Discussion Questions 1. Discuss the definition of a trade or business. Why does it matter whether a taxpayer is classified as an employee or self-employed? Answer: A trade or business is any activity that is engaged in for profit continually and regularly. The income from a sole proprietor is netted with related ordinary and necessary business expenses to determine the effect on AGI. 2. Discuss the concepts of ordinary, necessary, and reasonable in relation to trade or business expenses. Answer: According §162, in order for an expense to be deductible it must be an ordinary and necessary expenditure. The expense must also be reasonable (as established by the courts). A trade or business expense must not only be ordinary and necessary but also reasonable in amount and reasonable in relation to its purpose. The Supreme Court (in Welch, T., 1933, S Ct, 290 US 111) held that in order for an expense to be ordinary, in must be customary or usual in the taxpayers particular business. The necessary criterion refers to an expense that is appropriate and helpful, and not necessarily essential to the taxpayer’s business. Reasonableness is not specifically included by IRC §162, but has been added by the courts. In these cases, the courts held that a trade or business expense must not only be ordinary and necessary but also reasonable in amount and reasonable in relation to its purpose.
Chapter 06 - Self-Employed Business Income Schedule C
3. What form is depreciation reported on and how does it relate to other forms such as Schedule C, E, F, and Form 2106? Answer: Depreciation is reported on Form 4562, and the expenses flow from that forms to other schedules in the tax return. Depreciation is the expense allowed for the wear or loss of usefulness of a business asset. The understanding of depreciation is extremely important aspect of the tax system because depreciation is a material non-cash expense. Depreciation is allowed on most assets (excluding land) used in a trade or business or any activity held for the production of income (e.g. rental property). Thus, the depreciation calculation affects nearly every aspect of a tax return of any complexity. 4. On what type of property is depreciation allowed? Answer: Depreciation is allowed on trade or business property including (but not limited to) buildings, race horses, breeding hogs, automobiles, railroad tracks, sawmill equipment, water transportation equipment, wastewater treatment plants, roads, land improvements. An exhaustive list of depreciable property can be found in IRC §168(e). 5. Discuss the word basis in relation to the financial accounting term book value. What is meant by the term adjusted basis? Answer: Basis is similar to book value. Typically, the depreciable basis of property is the initial cost of the property. Adjusted basis is the cost basis less any accumulated depreciation.
in the year of disposal. Discuss the difference between personal property and real property. Unused §179 deductions cannot be carried forward unless the expense is disallowed by the lack of business income. Available conventions include the half-year convention. What is a depreciation convention? What conventions are available under MACRS? Answer: A depreciation convention is a concept which is used to determine the amount of a partial year allowed in the depreciation calculation. When calculating depreciation for personal property (assuming the half-year convention) using the IRS depreciation tables. does the taxpayer need to multiply the first year depreciation by one-half? What about in the year of disposal assuming the property is disposed of prior to the end of its recovery period? Answer: The half-year convention for the first year is built into the depreciation tables issued by the IRS. and the mid-month convention.000.) The maximum yearly deduction is determined in §IRC 179(b)(1) and is $125. furniture. Answer: Real property consists of land and buildings as well as any other structural components attached to land. Personal property includes equipment. The expense election is phased out dollar-for-dollar for purchases in excess of $500. 7. Give examples of each. and fixtures.Self-Employed Business Income Schedule C 6. the table percentage must be multiplied by ½ for the half-year convention and the appropriated months for mid-quarter and mid-month conventions. Discuss the concept of electing §179 expense. 6-3 . 9. or anything else that is not classified as real property. the mid-quarter convention.Chapter 06 . Does the election allow a larger expense deduction in the year of asset acquisition? Answer: The taxpayer can elect to expense a certain portion of personal property purchased during the year (the election cannot be made for real property.000 for 2007. However. 8.
