M3 - Gross Income: Part 2

Question 1

income subject to self-employment includes amounts from an _________ and _____. It does not includ _____, _____, _____, _____, or _____

Answer 1

• unincorporated sole proprietorship (schedule C) and general partnerships
• W-2 wages, interest, dividends, rental real estate income, or income from an S Corp.

Question 2

what are teh two taxes on net business income

Answer 2

1. income tax

2. Federal self-employment (SE) tax

Question 3

SE Tax Description for Net Business Income

Answer 3

• an adjustment to incom is allowed for one-half (which is 7.65% of up to 132,900 of SE income in 2019 plus 1.45% of SE income thereafter, if applicable) of SE tax (Medicare plus SS) paid.
• This allows the sole proprietor the ability to “Deduct” the employer portion of the SE tax as an adjustment to gross taxable income (of which the next Schedule C amount is a part).
• All SE income is subject to the 2.9% Medicare tax
• Up to $132,900 in 2019 is subject to the 12.5% SS tax (i.e. a total of 15.3% on SE earnings up to 132,900 in 2019)
• The actual SE tax is calculated on 92.35% of SE income

(e.g. Tyler earns 20K from his consulting business, which he runs a sole proprietorship. Tyler’s SE tax is 20K *92.35% = 18,470 *15.3% = 2,826 SE tax

Question 4

Only _______ are deductible against business income on Schedule C

Answer 4

business expenses

Question 5

SE income is subject to _____ and ______

Answer 5

Federal income tax and SE tax. The SE tax is made up of SS (12.4%) and Medicare (2.9%), for a total of 15.3%

Question 6

A taxpayer’s deductible losses are limited each year to _____ (single) and _____ (married). Hunter’s 50K loss is under this limitation. The 10K remaining business loss may _____ and ________

Answer 6

• $250K
• 500K
• be carried forward indefinitely
• is limited to offsetting up to 80% of taxable income each subsequent year

Question 7

What types of property is subject to the UNICAP rules beginning in 2018

Answer 7

• Real or tangible personal property acquired by the taxpayers for resale (retailer’s inventory) are all subject to UNICAP. However, retailers with average gross receipts under $25 million for the 3 preceding tax years are exempt.
• Real or tangible personal property produced by the taxpayer for use in his or her trade or business is subject to the UNICAP rules
• Real or tangible personal property produced by the taxpayer for sale to his or her customers (manufacturer’s inventor) are subject to the UNICAP rules

Question 8

What types of property is NOT subject to the UNICAP rules beginning in 2018

Answer 8

• UNICAP rules do not apply to retailer’s inventroy if the retailer’s average gross receipts for the preceding 3 tax years do not exceed $25 million annually

Question 9

Certain contracts are exempt from the requriements of long-term contract income recognition for tax purposes and may use other methods (e.g. completed contract method) to calculate their taxable income under the contract for regular income tax purposes which include (2)

Answer 9

1. small contractors (projects that are expect to last no more than 2 years and are performed by a taxpayer who has average gross receipts not exceeding $25 million for the 3 years that precede the tax year in questions)
2. Home construction contractors (where at least 80% of the total contract costs are related to the construction or rehabilitation of certain dwelling units, which do not include hotels, etc., where the majority of the use is on a transient basis).

Not exempt example:
- A long-term construction contract the includes land and less than 10% of the total contract cost related to the actual construction of property on the land is exempt from the POC method reporting requirement. B/c the contract has 20% of the cost related to construction of property, the contract is not exempt.

exempt example:

• project that are expected to last no more than 2 years and are performed by a taxpayer with average annual gross receipts not exceeding $10 million for the 3 previous years are exempt from POC reporting requirements
• The service of an engineer contracted by a builder on a long-term project is exempt from the POC reporting requirements
• Services performed under a maintenance agreement are exempt from POC reporting requirements

Question 10

Cost of sales from inventory formula =

Answer 10

Beg inventory + purchases - ending inventory = cost of sales

sales - cost of sales = GP

Question 11

______ and ________ are either deducted on the rental Schedule E or as an itemized deduction (subject to limitations).

Answer 11

-RE taxes and mortgage interest

Question 12

B/c the Groves rented their cabin for fewer than ____ days, it is treated as a personal residence. Therefore, the _____ is excluded from ______ and _____ and _______ are deductibe as itemized deductions on Schedule A (subject to limitations)

Answer 12

• 15
• Rental income
• Gross income
• Mortgage interest
• real estate taxes

Question 13

Income subject to SE included amounts from an ______ and _____. It does not include ____, ____, ____. _____, or _______

Answer 13

• unincorporated sole proprietorship (schedule C)
• GENERAL partnerships

W-2 wages, interest, dividends, income from an S corporation, or income as a limited partner from a limited partnership