M3 - Gross Income: Part 2

Question 1

How is prepaid interest treated for a cash basis taxpayer?

Answer 1

Deduct the current year’s interest and amortize the balance over the next 2 years

Question 2

Gross income on Schedule C:

Answer 2

• Cash = amount received (cash basis)
• Property = FMV
• Cancellation of debt

Question 3

Expenses on Schedule C

Answer 3

• COGS
• Salaries and commissions paid to others
• State and local business taxes paid
• Office expenses
• Auto expenses
• Business meal expenses at 50%
• Depreciation of business assets
• Interest expense on business loans
• Employee benefits
• Legal and professional services
• Bad debts actually written off for ACCRUAL basis taxpayer

Question 4

Self-employment net income:

Answer 4

Gross business income
- Business expenses
= Profit or loss

Question 5

Nondeductible expenses on Schedule C:

Answer 5

• Salaries paid to yourself
• Personal auto, travel and meal expense
• Personal interest expense (can be itemized deduction if mortgage interest or investment interest is paid)
• Personal state and local tax expense (report as itemized deduction on Schedule A)
• Personal health insurance
• Bad debt expense of a CASH basis taxpayer
• Charitable contributions (itemized deduction on Schedule A)
• Entertainment expenses

Question 5

Nondeductible expenses on Schedule C:

Answer 5

• Salaries paid to yourself
• Personal auto, travel and meal expense
• Personal interest expense (can be itemized deduction if mortgage interest or investment interest is paid)
• Personal state and local tax expense (report as itemized deduction on Schedule A)
• Personal health insurance
• Bad debt expense of a

Question 6

Calculation of self-employment tax:

Answer 6

Earnings of $20,000

$20,000 x 92.35% = $18,470
$18,470 x 15.3% = $2,826

Question 7

Uniform capitalization rules apply to:

Answer 7

• real or tangible personal property for USE
• real or tangible personal property for SALE
• real or tangible personal property ACQUIRED FOR RESALE, provided the taxpayer’s annual average gross receipts for the preceding three years EXCEEDS $27M

Question 8

Costs required to be capitalized:

Answer 8

• direct materials
• direct labor
• factory overhead

Question 9

Costs NOT required to be capitalized:

Answer 9

Period costs (expenses):
- Selling
- advertising
- marketing
- G&A expenses
- research
- officer compensation

Question 10

Rental activity is reported on:

Answer 10

Schedule E

Question 11

Formula for calculating rental income:

Answer 11

Gross rental income
+ prepaid rental income (nonrefundable deposit)
+ rent cancellation payment
+ improvement-in-lieu of rent ((FMV)
- rental expenses
= net rental income/loss

Question 12

Rented fewer than 15 days:

Answer 12

treated as a personal residence
- rental income is excluded from income
- mortgage interest and real estate taxes are allowed as itemized deductions

Question 13

Rented more than 15 days:

Answer 13

treated as a personal/rental residence
- expenses must be prorated between personal and rental use
- NO rental loss is allowed