as well as a mileage log to determine business use verses personal use. To qualify for any deduction. 13. or recreation. Distinguish between travel and transportation expenses. meal and entertainment expenses must be both ordinary and necessary business expenses as well as be either directly related or associated with business. 12. Are meal and entertainment expenses always limited to 50%? Answer: Generally. Answer: Travel expenses are different from transportation expenses in that travel involves the overnight stay for business purposes. amusement. 6-4 . Directly related or associated with business primarily means that the activity took place in a business setting or the entertainment directly preceded or followed business discussions. Answer: Listed property is defined as any passenger automobile or other property used as a means of transportation. computer or peripheral equipment.Self-Employed Business Income Schedule C 10. Discuss the limits on meals and entertainment. 11. The basic travel requirement is that the trip requires sleep or rest. The 50% limit pertains to any expense for food or beverage and to any expense with respect to an activity that is generally considered to constitute entertainment. any business meals and entertainment expenditures are limited to 50% of the amount incurred. the standard mileage rate must be used for the entire lease period. When can a taxpayer use the standard mileage rate? Is the standard mileage rate better than the actual auto costs? Answer: A taxpayer can use the standard mileage rate if the taxpayer owns the vehicle and uses the standard mileage rate for the first year it was placed in service or if the auto is leased. Discuss the concept of listed property. or any cellular telephone or other telecommunications equipment. The actual expense method usually results in a larger deduction but also requires receipts for actual expenses. property used for entertainment (boat).Chapter 06 .
the success of the taxpayer in carrying on other similar or dissimilar activities. which are earned. the expectations that assets used in the activity may appreciate in value. If any positive income remains. utilities. What are the two components of the self-employment tax? Is either component limited? Answer: Self-employment tax consists of two parts. the amount of occasional profits. if any. the financial status of the taxpayer. the expertise of the taxpayer or his advisors. and whether the activity creates elements of personal pleasure or recreation. 6-5 . In tax year 2007. 16.Self-Employed Business Income Schedule C 14.500 of wages and self-employment income is subject to the social security tax. the social security tax and the Medicare tax. and depreciation (depreciation is used last) can be deducted. The Medicare tax is not limited. The gross income is first reduced by regular trade or business expenses (not related to the home) and home office expenses that would be deductible in any event (mortgage interest and property taxes). Discuss the limits on home office expense deductibility. the business use portions of insurance. Some of the factors that determine whether an activity is to be considered a hobby or a trade or business include the manner in which the taxpayer carries on the activity. Answer: Home-office expenses that would not be otherwise deductible (such as insurance. The tax base for the social security tax is limited. the time and effort expended by the taxpayer in carrying on the activity. Why were the hobby loss rules established? What factors determine whether an activity is a trade or business or a hobby? Is any one factor controlling? Answer: Congress established the hobby loss rules in order to limit deductible losses from activities that are primarily for personal pleasure instead of a trade or business. 15. and depreciation) are limited to the gross income from the business use of the home. the taxpayer’s history of income or losses with respect to the activity. utilities. All the facts and circumstances are to be taken into account and no one factor is determinative in the hobby determination.Chapter 06 . only the first $97.
c.000 15. d. An itemized deduction if not reimbursed.600 $121. d. $120.000 1. b. c. b. c. A deduction from AGI.500 $125. Interest on investment indebtedness. Property taxes on business equipment.000 5. b.Chapter 06 .500 $150. A deduction for AGI. Answer: a 18. Which of the following is not a “trade or business” expense? a. A deduction from AGI limited to the amount in excess of 2% of AGI.000 4.Self-Employed Business Income Schedule C Multiple Choice 17. had the following income and expenses in her business: Fee Income Expenses: Rent Expense Penalties paid for late payment of state and federal income taxes Office expenses Supplies Interest paid on note used to acquire office equipment City impound fees and parking tickets for parking violations How much net income must Farrah report from this business? a. an attorney. Farrah. Depreciation on business property.500 900 Answer: c 6-6 . d. Answer: a 19. Trade or business expenses are treated as: a.500 $136. Cost of goods sold.000 3.
$2. he sells the equipment. $2.Self-Employed Business Income Schedule C 20. Answer: b 6-7 . Answer: a 21. He did not elect to expense the equipment under §179. $1. Edith’s expenses for the trip are as follows: Air fare Lodging (9 days × $165) Meals (9 days × $80) Taxi from airport to hotel and back Edith’s travel expense deduction is: a.749. On January 1. b.485 720 60 Answer: b 22. 2002. What it the cost recovery deduction for 2007? a.429. she sells the equipment to a scrap metal dealer. What is the cost recovery deduction for 2007? $ 0. Then she took four days of vacation to go sightseeing. flew from Miami to San Diego to attend an accounting conference that lasted five days. $725 1. On April 15.630.000 to be used in her business. c. 2007. 2007. She did not elect to expense the equipment under Section 179. On May 5.000 to be used in his business. a CPA. $ 892 $ 1.498 No deduction allowed.010. Edith.Chapter 06 . d.810. $1.784 $ 2. $1.990. Andy purchased some furniture and fixtures (7-year property) for $10. On June 30. d. 2005. Jill purchased equipment for $40. $2. c. b. $ 875.
