Schedule C
Line by Line
Self-Employment Tax
Preparation Training
Celebrating 39 years of providing free tax preparation and financial services to low‐ and moderate‐income taxpayers in the Twin Cities and Greater Minnesota. We move Minnesotans out of poverty by creating pathways to enhanced income. We do so by:
• Providing free tax assistance to low‐income working taxpayers and the self‐employed in the Twin Cities, and helping them to maximize the tax credit refunds they are due to significantly boost their incomes;
• Partnering with financial institutions and community organizations to expand access to financial products and services that encourage low‐ and moderate‐income taxpayers to use their cash credits to build assets and improve their long‐term financial security;
• Providing technical assistance to other organizations throughout Minnesota, training them to provide these vital services.
• Identified and filed for $35 million in refunds for taxpayers in Minnesota.
• Enlisted the help of 389 volunteers who donated 27,132 hours filing 43,355 returns.
• Assisted 19,301 taxpayers statewide in filing taxes, free of charge.
• Connected 493 unbanked customers to new credit union and bank savings accounts and 158 customers to Express Refund Loans across the state.
Income Guidelines
• Annual household income of $50,000 or less for self‐employed
Types of self‐employed clients we serve
• Sole‐proprietor: Business owned by one person (his‐ or herself) with no formal business organization
• Independent contractor: Works independently and is paid for services provided
Common business types we see
• Barbers/stylists, daycare, tutors, janitorial/cleaning, construction
Common expenses
• Mileage, supplies, business use of the home
Accounting methods
Two basic accounting methods to report income: cash and accrual
Cash method: Report income when it’s received and deduct expenses when they are paid*. Accrual method: Report income when sale is made and expenses when incurred. *Cash method is used by our self‐employed customers. Cash is king!
Schedule C‐EZ is a simpler, quicker form to use for self‐employed taxpayers, hence the name – it’s EZ to use!
Use Schedule C‐EZ if:
•
•
•
•
Deductible expenses do not exceed $5,000
Have no inventory
Have only one business as a sole proprietor or independent contractor
Use cash method of accounting
Use Schedule C if:
•
•
•
•
•
Deductible expenses exceed $5,000
Have a net loss
Claim expenses for business use of the home
Have employees
Claim depreciation
Line 1: Fill in the gross income from the business
Line 2: List all business expenses
Line 3: Subtract line 2 from line 1 and – voila! – net profit. On to line 12, Net Profit or Loss from a Business, on the Form 1040. •
Self‐employment tax is generated automatically on TaxWise.
Line 1: Gross Receipt or Sales
• Income from box 7 of the Form 1099‐MISC (if received)
•Many customers at AccountAbility Minnesota receive cash, check or credit/debit card payment from clients. •To make filing more efficient the customer must fill out our our Self‐
Employment Tax Organizer (SETO) to total payments and expenses. The SETO is based on Schedule C. • If the customer operate more than one business he/she will need to do a Schedule C for each business. Line 2: Returns and allowances
• Returned merchandise goes here
Line 3: Subtraction
• Subtract line 2 from line 1
Line 4: Cost of goods sold
• Subtract cost of raw material in products sold, salary paid to production workers, cost of production supplies
Line 5: Gross profit
• Subtract line 4 from line 3
Line 6: Other income
• Examples: income sales of scrap or recycled materials, interest on bank accounts, recapture of depreciation and IRS Section 179 deductions when business property ceases to be used in a business
Line 7: Gross income
• Add lines 5 and 6 •
Take an inventory count at the end of year
•
Different inventory methods: last in first out (LIFO), first in first out (FIFO), average cost (important to be consistent)
•
To calculate:
Beginning inventory (zero first year, same as ending inventory other
years) + purchases ‐ ending inventory = cost of goods sold
Line 8: Advertising
•
Newspaper, internet ads, business cards, radio announcements, etc.
Line 9: Car and truck expenses
• There are two basic methods for tracking
• Actual expenses: Deduct most everything (gas, oil, repairs, insurance, car wash, etc.)
• Standard mileage rate: 2009 rate of 0.55 cents per mile. Can also deduct parking, tolls and interest on a car loan (if used for business).
• The vast majority of AAM customers use the standard rate because it’s more advantageous and much easier to use. Commuting miles: From home to work or work to home. These miles are not deductible.
Business miles: From one point of work to another, these are deductible.
Personal miles: These are not deductible.
Line 10: Commissions and fees
• Any fees paid to sell products or referral fees paid to bring in new customers is listed on this line. • AAM customers sometimes do pay commissions.
Line 11: Contract labor
• This line is intended to identify businesses using independent contractors.
• AAM does not prepare tax returns for people who have employees.
Line 12: Not applicable for customer base.
