Chapter 3 Flashcards
Schedule C
Profit or loss From Business for Sole Proprietorship
Schedule C is filed by
self-employed taxpayers
Schedule E
rental and royalty income
Schedule F
farm and ranch income
“Trade or Business”
any activity engaged in for profit
Intermittent activities (e.g., casual craft sales) or leisure pursuits (e.g., wine making) do not always rise to the level of a trade or business and may require reporting under the hobby loss rules
The Ordinary and Necessary Test
the expense is commonly found in the specific business, and is helpful and appropriate in running the business
The Business Purpose Test
Expenses must have a legitimate business purpose to be considered deductible
The Reasonableness Test
The tax law requires that deductions be reasonable (not extravagent) to be deducted.
Cannot Deduct
Personal, living, and family expenses
Capital expenditures
Expenses related to tax-exempt income
Expenditures related to the sale of illegal drugs
Illegal bribes and kickbacks
Fines, penalties, and other payments to governments related to the violation of law
Lobbying and political expenditures
Settlement or attorney fees related to sexual abuse or harassment if subject to a non-disclosure agreement
Schedule C requires the taxpayer to provide
a principal business or professional activity code
Schedule C
Comes right off the income statement
lists income, expenses & COGS
Self Employment Tax
calculated on 1040
equivalent to 2x FICA + addl. Medicare where applicable.
Cap of 132900 for 12.4 %
No cap for 2.9%
Inventory
the stock of goods or materials that a business holds for the purpose of resale to generate a profit
COGS
is a tax deduction
Inventory Valuation Methods
FIFO
LIFO
W/A
SPID
Form 970
Declares a business’ Inventory Costing Method (can only be changed with IRS Permission
Transportation Deductions
Plane, Rail, Bus, Operating & Maintaining an Automobile
But NOT Commuting
Commuting Deductions
Only if:
- Outside the Metro Area where worker normally works
- Commuting to a temporary work location
- Commuting to a regular office if you normally work at home
Hauling Deduction
Hauling tools & instruments in your personal vehicle or a rented trailer/truck is deductible
Mileage Deduction
Actual cost or standard (.58/mi)
Standard Mileage deduction does not include
Fuel OIl Insurance Repairs Maintenance Depreciation
To use Standard Mileage deduction one must:
own or lease the vehicle
not operate a fleet (5+)
not claim depreciation (other than straight line)
not have claimed section 179 (expense election)
Actual Mileage Cost
% of miles driven for business X cost (FOIRMD)
Travel expenses
ordinary and necessary expenses incurred in traveling away from home, overnight, in pursuit of the taxpayer’s trade or business
Deductible Travel Expenses
50% meals lodging taxes tips laundry
A tax home is
the taxpayer’s principal place of business or employment
Temporary Assignment Deductions
apply only if not practical to return home or attendance is required.
If it lasts over 1 year, it is no longer temporary, and any reimbursements are considered income.
Combined Business/Pleasure trips
Only business expenses are deductible
-travel to and from
for business (unless mostly personal)
- business lodging
-business meals