000 $ 31. $6. Answer: b.000. $0. $6. Don purchased an office building on March 30. Answer: c 24. b. $ 7.000 of which was for the land. $5. d. d. $25. Fourth year. $25. What is the cost recovery deduction for 2007? a.083. On July 30.Chapter 06 . Assume that he has income from his business of $30.000 Answer: d 6-8 . c. Ken purchased an apartment building for $500.000. 6. $9. 2004 for $250.000.621. $4. On June 30.850.000 for his business. c. d. What is the maximum deduction he can take for his business in relation to the log skidder purchase? a. Answer: d 26.769.429 $ 55. Cory purchased a log skidder (seven year property) for $55. 2007. What is the cost recovery deduction for 2007? a. During the year. $5. $4.000. $3.955.860 $ 30.925.5 months. c.Self-Employed Business Income Schedule C 23. Determine the cost recovery deduction for 2007. d. a.000.410. c. Roy purchased an office building on March 30. $0. he sold the office building. $5.335.125. and he and his wife have combined salaries and wages income of $40. 2007 for $250. 25. b.574. b.000 of the price was for the land. b. 2007. $3.
4. c. 12. 7. gasoline. and vehicle registration fees. Delivery truck. Office furniture. Jordan has two jobs. b. she works as a short order cook at the Greasy Spoon Restaurant. On a typical day. 11. maintenance and repairs. d. When her shift at the motel is over. It includes parking fees. Which of the following is false with respect to the standard mileage rate? a. d.Chapter 06 . oil. Answer: a 28. It does not include interest expense on acquisition of the automobile. It can be used if the taxpayer owns the vehicle and uses the standard mileage rate for the first year it was placed in service. Answer: b 29. tolls. d. c. c. Answer: b 6-9 .Self-Employed Business Income Schedule C 27. b. she drives the following number of miles: Home to Moonlight Motel Moonlight Motel to Greasy Spoon Restaurant Greasy Spoon Restaurant to home 4 miles 7 miles 12 miles How many miles would qualify as transportation expenses for tax purposes? a. b. Computer. and property taxes on the vehicle. insurance. It encompasses depreciation or lease payments. Office building. She works as a night auditor at the Moonlight Motel. Section 179 expense is available for all of the following business assets except: a.
800 in interest and $480 in county property tax on the car.895 $ 1.600 2. $5.815. $ $ $ $ 3.Chapter 06 . The following expenses related to his home: Mortgage Interest Real Estate Taxes Utilities Insurance Repairs Depreciation (on business use portion of home) $ 10. b. Frank also paid $1. His home is 2400 square feet in total. Frank purchased a vehicle for business and personal use. c.000 of business expenses from his home based business. he used the vehicle 70% for business (11. Jimmy took a business trip from Dallas to Brazil. d.Self-Employed Business Income Schedule C 30. b.404 3. His expenses were as follows: Airfare Lodging (7 days x $300) Meals (7 days x $85) Taxi fares ($600 to and from business meetings) How much is Jimmy allowed to deduct? a.000 miles) and calculated his vehicle expenses using the standard mileage rate.000 of business revenue and $22. Answer: d 31. Jake had $27. d. $7. He uses 600 square feet of his home exclusively for the business. What is the total business deduction related to business use of the car? a.400 600 2. he spent his time sightseeing and relaxing. c. He was there for a total of 7 days of which 2 were weekend. Over the weekend.400 $ 2.200 6-10 .135. Jake runs a business out of his home. $7. $5.800 1.400 1.615.335.100 $ 595 $ 800 Answer: c 32. In 2007.598 4.496 4.
000) and $0 carryover. b. Annie is self-employed and has $58. All of the above. d. 33. c. $550 and $0 carryover. She also has investments that generated dividends of $3. c.Chapter 06 . Answer: d 34.548 8. Expertise of the taxpayer or his or her advisers. Which of the following is not a relevant factor to be considered in deciding whether an activity is profit-seeking or a hobby? a. What is Annie’s self-employment tax for the year? a. c. ($14. An accounting bookkeeper taking a CPA review course to pass the CPA exam and become a CPA Answer: c 35. Manner in which the taxpayer carries on the activity. Which of the following individuals can deduct the stated educational expenses? a. b.619 8. Answer: c – The expenses from the home office can not create a loss in the business. b. A CPA who attends a review course to obtain his building contractor’s license. b. $ $ $ $ 8. Time and effort expended by the taxpayer in carrying on the activity. c.874 Answer: a 6-11 . if any? a. d.000 in income from her business.000 and interest of $2. d. d.Self-Employed Business Income Schedule C What is Jake’s Net Income from his business and determine the amount of expenses carried over to the following year.500. ($650) and $0 carryover. $0 and $650 carryover. A corporate executive attending an executive MBA program. A real estate broker who attends college to get an accounting degree.195 8.