Line 13: Depreciation
• Annual deduction allowing taxpayer to recover the cost of an investment in business equipment that has more than one year of useful life.
• The Modified Accelerated Cost Recover System (MACRS) is used to determine the amount of depreciation deduction that can be taken each year.
• Use Form 4562, “Depreciation and Amortization” to compute taxpayer’s
depreciation. Then carry the total amount of depreciation over to line 13 of
Schedule C.
Section 179 deduction. What is it? Why we care? • Can elect to depreciate all new assets up to income in the same year –
“Section 179 election”(carry forward of any excess). • Section 179 allows you to deduct 100% of an asset, like a computer, in one year
vs. the five years of its useful life (see below). • Depreciate over the useful life of an asset using IRS recovery periods:
•
•
•
•
3 years – software
5 years – computers, printers, appliances
7 years – office furniture
39 years – home office (home, less land)
Line 14: Not applicable for our customers
Line 15: Insurance (other than health)
• Premiums for business liability insurance
Line 16a: Mortgage Interest
• If taxpayer owns the building in which he/she operates the business, can deduct any mortgage interest paid on this line. • However, if claiming the deduction for business use of the home, mortgage interest is deducted on Form 8829 “Business Use of Home” Line 16b: Other interest
• Interest paid on business loans or business credit cards
Line 17: Legal and professional services
• Fees for tax advice and tax preparation, legal fees regarding business matters.
• Consulting fees normally are listed on line 10: Contract labor
Line 18: Office expense
• Did you buy stationery, paper, stamps, printer toner? Line 20: Rent or lease
• Part A, vehicles, machinery, and equipment
• Part B, other business property
• If the taxpayer rented or leased machinery or equipment this is where to list it
• If the taxpayer had to rent business property, e.g. a barber who rents a chair at a salon, list that on line B Line 21: Repairs and maintenance • Repair is defined as keeping your business equipment in working order
• Routine repairs like fixing a copier or computer go on line 21
Line 22: Supplies
• These are supplies needed for the operation of the equipment that you use in your office or business. Office expenses go on line 18.
Line 23: Taxes and licenses
• Business taxes such as real estate and sales taxes
• Most common for AAM customers, permits and licenses, e.g. the cost of barber’s or cosmetologist’s license
• Do not deduct federal or state income taxes Lines 24 A‐B: Travel, meals and entertainment
• 100% of the money spent on airfare and hotels for business trips can be deducted (line 24A)
• 50% of meals and entertainment expenses for business trips can be deducted (line 24B)
Line 25: Utilities
• List here electric and other utility costs • If the taxpayer plans on taking the home office deduction, utility costs belong on Form 8829 “Expenses for Business Use of Your Home”
Line 27: Other expenses
• On the back of Schedule C there is Part V “List below business expenses not included on lines 8‐26 or line 30.” This is the “catch‐all” place. • Expenses we’ve listed here include: cell phone cost, internet, dues to professional organizations, subscriptions for business journals, delivery fees, etc. • The total on line 48 is transferred to line 27. Line 28: Total expenses
• Add lines 8‐27. This is the cost to run your business – total expenses.
Line 29: Tentative profit (loss)
• Subtract line 28 from line 7
• If line 28 is more than line 7 you have a loss which will be entered as a negative number. Line 30: Form 8829 – Expenses for Business Use of the Home
• The part of a taxpayer’s home used for business must be exclusively and regularly used for the business. Can be just part of a room. Line 31: Net profit (or loss)
• Here is your net profit or loss and tax software programs will transfer the total to the 1040, line 12. Self‐employment tax is automatically calculated on TaxWise. • Start‐up and other costs that exceed income from the business equal a net operating loss. Examples include equipment, rent, and other expenses.
• That loss can be written off against any other income on the 1040.
• Losses can be carried back (or preferably forward at AAM) if you are not offsetting income from another job. Hobby Loss Rule
• The IRS will not allow a taxpayer to continuously deduct losses for a business that loses money
• Continual loss is referred to as Hobby Loss. • The taxpayer needs to show a profit in at least 3 of 5 consecutive years. If not, the IRS can declare your endeavor a hobby and you can deduct expenses only up to the point of income. • Line 32
• If the taxpayer has a loss, check the box that describes the investment
• AAM customers will check box 32A “All investment is at risk”
• For our self‐employed customers all of their investment is at risk. They are not investors or silent partners. They could lose it all. Thomas Larson
Self‐employment program coordinator
651‐287‐0187, x118
tlarson@accountabilitymn.org
www.accountabilitymn.org
Facebook: www.facebook.com/AccountAbilityMinnesota
Twitter: www.twitter.com/accountabilitym
AccountAbility Minnesota
2610 University Avenue West Suite 450
St. Paul, MN 55114
651‐287‐0187