Week 2 Chapter 9 Flashcards
Business entity types
sole proprietorship
partnership
corporation
Sole Proprietorship
Owned by one individual; reports income on Schedule C (Form 1040).
Partnership
Two or more individuals; reports income on Form 1065, partners receive Schedule K-1.
Corporation
c corp
s corp
c corp
Pays corporate income tax; reports on Form 1120.
s corp
Income flows to shareholders; reports on Form 1120-S
taxable income calculation
gross income
deductible expenses
gross income
Total income minus allowable deductions per the Internal Revenue Code (IRC).
deductible expenses
Ordinary and necessary business expenses, including:
Cost of Goods Sold (COGS)
Cost of goods sold calculated as
Beginning Inventory + Purchases + Labor Costs + Uniform Capitalization Costs + Other Costs - Ending Inventory = COGS
Ordinary and Necessary Expenses
Defined as expenses common in the industry and helpful for the trade.
Accountable Plans vs. Nonaccountable Plans
Reimbursements may be deductible; the former requires documentation.
Business Income Definition
Includes payments for goods/services; valued at fair market level.
Ordinary Expenses
Must be reasonable and customary within the industry
Capital Expenses
Investments in assets including:
Business property (buildings, equipment).
Improvements (enhancements).
Startup costs (training, advertising)
Mealtime Deduction
Limited to 50% of expenses, subject to conditions (presence of taxpayer required).
Travel Expenses
Must exceed a certain threshold of time away from home
Entertainment Expenses
Generally not deductible unless they are for employee benefit or documented correctly
Rental Income
Deductions Criteria
Must meet specific rental-use tests; expenses must be divided between personal and rental use.
FICA Taxes
Employee Contributions:
6.2% for Social Security up to $168,600 (2024).
1.45% for Medicare with an additional 0.9% for higher earners.
Employer Contributions: Equivalent to employee withholding.
FUTA Taxes
Imposed solely on employers at 6% for the first $7,000 paid to each employee.
Bad Debts
Only deductible as a bona fide debt.
Business Gifts
Limited to $25 per recipient annually.