9%. 12.200. 2. During the current year. The maximum tax bases and percentages for 2007 for the two portions of the selfemployment tax are: a. Kelly believes that obtaining a CPA license would improve her skills as a tax attorney. Social Security $97. 15. During the year.Chapter 06 . b. Unlimited. Unlimited.4% $94. Answer: a Problems 37.3%.50 $350. How much of these expenses can Kelly deduct? Why? Answer: Lodging Meals (50% deductible) Registration Transportation Total Deduction $400. 15.500 for tuition and $300 for books. She enrolls as a part-time student at a local college to take CPA review courses. Unlimited.00 $ 47. 2. 12. d. 15.3% $94.00 $150. 15. she attended a three-day seminar regarding new changes to the tax law.9%.Self-Employed Business Income Schedule C 36.200.00 $947.4% $97. Kelly is a self-employed tax attorney whose practice primarily involves tax planning. She incurred the following expenses: Lodging Meals Course registration Transportation $400 $95 $350 $150 a.500.500. she spends $1. c.3%.50 6-12 .3% Medicare Unlimited. How much can Kelly deduct? b.
Since obtaining a CPA qualifies Kelly for a new profession (although related). her entertainment expenses for her clients include: Cab fare to and from restaurants: Gratuity at restaurants Meals Cover charges $ 350 $ 300 $4.500. Jackie owns a temporary employment agency that hires personnel to perform accounting services for clients. During the year.000 $ 250 Jackie also held a holiday party for her employees. How is the deduction classified? __________________________________________________________ Answer: (a) Cab Fare 100% deductible Gratuity 50% “ “ Meals 50% “ “ Cover Charges 50% Party 50% $ 350 $ 150 $2. This argument. (b) The cab fare would be travel costs and the others would be considered “meals and entertainment. However. Can Jackie deduct any of these expenses? If so.Chapter 06 . In this situation an argument can be made that the education does not qualify Kelly for a new profession because she is already in the tax profession. which cost $1. the expenses are not deductible.” 6-13 . would be an extremely aggressive position. a. however. how much? __________________________________________________________ b. 38. the education expenses are not deductible if the education qualifies the taxpayer for a new trade or business.000 $125 $750. All expenses are reasonable.Self-Employed Business Income Schedule C Educational expenses are deductible if they are for education that (1) maintains or improves skills by the taxpayer in his employment or (2) meets the express requirement of an employer or law.
500 $6. His AGI (without consideration of consulting income) is $45. Answer: AGI before business Business Proceeds Business Expenses Interest & Taxes Utilities Main.000 $4.000. And Repairs Depreciation limited to $387 Net Business Income $4. He uses 25% of his home exclusively for the consulting practice.500 -$1.500 *75% of this amount would be deductible on Schedule A as an itemized deduction.Chapter 06 . He is single and 63 years old.Self-Employed Business Income Schedule C 39. Other information follows: Income from consulting business Consulting expenses other than home office Total costs relating to home Interest and taxes Utilities Maintenance and repairs Depreciation (business part only) Calculate David’s AGI.000 -$1. 6-14 .500 $ 450 $1.625* -$ 375 -$ 113 -$ 387 AGI 0 $45.000 $1.500 $1.000 $45. David is a college professor who does some consulting work on the side.
Self-Employed Business Income Schedule C 40. 2006.Chapter 06 . Gerald loaned Main Street Bakery $55. 41.470 6-15 .400 of the loan. A non-business bad debt is treated as a short-term capital loss. In 2007. Answer: If Gerald has a business relationship [see Reg. In 2005.000 in 2006. the expenses are deducted on Schedule C as follows: Airfare Lodging Meals Tuition Fees 100% deductible 100% deductible 50% deductible $480 $290 $ 50 $650 $1. Gerald received $3. Calculate Gerald’s possible deductions with respect to the loan for 2005. His unreimbursed expenses were as follows: Airfare $480 Lodging 290 Meals 100 Tuition and fees 650 How much can Charles deduct on his return? Answer: Since he is self-employed.166-5(b)(2)] with Main Street Bakery.000 in final settlement of the loan. §1. and 2007.000. Gerald he learned that he would probably receive only $6. attended a conference on the impact of the new building codes on real estate investments. There would be no deduction in 2004 or 2005 because the debt was not worthless and there was some prospect of collection. then Gerald is allowed an ordinary deduction of $52. a self-employed real estate agent. Charles. In 2006.
