REG 1 - Gross Income: Part 2

Question 1

At what amount do the following gross incomes get reported for Schedule C:

1) Cash
2) Property
3) Cancellation of Debt

Answer 1

1) Cash = Amount received (cash basis)
2) Property = FMV
3) Cancellation of Debt = fully included in gross income

Question 2

How do salaries and commissions on Schedule C get expensed:

1) Salaries and commissions paid to others
2) Salaries and commissions paid to yourself

Answer 2

1) Salaries and commissions paid to others are fully expensed
2) Salaries and commissions paid to yourself can not be expensed because it is considered DRAW.
- You are taxed on NET PROFIT.

Question 3

What are the rules for expensing interest expense for Schedule C?

Answer 3

Interest expense must be “incurred and paid”.

• You can only expense interest for the months incurred.
• For example: you can’t pay Jan - April 2018 interest on Dec 2015 and expense full amount. You can only expense amount incurred.

Question 4

How are bad debts treated for Schedule C filers?

Answer 4

• Bad debts are ONLY allowed for accrual basis taxpayers

- Bad debts are NOT allowed for cash basis taxpayers

Question 5

What are examples of nondeductible expenses on Schedule C?

Answer 5

Nondeductible expenses
1) Salaries paid to yourself (considered draw)
2) Federal income tax
3) Personal portion of:
meals and entertainment, auto, interest expense (mortgage interest is Sch.A)
4) State and local tax (Sch. A)
5) Health insurance (adjustment to arrive at AGI)
6) Bad debt expense for cash basis taxpayer
7) Charitable contributions (Sch. A)

Question 6

How is inventory treated for Schedule C?

Answer 6

All taxpayers must use ACCRUAL method for inventory.

Question 7

What are the two taxes paid on net business income for Schedule C?

Answer 7

1) Income tax

2) Self-employment (SE) tax - you are both employee and employer (pay SS and medicare)

Question 8

What are the carryback/carryforward rules for net taxable loss on Schedule C?

Answer 8

1) 2 year carryback

2) 20 year carryforward

Question 9

Define uniform capitalization rules?

Answer 9

Costs required to be capitalized:

1) Direct materials
2) Direct labor (compensation, payroll taxes)
3) Applicable indirect costs

Costs not required to be capitalized:
Period expenses:
1) Selling
2) Advertising
3) Marketing
4) General and administrative expenses
5) Research