Liberty Tax Service Online
Basic Income Tax Course.
Lesson 14
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Chapter 13 - Homework
HOMEWORK 1: Use Part II of Form 2106 to figure car
expenses for the following. Use both the standard mileage
rate and actual expenses to determine
which is better for the taxpayer and enter that amount on
the correct line of Part I of Form 2106.
Barry B. Breene (055-48-0801) purchased a new car on
January 6, 2008 for $27,000. In 2008, he drove 28,000
total miles. 22,400 miles were for business use in his job as
an engineer. 11,000 of his business miles were driven from
January 1, 2008 to June 30, 2008. The round trip commute
to Barry’s office is 10 miles and he drove 3,200 commuting
miles in 2008. He paid $3,080 for gas, oil, repairs, and
insurance. Barry kept records and receipts for all his
expenses. Barry wants to elect out of the special
depreciation allowance.
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Chapter 13 - Homework
Homework 1
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Chapter 13 - Homework
HOMEWORK 2: Using the information provided, prepare
a 2007 tax return for the following taxpayer.
Andrew L. Jackson (born 1/4/1962) lives with his son
John (311-45-9561, born 5/5/1992). Andrew’s wife
died in 2007 and he has not remarried. On his joint
return in 2007 his itemized deductions were $13,450.
Their 2007 state income tax deduction was $1,689
and the sales tax deduction they could have taken
was $765.
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Chapter 13 - Homework
In March 2008, Andrew was in a car accident. He had paid
$24,000 for his Subaru on February 4, 2006. The FMV of
the car before the accident was $17,000. The FMV after the
accident was $11,000. His insurance paid him $4,000.
Andrew is a manufacturer’s representative. In 2008, he
traveled away from home on business and had the
following expenses:
Airfare - $830
Meals - $320
Entertainment - $55
Hotel bill - $600
Car rental - $250
Parking fees - $12
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Chapter 13 - Homework
Andrew also had the following expenses:
Doctor’s bills - $650
Health insurance - $2,000
Prescription drugs - $300
Life insurance - $1,500
Health club dues - $300
Church contributions - $600 (no one
contribution over $250)
Tax preparation fee - $140
Legal fees related to his wife’s death - $400
Safe deposit box fee to store his stock certificates-$120
United Way contribution - $25 per month
Car loan interest - $800
Gifts to 3 clients - $190
Business cards - $45
Tuition for a course at an eligible educational institution
to qualify for a new job - $400
Union dues - $300
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Chapter 13 - Homework
Andrew received an expense allowance of $500 for his
travel expenses under his employer’s accountable
plan (shown with code L in box 12 of his W-2 form).
He did not receive a meal or entertainment
allowance.
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Chapter 13 - Homework
If tuition had been for a course that qualified
as a business expense, all three methods for
taking an education deduction (lifetime
learning credit (F8863), business expense
(F2106) and tuition and fees (F8917,
covered in Chapter 16) should be explored to
see which gives the largest refund.
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Chapter 14: Profit or Loss from Business
Chapter Content
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Self-Employment
Schedule C: Background Information
Schedule C: Income
Schedule C: Expenses
Schedule C: Profit (Loss) Calculation
Business Use of Your Home
Form 8829, Expenses for Business Use of Your Home
Schedule SE: Self-Employment Tax
Key Ideas
Objectives
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Learn About Self-Employment
Understand How to Use Schedule C
Be Able to Determine If You Can Take a Home Office
Deduction
Be Able to Complete Form 8829
Understand How to Calculate Self-Employment Tax Using
Schedule SE
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Profit or Loss from Business
A. You are SELF-EMPLOYED if you:
1. Carry on a business or trade as a sole proprietor
2. Are an independent contractor
3. Are a member of a partnership
4. Are in business for yourself in any other way.
B. An activity qualifies as a business if your primary
purpose for engaging in it is for income or profit and
you are involved in the activity with continuity and
regularity.
C. A sole proprietor owns a business alone and has not
incorporated.
D. An independent contractor is actually a sole
proprietor.
31
Profit or Loss from Business
E. Report income and expenses on Schedule C unless
partnership.
1. If your net earnings from self-employment are at least $400,
you must file a return.
2. Total profit (or loss) is entered on line 12 of Form 1040 (be
sure self-employment income is reported on Schedule C
first before entering on Form 1040)
3. Self-employed farmer uses Schedule F.
Form 1040, Page 1
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Profit or Loss from Business
Statutory Employee
F. A statutory employee is a person who is treated
partly as an employee and partly as being selfemployed.
1. Treated as employee for social security and
Medicare purposes.