03485 = $7.000 x .000) limit Basis $225. Determine the amount of cost recovery that can be taken in 2007. The depreciable basis is the lower of the FMV or basis at the date of conversion. She also acquired 7 year property in July 2007 for $350.Self-Employed Business Income Schedule C 42.000 x . Determine Betsy’s total cost recovery deduction with respect to her purchases in 2007.1429 7 year MACRS $125.318. Betsy acquired a new network system on June 5. without regard to the §179 election. Janet purchased her personal residence in 1998 for $250.000 $ 32.000 Depre. 7 year Property §179 $350.153 5 year Property Basis $55.50 b.712.000. In January 2007 she converted it to rental property.000 ($125.000 x . Determine the amount of cost recovery that could be taken in 2007 if the fair market value of the property was $350.000 $168. b. Using §179 on this asset is not incorrect but typically a taxpayer would want to take §179 on the asset with the longer life to maximize the deduction over time. Therefore. $210.000. Answer: The answer to this question will vary if §179 is taken on the 5 year asset.000 x .Chapter 06 .153 43. the depreciable basis is $210.000 depreciated on a 27 ½ year mid-month method.000. Betsy will elect §179 expensing immediately. (5-year class property) for $75. The fair market value at the time of conversion was $210. 2007. She expects taxable income from the business will always be about $175.000. $250.000.000. Basis $225.03485 = $8. Answer: a.20 5 years MACRS Total Cost Recovery $ 11. a.50 6-16 .
564% = $76.000 §179 ($12. 45.50. On March 1.000 on furniture and equipment in 2007.470 2. 2007 for $3 million.858 $13. 2007. determine the cost recovery for 2007 with respect to the conference table. Assume Huron does not make the §179 election.5/12 = $16.749% = $22.564 x 2. Therefore. 2007. Answer: $21.000. On June 10.Self-Employed Business Income Schedule C 44. Michael is the sole proprietor of a small business. If Michael elects to take the §179 deduction on a conference table that cost $25. the total is limited to $2. 6-17 .000 x 14. Answer: 2006 2007 2008 2009 2010 $3.000 (included in the $245.000.300 . Huron purchased equipment (7-year class property) for $75.29% = $10.858 47. he sells the warehouse. Answer: Remember.000. The car was used exclusively for her business purposes. 2011. Determine Huron’s cost recovery deduction for computing 2007 taxable income.000 14. Compute Jackie’s cost recovery deduction in 2007 assuming no §179 expense was taken.29% Total Cost Recovery $12.000 $ 1. However.025 46. his business income is $12. the §179 expense is limited to $12.000 before consideration of any §179 deduction.960 because of the luxury auto limitations. §179 cannot create a NOL. On February 4. Answer: $75. He spends $245. Rueben acquires a warehouse on September 1.5 year MACRS depreciation.Chapter 06 .000 x . $25. Determine Rueben’s cost recovery for 2007 and 2011.000) $13.920 Same as 2004 Same as 2004 X 2.000 total).20 = $4. In June 2007.500 × .500.717. Jackie purchased and placed in service a car she purchased for $21.
425 $500. Warehouse Answer: a. Walt purchased a computer for $5. Answer: Exclusive Business Use 5 year MACRS $5.5 years 1999 2007 b.180 60% Personal 40% Business 5 year S/L $5. What is the tax savings if Walt used the computer exclusively for business? Assume that Walt would not elect §179 expensing and that he is in the 25% tax bracket. Brittany purchased a building for $500. (Purchase price does not include land).000 x 1/5 x ½ = $200 Deduction Tax Savings Difference in Deductions $800 x 25% = $200 Savings 6-18 . Using the statutory percentage method. 39 years 1998 $500.000 x 20% = $1. 1999.000 x 40% = $2.820 49. calculate the cost recovery for 1999 and 2007 if the real property is: a.305 2006 $500. 27.Self-Employed Business Income Schedule C 48. or he could allow his family to use the computer 60% of the time and 40% would be for business use.000.485% = $17.Chapter 06 .461% = $12.000 x 3. Determine the tax deduction for year of acquisition under both alternatives.000 x 2.000 x 3.564% = $12. He could use the computer exclusively for his business.000 Deduction $500. Residential real property b.636% = $18.000 x 2.000 on January 1.
