M3 - Gross Income: Part II Flashcards
Business Income (Loss)
Net income from self-employment is computed on Schedule C. The net income from the sole proprietorship is then transferred to Form 1040 as one amount.
Business Expenses
1) Cost of goods sold
2) Salaries and commissions paid to others
3) State and local business taxes paid
4) Office expenses (supplies, equipment, rent)
5) Actual automobile expenses or a standard mileage rate
6) Business meal expenses at 50 percent
7) Depreciation of business assets
8) Interest expense on business loans (limited to 30% of business income, excluding interest income, before depreciation and interest expense deductions)
9) Employee benefits
10) Legal and professional services
Non-deductible Business Expenses
1) Salaries paid to the sole proprietor
2) Federal income tax
3) Personal portion of auto, travel and meal expense, interest expense (itemized deduction), state and local tax expense (itemized deduction), health insurance of a sole proprietor (adjustment to AGI)
4) Bad debt expense
5) Charitable contributions (itemized deduction)
6) Entertainment expenses
Net Business Income is Taxable
Net business income is subject to two federal taxes, Income Tax and Self-employment (SE) Tax. SE tax is calculated on 92.35% of net business income.
Medicare Tax - 2.9% (All Income)
Social Security Tax - 12.4% (up to $142,800 (2021))
Net Taxable Loss (NOL)
A business with a loss may deduct the loss against other sources of income subject to limitations. A combined excess business loss is not allowed and must be carried forward as a new operating loss (NOL).
NOLs prior to 2018 can offset 100% of future year’s taxable income, but can only be carried forward 20 years. NOLs generated after 2017 can be carried forward indefinitely.
Starting in 2021, NOL carryforwards from post-2017 tax years can only offset 80% of taxable income.
Uniform Capitalization Rules
The uniform capitalization rules apply to all business enterprises that meet the criteria for implementation and provide guidelines with respect to capitalizing or expensing certain costs.
Uniform Capitalization Rules (Types of Property)
1) Produced for Use: real or tangible personal property produced by the taxpayer for use in his (her) business.
2) Produced for Sale: real or tangible personal property produced by the taxpayer for sale to his (her) customers (manufacturer’s inventory)
3) Acquired for Resale: real or tangible personal property acquired by the taxpayer for resale (retailer’s inventory)
Uniform Capitalization Rules - Costs Required to be Capitalized
Include direct materials, direct labor, and applicable indirect costs (utilities, warehousing costs, repairs, maintenance, indirect labor, rents, storage, insurance, depreciation and amortization, supplies.
Uniform Capitalization Rules - Costs Not Required to be Capitalized
Include selling, advertising, and marketing expenses, certain general and administrative expenses.
Farming Income
A person (or entity) who engages in the management or operation of a farm with the intent of earning a profit will report income and expenses on Schedule F.
Rental Income (Loss)
Rental activity is reported on Schedule E.
Rented fewer than 15 days: rental income is excluded from income, mortgage interest and real estate taxes are allowed as itemized deductions.
Rented greater than 15 days: expenses are prorated between personal and rental use.