2. Treated as being self-employed for income tax
purposes.
3. Box 13 of W-2 checked.
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Profit or Loss from Business
Presumption of Profit
 An activity is presumed carried on for profit if it
produces a profit in at least 3 of the last 5 tax years,
including the current year.
 Activities that consist primarily of breeding, training,
showing or racing horses are presumed to be carried
on for profit if they produced profit in 2 of the last 7
tax years, including the current year.
 If your activity is not carried on for profit, your
deductions and losses may be limited.
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Profit or Loss from Business
Hobby
G. A hobby is not considered a business because the
activities are not carried on to generate a profit.
1. Report hobby income on line 21 (Other Income) of
Form 1040
2. Hobby expenses are reported as miscellaneous
deduction on Schedule A.
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Profit or Loss from Business
Schedule C
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Profit or Loss from Business
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Profit or Loss from Business
38
Profit or Loss from Business
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SCHEDULE C
Schedule C is a two-page form which may include expenses
that require you to attach other forms and schedules.
 Form 4562, Depreciation and Amortization.
 Form 8829, Expenses for Business Use of Your Home.
 Schedule SE, Self-Employment Tax,
Schedule C is divided into sections:
 Background information (A-H)
 Income (Part I, lines 1-7 and Part III, Cost of Goods Sold,
lines 33-42)
 Expenses (Part II, lines 8-27 and Part V, Other Expenses,
line 48)
 Profit or Loss Calculation (lines 28-31)
 Information on Your Vehicle (Part IV, lines 43-47b)
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SCHEDULE C
Background Information
A. If you own more than one business, complete a
separate Schedule C for each one.
1. A business code is entered on line B and can be
found in the instructions of Schedule C in
Appendix E
2. Your Employer Identification Number (EIN) (if
any) is entered on line D
a. Do NOT enter your SSN
b. Obtain an EIN by sending in Form SS-4.
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SCHEDULE C
Satish J. Patel (093-62-7357) owns a tax preparation
business called Many Happy Returns located at 1040
Liberty Lane, Chicago, IL 60621. The EIN of Satish’s
business is 16-3863117. The business code for tax
preparation is 541213. The Schedule C lines A-E for
Satish Patel is as follows:
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SCHEDULE C
B. Report your accounting method on line F.
1. With cash method, report income when you
receive it; deduct expenses when paid
2. With accrual method, report income in year sales
occur (even if collected in later year); deduct
expenses in year incurred (even if not paid until
later year)
3. Hybrid method is combination of cash method and
accrual method.
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SCHEDULE C
Income (Part I of Schedule C)
C. Gross income is reported on line 7 of Part I of
Schedule C.
1. Gross receipts or sales (line 1) are the total
revenue of business from sales and services.
2. May receive Form 1099-MISC reporting nonemployee compensation (box 7) which is entered
on line 1.
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SCHEDULE C
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SCHEDULE C
3. Returns and allowances (line 2) are amounts
covering any returned products or allowances
and rebates from sales price made to customers.
4. Cost of goods sold (line 4) is determined by
completing Part III of Schedule C
a. Basically difference between inventory at end
of year and inventory at beginning of year with
adjustments for purchases, labor costs,
materials and supplies and other costs
b. To determine value of good sold, FIFO means
product purchased first is considered sold first
c. To determine value of good sold, LIFO means
product last purchased is considered sold first
5. Gross profit for service business is usually equal
to gross receipts.
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SCHEDULE C – Problem 1
Gary owns a retail furniture store. In 2008, he
purchased two identical tables, one for $850 and the
other for $1,050. He bought the $850 table first. He
sold one of the tables in 2008. The inventory method
that Gary uses determines which table he sold.
Which inventory method is Gary using if the second
table purchased was the one sold?
a. FIFO
b. LIFO
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SCHEDULE C – Problem 1
Gary owns a retail furniture store. In 2008, he
purchased two identical tables, one for $850 and the
other for $1,050. He bought the $850 table first. He
sold one of the tables in 2008. The inventory method
that Gary uses determines which table he sold.
Which inventory method is Gary using if the second
table purchased was the one sold?
b. LIFO
Gary is using the LIFO method because the $1,050
table was the last purchased so it is the first sold.
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SCHEDULE C
Expenses (Part II and Part V of Schedule C)
D. Expenses are reported on Part II and V of Schedule C.
1. Most expenses are deductible.
a. Ordinary expenses are common and accepted in
your type of business.
b. Necessary expenses are appropriate and helpful
to your business.
2. Advertising costs (line 8) include classified ads,
business cards, mailers, television spots, and
promotional brochures.