5 cents Interest $1. a.Chapter 06 .000 to use 80% for her sole proprietorship. Answer: The standard mileage rate is for depreciation. oil.000 in 2007.120 = $120 $9. and 13. $45.) Answer: a.Self-Employed Business Income Schedule C 50. 13.5 cents/mile = $5.2% (Appendix Table 1 – 3rd year of 5 year MACRS) = $8.912. and registration fees. If Jessica uses the standard mileage method.400 miles x 48.000 miles Business Portion x 48. how much may she deduct on her 2007 tax return? b. gasoline. In 2007.400 in interest and $150 in property taxes on the car.640 x 80% = $6. What is the deduction for 2007 assuming the actual method was used from the beginning? (calculate depreciation only – the truck is not limited by the luxury auto rules.730 = $1.000 miles (80%) for business and calculated his vehicle expenses using the standard mileage rate. 51.400 x .80 Total Deduction on Schedule C = $8. This depreciation is assuming the luxury auto limits do not apply. 18. maintenance and repairs.000 in 2005. He paid $1. Total miles driven include 12. In 2005.000 x 19.000 miles x . Calculate the total business deduction related to the car.000 lbs.80 business use = 10.500 in 2006. The limits do not apply to autos greater than 6. Jessica bought a new truck for $45. Interest and taxes are deductible in addition to the standard mileage rate. Jose purchased a vehicle for business and personal use. he used the vehicle 18.80 Taxes $ 150 x .044 b. insurance. 14.970 The $30 of taxes (20% personal) is deducted on Schedule A as an itemized deduction (see chapter 5) 6-19 .
She incurred the following expenses: Airfare $ 550 Lodging 3. and damaged a barn. Loss 6-20 .000 $35. had $45.000 $68.000 $15.000 FMV After Damage $0 $0 $95. Answer: Proceeds Bld. the president of the United States declared all areas affected by the hurricane as a disaster area. Jordan took a business trip from New York to Denver.Self-Employed Business Income Schedule C 52.000 Equip $15. Airfare 100% deductible Lodging 9/14 days x $3.000) ($53.000 Insurance Proceeds $55. some farm equipment.000.000 Building Equipment Barn Due to the extensive damage throughout the area. Derrick.Chapter 06 . who files a joint return with his wife. A hurricane hit the area and destroyed a farm building.000 $95.000) = Gain/loss ($30. 100% of the travel expenses are deductible.000 $145. $55. Their taxable income for the current year is $150.000) Ord.000) $( 98. She spent two days in travel. Derrick owns a farm in eastern North Carolina. excluding the loss from the hurricane. Calculate the amount of the loss by Derrick and his wife and the year in which they should deduct the loss (Hint: Chapter 5 provides information concerning nationally declared disaster areas).000 Basis/Decrease in FMV ($85.000) ($15.000 FMV Before Damage $115.000) = ($50.143 53.000 Meals 9/14 days x $900 x 50% Entertainment 100% x 750 x 50% $ 550 $ 1.000 Barn* $35.000) = ($68. and visited friends for five days.000 Meals 900 Entertainment of clients 750 How much of these expenses can Jordan deduct? Answer: Since the trip is primarily for business (and not foreign travel).000 of taxable income last year.000 $49. Item Adjusted Basis $85. conducted business for nine days.929 $ 289 $ 375 $ 3.
