Tax Preparer Guide to 1040 Chapter 11 Self-Employment Activities

Question 1

Form 1099-MISC

Answer 1

Miscellaneous Income
Payers use this information return to report payments to independent contractors for services of $600 or more in total for the year.

Question 2

Form 1099-K

Answer 2

Merchant Card and Third Party Network Payments
Financial institutions use this information return to report merchant transactions on credit cards, debit cards, and electronic transactions. However, no reporting is required unless the taxpayer exceeds $20,000 in total transactions and exceeds 200 transactions processed during the year.

Question 3

Form 1065

Answer 3

U.S Return of Partnership Income

Question 4

Cash Method of Accounting

Answer 4

Income is reported when actually or constructively received (i.e., when the taxpayer has control over the funds). Expenses are deducted when paid.

Question 5

Accrual Method of Accounting

Answer 5

Income and expenses are reported when all the events necessary to earn the income or owe the expense have occurred and the amount is determinable.

Question 6

Material Participation

Schedule C Form 1040

Answer 6

Indicate whether the taxpayer materially participates in the business activities. Material participation occurs when the taxpayer is involved in an activity on a regular, continuous, and substantial basis during the year.

Question 7

Cost of Goods Sold

Answer 7

represents the business owner’s cost to purchase inventory. When a business owner purchases inventory for resale, the cost of the inventory is not a deductible expense until it is sold.

Question 8

Depreciation

Answer 8

Is an allowance that is deducted on long lived assets that the business purchases. NO depreciation is claimed on property that is leased.

The property can be tangible personal property items, such as furniture or computers. The property can be real property, such as an office building or factory.

Some types of property cannot be depreciated. For example, land is not depreciable.

Question 9

Section 179 Deduction

Answer 9

This is a deduction of the cost of tangible personal property up to $500,000. The deduction applies to both new and used property purchased. However, there is a taxable income limit so that the deduction can be claimed only if the business is profitable.

Question 10

Bonus Depreciation

Answer 10

This is a deduction for 50% of the cost of tangible MACRS property with a class life of 20 years or less, computers, and certain building improvements. Bonus depreciation only to new property.

Question 11

Hobby Loss

Answer 11

What Is a Hobby Loss?
Hobby loss is the term associated with funds spent to pursue a recreational activity that is not recouped.1

These expenses, when paid in connection with a hobby, are deductible only to the extent of income earned by the hobby or recreational activity. A loss is not allowed for expenses in excess of hobby income.1

KEY TAKEAWAYS
A hobby is defined by the IRS as an activity you undertake for pleasure and not for profit: “from painting and pottery to scrapbooking and soapmaking,” according to the IRS factsheet.
If you and your children set up a lemonade stand on a busy corner on a hot summer day and make money from it, you must report the profit on your 1040.
You may be able to deduct some losses stemming from the activity if they don’t exceed the gross income for the activity.