3. Car and truck expenses (line 9) are costs paid to
operate a vehicle for business purposes.
a. Also enter on Form 4562 (depreciation) if
required to file one.
b. Take standard mileage rate 50.5 cents per mile
driven Jan 1 thru Jun 30 and 55.5 per mile
driven Jul 1 thru Dec 31 or actual expenses.
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SCHEDULE C
4. Deduct commissions and fees other than contract
labor on line 10.
5. Contract labor (line 11) amounts paid to
independent contractors.
6. Depletion (line 12) is deduction for exhaustible
natural resources.
7. Depreciation and section 179 expense deduction
(line 13) are covered in Chapter 12.
8. Employee benefit programs (line 14) includes
payments made for employees for accident and
health insurance, term life insurance, and
dependent care assistance programs.
9. Insurance (line 15) costs related to operation of
business are deductible.
10. Interest (line 16) on any loans used to finance
business is deductible.
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SCHEDULE C
11. Legal and professional services (line 17) include
fees for tax advice and tax preparation.
12. Office expense (line 18) includes cost of paper,
toner and postage.
13. Pension and profit sharing plan contributions
(line 19) made to employee accounts are
deductible.
14. Rent or lease (line 20) payments for:
a. vehicle, machinery, or equipment for business
are deducted on line 20a.
b. Other items as for office space, storage, or
other real property leases enter on line 20b.
15. Repairs and maintenance (line 21) include costs
of labor, supplies, and other items spent for
repairs and maintenance that do not add to
value or increase life of property
a. Do not deduct your own labor
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SCHEDULE C
16. Supplies not covered on line 38 of Part III are
entered on line 22, including paper bags, staples,
pens and pencils, paper, and invoices.
17. Taxes and licenses (line 23) directly related to
business are deductible.
18. Travel, meals, and entertainment (line 24) related to
business are deductible.
a. Generally 50% cost of meals and entertainment.
19. Utilities (line 25) including gas, electricity, and
telephone directly related to business are deductible.
20. Wages (line 26) including total salaries and wages
paid to employees are deductible.
21. Other expenses (line 27) not listed in other sections
of Part II are listed on Part V; carry total of these
expenses (line 48) to line 27.
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SCHEDULE C
Profit And Loss Calculation
E. Net profit (loss) is entered on line 31 of Schedule C
and line 12 of Form 1040.
1. Report it also on line 2 of Schedule SE (see
Chapter 17).
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SCHEDULE C
AT-RISK RULES
F. Line 32 of Schedule C deals with At-Risk Rules.
1. Limits amount of loss you can claim to amounts
you personally have at risk
2. If all or part not at risk, complete Form 6198.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
If you use a part of your home for business, even if it is
not your full-time job but a secondary one, you may
be able to deduct the expenses for business use of
your home from your business income.
If you qualify for this deduction, you can include as
business expense a portion of:
 home mortgage interest or rent
 insurance,
 maintenance
 real estate taxes
 utilities
May also deduct, as a business expense, a portion of
depreciation of home if you own it.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
A. Business use of home deduction is figured on Form
8829 and entered on line 30 of Schedule C.
On Schedule C
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Principal Place Of Business Test
B. The two qualifying tests that must be met are: principal
place of business test and regular and exclusive use test.
C. The principal place of business test is met if you use a
portion of your home:
1. As principal place of business; or
2. As place of business used by you to meet your patients,
clients, or customers to meet or deal with you in
normal course of running business; or
3. In connection with your business if it is a separate
structure that is not attached to your home.
4. Principal place of business includes part of home used to
conduct administrative and managerial functions if
your business does not have another fixed location to
carry out these functions.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 1
By day, James works full time as a school teacher. At
night, he has a home based business of making
greeting cards. His home office is the main place
of business for his greeting card business. Does
James pass the principal place of business test?
Yes or No?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 1
By day, James works full time as a school teacher. At
night, he has a home based business of making
greeting cards. His home office is the main place
of business for his greeting card business. Does
James pass the principal place of business test?
Yes
Since his home office is the main place of business for
his greeting card business, he passes the principal
place of business test.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 2
Elaine paints wall murals for residential and
commercial buildings. Her home office is where she
keeps her records, books, and schedules
appointments. Her home is not the place where she
earns her money. The places where she earns her
money are the establishments where she paints and
therefore, would not meet the principal place of
business test.
True or False?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 2
Elaine paints wall murals for residential and
commercial buildings. Her home office is where she
keeps her records, books, and schedules
appointments. Her home is not the place where she
earns her money. The places where she earns her
money are the establishments where she paints and
therefore, would not meet the principal place of
business test.