the loss is calculated using the lesser of the decrease in FMV or the basis.200 350 a.000 of AGI.000. Expenses that reduce basis (depreciation) b. Derrick would report the losses on Form 4684 pg.500 $4. A loss of $6. Her records show the following related income and expenses for the current year: Income from fees and sales Expenses: Dog food Veterinary bills Supplies Publications and dues $2.000 of the loss against last year’s income (get an immediate refund) and use the remaining amount of the loss to the current year tax return.000 3.550 would be reported on Schedule C as a business. Form 1040 Expenses – (Schedule A – Misc.Self-Employed Business Income Schedule C *Since the Barn was only partially destroyed. $2. Expenses already deductible on Schedule A – mainly mortgage interest and property taxes. Since Derrick only had $45. Other expenses that do not reduce basis of property (non-depreciation expenses) 3.500 1.Chapter 06 . Since the loss was in a declared disaster zone.500 0 6-21 . the proper strategy would be to use $45. 2. The decrease in the FMV was only $50. Her home is on 15 acres.000 before consideration of income or loss from her dog breeding business. 10 of which she uses to house the animals and provide them with ample space to play and exercise. 54.000 ordinary loss.500 $2. Derrick has the choice of taking the loss against last years income and getting a refund immediately or waiting until filing his current year tax return. How must Rebecca treat the income and expenses of the operation if the dog breeding business is held to be a hobby b. Deductions) Expenses are allowed in the following order: 1. Hobby Other income. Rebecca is a doctor with an AGI of $125. How would your answer differ if the operation were held to be a business? Answer: a. 2 and have a $98.
Answer: Hobby Revenue $ 12.00 FICA Limit $97. (limited to income)($ 1. Eric’s AGI is $55. and his AGI. Answer: $180.000) Utilities ($ 1.000.000 4. Will has self-employment earnings of $180.40% = $ 12.000 Without regard to this activity.456 6-22 . ($ 1.9% = $ 4. In 2007. Determine how much income Eric must report.000 Prop.Self-Employed Business Income Schedule C 55.500 1.000 1. 56.230.000.825 Depr.821 Self-employment tax $ 16.911 x 50% Deduction FOR AGI $8. who is single.000 x . The activity produces the following revenues and expenses: Revenue Property taxes Materials and supplies Utilities Advertising Insurance Depreciation $12.500) Adv.9235 = $166. the amount of the expenses he is permitted to deduct. Eric.000.900) Insurance ($ 775) Income before Depre.Chapter 06 . Taxes ($ 2.825) Income from hobby $ 0 Eric’s AGI is $55.500 x 12.090 Medicare $166.000 2. $ 1. Compute Will’s selfemployment tax liability and the allowable income tax deduction of the self-employment tax paid.000) Supplies ($ 4.230 x 2. participates in an activity that is appropriately classified as a hobby.900 775 5.
000 Cost Spencer is a new client and unfortunately does not have a copy of his prior year tax return.500 $3. Calculate the current year depreciation allowance for Spencer’s business.Chapter 06 .000 $17.000 $230. Spencer does not wish to take a §179 deduction this year because he feels he will be more profitable in the future and would like the depreciation deduction at that time.500 $4.300 $2. Spencer used the following assets in his Schedule C trade or business in the tax year 2006: Asset Computer 1 Computer 2 Printer Computer 3 Equipment Auto Furniture 1 Furniture 2 Office Bldg.000 $2.000 $6. Correctly report the amounts on Form 4562.Self-Employed Business Income Schedule C 57. Date Purchased 03/12/04 05/05/04 08/25/07 05/25/07 03/20/05 05/01/07 02/12/05 08/15/05 04/01/07 8/25/07 05/15/07 Date Sold Business Use % 100% 100% 100% 100% 100% 80% 100% 100% 100% $3. 6-23 . He recalls that all of the assets purchased in prior years used MACRS depreciation (no §179 expense was taken).300 $18.
000 $17. However.000 × .000 $2. the luxury auto limits depreciation to $2.500 $4. 100% 100% 100% 100% 100% 80% 100% 100% 100% $3.Chapter 06 .487 $1.80 business use).184 Cost Method 2007 Expense ** The regular depreciation would be $2.Self-Employed Business Income Schedule C Answer: Asset Date Purch 03/12/0 4 05/05/0 4 08/25/0 7 05/25/0 7 03/20/0 5 05/01/0 7 02/12/0 5 08/15/0 5 04/01/0 7 8/25/07 05/15/0 7 Date Sold Busine ss Use Computer 1 Computer 2 Printer Computer 3 Equipment Auto Furniture 1 Furniture 2 Office Bld.300 $2.300 $18.2).00 0 5yr MACRS 5yr MACRS 5yr MACRS 5yr MACRS 7yr MACRS 5yr MACRS 7yr MACRS 7yr MACRS 39 SL $403 $259 $600 $460 $442 **$2. 6-24 .049 $4.880 ($18.448 $1.448 ($3.000 $6.8 × .000 $230.060 x .500 $3.