False
She would meet the principal place of business test
because her home office is where she conducts her
administrative and managerial activities.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 3
Ran has a freestanding greenhouse in which he
exclusively grows perennials to sell as a business.
The home office deduction applies and the
greenhouse is considered to be the home office.
True or False?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 3
Ran has a freestanding greenhouse in which he
exclusively grows perennials to sell as a business.
The home office deduction applies and the
greenhouse is considered to be the home office.
True
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 4
Sean O’Brien sells different types of insurance. He uses
a front room in his home exclusively and regularly to
meet with clients and manage other insurancerelated matters. Sean does sell insurance at several
other locations. Does he meet the principal place of
business test?
Yes or No?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 4
Sean O’Brien sells different types of insurance. He uses
a front room in his home exclusively and regularly to
meet with clients and manage other insurancerelated matters. Sean does sell insurance at several
other locations. Does he meet the principal place of
business test?
Yes
You could debate whether his home office is his
principal place of business. However, he meets the
test because his home office serves as a regular
place to meet clients as a normal part of conducting
his business.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Regular And Exclusive Use Test
D. The exclusive use test states that the home office
must be used exclusively for your business and on a
regular basis.
1. Qualifying day-care providers are exempt from this
test.
2. Do not have to use entire room exclusively for
home office.
3. Rules for employees taking work home covered in
Chapter 13.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 5
Lisa has a TV room in her house which the family uses
during the day. In the evening, Lisa uses the room to
manage her sideline business. Is the exclusive use
test met in this case?
Yes or No?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 5
Lisa has a TV room in her house which the family uses
during the day. In the evening, Lisa uses the room to
manage her sideline business. Is the exclusive use
test met in this case?
No
Because the room is not used exclusively as her home
office.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 6
Nick has two separate businesses. He is a freelance
writer and also runs a lawn mowing business. He has
an office in his home for his freelance writing. He
also uses this same room to do administrative
functions for the lawn mowing business. Can he take
the home office deduction?
Yes or No?
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 6
Nick has two separate businesses. He is a freelance
writer and also runs a lawn mowing business. He has
an office in his home for his freelance writing. He
also uses this same room to do administrative
functions for the lawn mowing business. Can he take
the home office deduction?
Yes, if both businesses pass the exclusive-use test,
then the exclusive-use test is met to take the
deduction.
No, if one of the businesses using the home office fails
one of the other tests.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Part Of Your Home Used For Business: Form 8829 - Part I
E. Generally, part of home used for business is figured
on square-footage basis.
1. Day-care providers must figure percentage of time
business operates.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 7
Gloria’s home office is a room in her house that
measures 10 feet by 15 feet. The total area of her
home is 1,500 square feet. The area of her home
office is 150 square feet (10 ft. x 15 ft.). What
percentage of her home is used as a home office?
a. 20%
b. 10%
c. 15%
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 7
Gloria’s home office is a room in her house that
measures 10 feet by 15 feet. The total area of her
home is 1,500 square feet. The area of her home
office is 150 square feet (10 ft. x 15 ft.). What
percentage of her home is used as a home office?
b. 10%
The percentage of her home used as a home office is
10% (150 divided by 1,500).
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 8
Antonio operates a business out of one room of his fiveroom apartment. All the rooms are about the same
size. What percentage of Antonio’s room is used for
his home office.
a. 20%
b. 15%
c. 10%
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EXPENSES FOR BUSINESS USE OF
YOUR HOME – Problem 8
Antonio operates a business out of one room of his fiveroom apartment. All the rooms are about the same
size. What percentage of Antonio’s room is used for
his home office.
a. 20%
His home office percentage is 20% (1 room divided by
5 rooms).
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Christina runs a day-care business four hours a day for
five days a week. She uses 80% of her house, so line
3 is 80%. She figures the days per year she operated
the day care by multiplying 5 days by 52 weeks (5 x
52= 260), then, to arrive at the hours per year she
operated the business, multiply 260 days by 4 hours
(260 x 4= 1,040 hours).
Enter 1,040 on line 4 of Form 8829. For line 6, divide
1,040 hours by 8,784 hours to get 0.1184. Line 7 is
calculated by multiplying .1184 by 80% (.1184 x
80%= 9.472%). Therefore, her business percentage
for her day-care operation is 9.472%.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Figure Your Allowable Deduction: Form 8829 - Part II
F. Expenses for home-office deduction are reported as
either direct expenses or indirect expenses.
1. Direct expenses are derived solely from the home
office part; examples include refinishing floor of
home and painting home office.
2. Indirect expenses result from the entire home and
include rent, home mortgage interest, real estate
taxes, and furnace and roof repairs.
If your rent is $500 per month and your business use
percentage is 20% of your apartment, then you can
deduct $1,200 ($6,000 x 20%) as your rent expense
for your business use of home deduction. Rent is an
indirect expense.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Depreciation Of Your Home: Form 8829- Part III
G. Deduct depreciation only if own property.
1. Report on Part III of Form 8829
2. Refer to Chapter 12
3. Use table in this chapter to determine percentage
on line 39.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Karen R. Walsh (310-40-0912) is a freelance writer. She is
self-employed and uses one room of her house exclusively
and regularly for her writing. She uses 300 square feet of
her 1,500 square feet home for her office. She purchased
her home in 2006 for $90,000 (the land was valued at
$10,000) and started using her home for business that
year.
Karen’s business had a profit of $12,000, which she reported
on her Schedule C. The following are expenses paid by
Karen for her home:
Mortgage interest
$4,500
Indirect expense
Real estate taxes
1,500
Indirect expense
Insurance
600
Indirect expense
Utilities
1,800
Indirect expense
Painting her office
100
Direct expense
Furnace repairs
1,200
Indirect expense
Depreciation
410
Karen’s Form 8829 is on the next slide.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Carryover Of Unallowed Expenses To 2009: Form 8829 Part IV
H. You may carry over excess or unused portion of
deduction to future year.
1. Use Part IV of Form 8829.
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EXPENSES FOR BUSINESS USE OF
YOUR HOME
Day-Care Providers – Meals for Children
I. Child day care providers can use standard meal and
snack allowance in lieu of actual costs
The table below shows the 2007 standard meal and snack rates:
Allowance per child per day U.S. other than AK and HI
Alaska
Hawaii
Breakfast (1)
$1.11
$1.76
$1.29
Lunch or dinner (1 of each)
$2.06 each
$3.34 each
$2.41 each
Snacks (3)
$0.61 each
$0.99 each
$0.72 each
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SELF- EMPLOYMENT TAX
A. File Schedule SE with your return if:
1. Your net earnings from self-employment were
$400 or more, or
2. You had church employee income of $108.28 or
more.
B. Self-employment tax provides you with coverage
under the social security system.
C. Self-employment tax is 15.3%.
1. 12.4% is social security tax on earnings up to
$102,000
2. 2.9% is Medicare tax.
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SELF- EMPLOYMENT TAX
Rich earned $74,300 in salaries as an employee and another
$35,000 as net income from self-employment. The social
security part of his self-employment tax is calculated on
$27,700 ($102,000 max - $74,300 salary). The Medicare
part of his self-employment tax is based on the entire
$35,000.
D. If reporting only self-employment income, use Section A of
Schedule SE. This is the short Schedule SE.
E. If you have both salary income from employer and selfemployment income, use long form of Schedule SE.
1. Total amounts from boxes 3 and 7 of Form W-2 are
entered on line 8a of Schedule SE.
F. Self-employment tax from line 5 of Section A of Schedule
SE or from line 12 of Section B is entered on line 58 of
Form 1040.
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SELF- EMPLOYMENT TAX
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SELF- EMPLOYMENT TAX
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SELF- EMPLOYMENT TAX
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SELF- EMPLOYMENT TAX
Form 1040, Page 1
Form 1040, Page 2
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SELF- EMPLOYMENT TAX
Self-Employment Income
G. If a member of partnership, refer to Publications
541.
H. Ministers, Christian Science practitioners, and
members of religious orders who have not taken a
vow of poverty, in most cases, must pay selfemployment tax on net earnings.
1. Exemption on certain earnings possible on Form
4361
2. See Publication 517.
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SELF- EMPLOYMENT TAX
Figuring Net Self-Employment Income
I. Net self-employment income obtained from other
schedules.
Schedule
Schedule
Schedule
Schedule
Schedule
C (Form 1040)………………….. Line 31
C-EZ (Form 1040)……………… Line 3
F (Form 1040)…………………... Line 36
K-1 (Form 1065)……………….. Box 14, code A
K-1 (Form 1065-B)…………….. Box 9, code J1
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SELF- EMPLOYMENT TAX
Matthew Calandra is the sole proprietor of two separate
businesses. He operates a restaurant that made a net
profit of $25,000. He also has a cabinetmaking
business that had a net loss of $500. Matthew files
Schedule SE showing a net self-employment income
of $24,500. He also files a Schedule C for each
business - a Schedule C for the restaurant showing a
net profit of $25,000, and another Schedule C for the
cabinetmaking business showing a net loss of $500.