200) (2.700 Furniture 3/01/06 $5.200 miles 45.275) ( 125) (5. The following are the results from business operations for the tax year 2007: Gross Receipt from Clients Business mileage 35.300 Computer 2 6/01/07 $5.000 miles total during the year 2007 Dodge Caravan Placed in Service 05/01/05 Postage Wages Payroll taxes State license fee Supplies Professional education registration Travel to education course Plane Taxi Lodging $110/night × 2 nights Meals per diem $34 × 2 days Business Assets Date Purchased Cost Computer 1 5/18/07 $4.000 Phone Internet service Rent Insurance $145.000) Determine Lori’s self-employment income and prepare Schedule C and Schedule SE. §179 expense is elected on all eligible assets (§179 was not taken on assets purchased last year).Self-Employed Business Income Schedule C Tax Return Problem #1 Lori has a home health care business she runs as a sole proprietorship.700 Printer 3/01/06 $ 800 Copier 3/02/06 $1.Chapter 06 . 6-25 .000) ( 1.300) ( 975) ( 245) ( 40) ( 220) ( 78) (600) (450) (7.000 (500) (17.
Chapter 06 .000 personal Supplies $ 500 Cell phone charge $ 540 Cassandra (SS# 333-33-3333) resides at: 1400 Medical Street Apt. She also has a consulting practice that had the following income and expenses: Revenue $48.500 miles for business 13.000 Laptop computer purchased 4/23/07 $2. CA 12345 6-26 . who is single. Cassandra Albright. 3A Lowland.300 Travel 2.Self-Employed Business Income Schedule C Insert Schedule C Filled in One Page Insert Schedule SE One Page Filled in Tax Return Problem #2 During 2006. works part-time at doctors office and receives a W-2.
Schedule C. Form 4562. sec. and Schedule SE. Schedule C. You will need Form 1040.300 Prepare Form 1040 for Cassandra for 2007. Schedule B.100 3.100 1099-INT 1099-DIV Old Bank Bake Co.Chapter 06 .Self-Employed Business Income Schedule C Cassandra’s W-2 Wages Federal withholding Soc.300 $ 2.983 $45. Schedule A. withholding Medicare withholding State withholding $45. sec.300 $ 4.265 $ 350 $ 3.300 3.450 $ 12.809 $ 657 $ 2.265 $ 2. Form 1040 2 full pages Schedule A One full page Schedule B One full page Schedule C One full page Schedule SE One full page 6-27 . wages Soc. Ordinary dividends $ Qualified dividends $ Cassandra had the following itemized deductions: State income tax withholding (above) State income tax paid with the 2006 return Real estate tax Mortgage interest $ 2. Inc.
600 3.000 $12.182 425 Jason’s Landscaping Revenue Wages Payroll tax Cell phone charge Assets: Purchased Truck 2/05/07 Mower1 3/08/07 Mower2 3/08/07 Equip 6/25/07 Amount $28. sec.840 Medicare withholding $ 664 State withholding $ 2.595 Bus. Jason owns his own landscaping business and Vicki works as an executive assistant at a university.000 $ 3.870 Soc. withholding $ 2.Self-Employed Business Income Schedule C Tax Return Problem #3 During 2007. 555-55-5555 Born 2000 Catlin 666-66-6666 Born 2004 Vicki’s W-2 Wages $ 45.500 is deducted on last year’s return 1099-INT 1099-DIV First Bank of Alabama IBM. sec.Chapter 06 .400 $ 1.000 41.800 Soc. who are married with two children. Jason and Vicki Hurting. AL 54321 They have two kids under the age of 17: Jason Jr.800 Federal withholding $ 6. Inc Ordinary dividends Qualified dividends $ $ $ $ 897 225 125 125 $153. wages $ 45.290 1099-G from AL – State tax refund – taxable because $2. Jason (SS# 333-44-444) and Vicki (SS# 444-33-3333) resides at: 123 Bate Street Bright. had the following tax information. Use 100% 100% 100% 100% 6-28 .
Self-Employed Business Income Schedule C The Hurtings had the following itemized deductions: State income tax withholding (above) Real estate tax Personal property tax Mortgage interest Charitable contributions $ $ $ $ $ 2. You will need Form 1040.300 2. Schedule C. Schedule B.290 2. Form 4562. Schedule A.400 Prepare Form 1040 for the Hurtings for 2007.100 425 8.Chapter 06 . Schedule C. Form 1040 2 full pages Schedule A One full page Schedule B One full page Schedule C One full page Schedule SE One full page 6-29 . and Schedule SE.
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