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SELF- EMPLOYMENT TAX
To arrive at net earnings, do not reduce your selfemployment income by any of the following:
 Deductions for personal exemptions for yourself,
your spouse, or dependents
 The standard deduction or itemized deductions
 The net operating loss deduction
 Non-business deductions (including contributions
on your behalf to a pension, profit-sharing plan,
annuity plan, Keogh, SIMPLE, or SEP plan)
 The self-employed health insurance deduction
 The deduction for one-half of your self-employment
tax.
97
SELF- EMPLOYMENT TAX
Mike owns a grocery store that had the following
income, expenses, and net operating loss carryover
for the year.
Gross Income
Salaries
Rent
Heat, light and air
Conditioning
Other expenses
Gain on refrigerator sale
Fire loss on store
Building
Net operating loss
Carryover
$87,400
$30,000
$ 6,000
$ 2,400
$ 1,900
$
350
$ 1,200
$ 1,000
98
SELF- EMPLOYMENT TAX
To figure taxable income, consider all the above items. But to
figure net self-employment income, use only the following:
Gross Income
Expenses:
Salaries
Rent
Heat, light and air
conditioning
Other expenses
Net Profit
$87,400
$30,000
$ 6,000
$ 2,400
$ 1,900
$ 40,300
$ 47,100
The $47,100 is Mike’s net SE income. The refrigerator sale,
the fire loss, and the net operating loss carried over from a
previous year are not included in the calculation.
99
SELF- EMPLOYMENT TAX
Net Earnings from Self-Employment
J. There are three ways to figure net earnings from
self-employment: regular method, non-farm optional
method, and farm optional method.
1. Use regular method unless eligible to use one or
both optional methods.
a. Using the regular method, you multiply
your net self-employment income by
92.35% (0.9235) to get your net
earnings.
2. Calculations for the optional methods are not
covered in this course.
100
SELF- EMPLOYMENT TAX
Figuring Self-Employment Tax
To arrive at your self-employment tax, you multiply the
net earnings you figured by the tax rate. The selfemployment tax rate is 15.3%. It is the same for net
earnings figured under each method.
Vincent has $30,000 in net SE income and receives no
wages subject to social security and Medicare taxes
for the year. Multiply the $30,000 by 0.9235 on the
short Schedule SE to get his net earnings from selfemployment of $27,705. His SE tax is 15.3% of
$27,705, or $4,238.87.
101
SELF- EMPLOYMENT TAX
Bertha has $120,000 in net SE income and receives no
wages subject to social security and Medicare taxes
for the year. Multiply the $120,000 by 0.9235 on the
long Schedule SE to get her net earnings of
$110,820.
Since only $102,000 of her earnings is subject to the
social security part of the SE tax, her tax for this part
is $12,648 (12.4% of $102,000). Since all of her net
earnings are subject to the Medicare part of the SE
tax, multiply $110,820 by 2.9% on the long
Schedule SE for the Medicare part. The result is
$3,213.78. Add this to $12,648 for a total SE tax of
$15,861.78.
102
SELF- EMPLOYMENT TAX
Donna has $105,000 in net SE income and receives $15,000 in
wages subject to social security and Medicare taxes for the
year. Her net earnings are figured on the long Schedule SE,
line 4a to be $96,968.
Next, subtract her wages of $15,000 from $102,000, the
maximum income subject to the social security part of the
SE tax. The result is $87,000. Since only $87,000 of her
earnings is subject to the social security part of the SE
tax, her tax for this part is 12.4% x $87,000, or $10,788.
Since all her net earnings are subject to the Medicare part of
the SE tax, multiply all her net earnings from selfemployment, $96,968 by 2.9% on long Schedule SE for the
Medicare part. The result is $2,812.07. Add this to the
$10,788 figured above for the total SE tax of $13,600.07.
103
Profit or Loss from Business
KEY IDEAS
♦ A sole proprietor is a person who owns a business alone
and has not incorporated the business.
♦ If you are a sole proprietor or a statutory employee, you
report your business income and expenses on Schedule
C of Form 1040.
♦ Generally, Form 1099-MISC, box 7, shows nonemployee
compensation. Payments reported in this box are
generally income from self-employment. Since you
have received this form, rather than Form W-2, the
payer may have considered you self-employed and did
not withhold social security or Medicare taxes. Report
self-employment income on Schedule C or Schedule CEZ.
104
Profit or Loss from Business
KEY IDEAS
♦ You must obtain an Employer Identification Number
(EIN) if you have employees, have a Keogh plan, or
file an excise tax return.
♦ Most expenses you incur for your business are
deductible.
♦ All income must be reported even if you do not
receive a Form(s) 1099-MISC
♦ You may be able to deduct the expenses for the
portion of your home in which you conduct your
business.
105
Profit or Loss from Business
KEY IDEAS
♦ Expenses for the business use of your home are
reported on Form 8829 if you are self-employed.
♦ Day-care providers can use a standard rate for meals
and snacks for children in lieu of using actual costs.
♦ If your net earnings from self-employment were $400
or more or you had church employee income of
$108.28 or more, you must file a Schedule SE.
♦ The self-employment tax rate is15.3% and is
comprised of both the social security tax (12.4%)
and the Medicare tax (2.9%). The SE tax is reported
on line 57 of Form 1040.
106
Profit or Loss from Business
CLASSWORK 1: True or False.
(1) An activity is presumed to be carried on for profit if it
produces a profit in at least 2 of the last 5 tax years.
(2) The total profit (loss) for all of your sole proprietorships
should be entered on line 12 of Form 1040.
(3) To take the home-office deduction, you must meet either
the principal place of business test or the exclusive use
test.
(4) The closing inventory of one year should be greater than
the opening inventory of the next year.
(5) FIFO means that the first product produced or purchased
is the product that is considered sold first.
107
Profit or Loss from Business
CLASSWORK 1: True or False.
(6) You may substitute your social security number for an EIN
on Schedule C.
(7) If a husband and wife own and operate a business and
share in the profits and losses they can report their
income and expenses on Schedule C.
(8) You can generally deduct 50 % of the lodging and
transportation expenses connected with business travel.
(9) A licensed day-care provider is exempt from passing the
principal place of business test for the home-office
deduction.
(10) The part of your home used for business to claim a
home-office deduction must be figured by using the
number of rooms in your house.
108
Profit or Loss from Business
CLASSWORK 1: True or False.
(11) The use of a cleaning service is not considered a valid
office expense.
(12) If you are a sole proprietor, you cannot work as an
employee for someone else.
(13) In determining whether you can use a business use of
home deduction, your principal place of business can
include a place you use for the administrative or
management activities of your business even if there is
another fixed location where you can carry on these
activities.
(14) An office in home is depreciated over 27.5 years.
(15) If you had net earnings from self-employment of at least
$300, you must file a return.
109
Profit or Loss from Business
CLASSWORK 1: True or False.
(16) If you are self-employed and claim the standard mileage
rate for the business use of your car, you can also claim
business related parking fees and tolls.
(17) An example of a direct expense for a business use of
home deduction is the cost of having the home office
professionally painted.
(18) Amortized business start-up costs are deductible
expenses.
(19) A day-care provider can alternate between the standard
rate method and the actual cost method for meals and
snacks in the same tax year.
(20) If you keep an inventory, you must use the cash method
of accounting.
110
Profit or Loss from Business
CLASSWORK 1: True or False.
(21) You must always file the long form of Schedule SE with
your Form 1040 if the total of your wages and tips
subject to social security plus your net earnings in 2008
from self-employment were more than $102,000.
(22) You are a self-employed carpenter. If you have net
earnings from self-employment of less than $400, you
may be able to use the short form of Schedule SE.
(23) In most cases, ministers, Christian Science practitioners,
and members of religious orders who have not taken a
vow of poverty can get an exemption from selfemployment tax on certain earnings by filing Form 6251.
(24) If you have more than one business, you must file
separate Schedules C and Schedules SE for each
business.
111
Profit or Loss from Business
CLASSWORK 1: True or False.
(1) An activity is presumed to be carried on for profit if it
produces a profit in at least 2 of the last 5 tax years. F
(2) The total profit (loss) for all of your sole proprietorships
should be entered on line 12 of Form 1040. T
(3) To take the home-office deduction, you must meet either
the principal place of business test or the exclusive use
test. F
(4) The closing inventory of one year should be greater than
the opening inventory of the next year. F
(5) FIFO means that the first product produced or purchased
is the product that is considered sold first. T
112
Profit or Loss from Business
CLASSWORK 1: True or False.
(6) You may substitute your social security number for an EIN
on Schedule C. F
(7) If a husband and wife own and operate a business and
share in the profits and losses they can report their
income and expenses on Schedule C. T
(8) You can generally deduct 50 % of the lodging and
transportation expenses connected with business travel.
F
(9) A licensed day-care provider is exempt from passing the
principal place of business test for the home-office
deduction. F
(10) The part of your home used for business to claim a
home-office deduction must be figured by using the
number of rooms in your house. F
113
Profit or Loss from Business
CLASSWORK 1: True or False.
(11) The use of a cleaning service is not considered a valid
office expense. F
(12) If you are a sole proprietor, you cannot work as an
employee for someone else. F
(13) In determining whether you can use a business use of
home deduction, your principal place of business can
include a place you use for the administrative or
management activities of your business even if there is
another fixed location where you can carry on these
activities. F
(14) An office in home is depreciated over 27.5 years. F
(15) If you had net earnings from self-employment of at least
$300, you must file a return. F
114
Profit or Loss from Business
CLASSWORK 1: True or False.
(16) If you are self-employed and claim the standard mileage
rate for the business use of your car, you can also claim
business related parking fees and tolls. T
(17) An example of a direct expense for a business use of
home deduction is the cost of having the home office
professionally painted. T
(18) Amortized business start-up costs are deductible
expenses. T
(19) A day-care provider can alternate between the standard
rate method and the actual cost method for meals and
snacks in the same tax year. F
(20) If you keep an inventory, you must use the cash method
of accounting. F
115
Profit or Loss from Business
CLASSWORK 1: True or False.
(21) You must always file the long form of Schedule SE with
your Form 1040 if the total of your wages and tips
subject to social security plus your net earnings in 2008
from self-employment were more than $102,000. T
(22) You are a self-employed carpenter. If you have net
earnings from self-employment of less than $400, you
may be able to use the short form of Schedule SE. F
(23) In most cases, ministers, Christian Science practitioners,
and members of religious orders who have not taken a
vow of poverty can get an exemption from selfemployment tax on certain earnings by filing Form 6251.
F
(24) If you have more than one business, you must file
separate Schedules C and Schedules SE for each
business. F
116
Profit or Loss from Business
CLASSWORK 2: Identify the line of the Schedule C on
which the following are entered:
1.
2.
3.
4.
5.
6.
7.
liability coverage
postage
refund for unsatisfactory service
car expenses
television advertising
tax preparation fees
business permits
117
Profit or Loss from Business
CLASSWORK 2: Identify the line of the Schedule C on
which the following are entered:
8. telephone bills
9. employee salaries
10. toner costs
11. employee term life insurance
12. section 179 expense deduction
13. expense for business use of home
14. tentative loss
118
Profit or Loss from Business
CLASSWORK 2: Identify the line of the Schedule C on
which the following are entered:
1.
2.
3.
4.
5.
6.
7.
liability coverage 15
Postage 18, 22
refund for unsatisfactory service 2
car expenses 9
television advertising 8
tax preparation fees 17
business permits 23
119
Profit or Loss from Business
CLASSWORK 2: Identify the line of the Schedule C on
which the following are entered:
8. telephone bills 25
9. employee salaries 26
10. toner costs 18, 22
11. employee term life insurance 14
12. section 179 expense deduction 13
13. expense for business use of home 30
14. tentative loss 29
120
Profit or Loss from Business
CLASSWORK 3: Complete Schedule C and Schedule SE
for the following:
Bonnie I. Nickolaus (SSN 121-94-6001, born
7/11/1946) is single. She lives at 42 Mary Dr., Eden,
MD 21249. Since 1995, she has owned and operated
a children’s clothing store called Young Styles. Her
income consists entirely of the proceeds from the
store. Her business (EIN 16-7864713) is located at
17 Iris St., Seneca, MD 21245. Bonnie uses the
accrual method of accounting. She does not use her
home for her business. Bonnie uses business code
448130.
Bonnie had an opening inventory of $51,368. She had
$189,634 in purchases and a closing inventory of
$53,624. She uses the cost method of valuing her
inventory. Her gross receipts were $297,336.
121
Profit or Loss from Business
She had the following expenses for her business:
Returns
Advertising
Repairs
Attorney fees
Depreciation for display
Cases (placed in service
5/15/2006)
Theft insurance
Liability insurance
Interest on loan for store
Tax preparation fee
(business portion of fee)
Meals for business trip
$2,200
2,800
290
800
550
450
550
2,080
280
180
Store lease
Equipment lease
Business subscriptions
Supplies
Taxes
Business license
Utilities
Wages
Office expense
Lodging for business trip
$ 9,500
1,600
150
1,750
4,900
185
3,100
49,650
365
890
122
Profit or Loss from Business
Bonnie first used her car for business 6/22/2005. In
2008, she drove 12,555 miles of which 1,350 miles
were for business purposes. She drove 675 business
miles from 1/1/2008 to 6/30/2008. She does not
have another vehicle and did keep records of her
mileage.
123
Profit or Loss from Business
124
Profit or Loss from Business
125
Profit or Loss from Business
126
Profit or Loss from Business
127
Profit or Loss from Business
128
Profit or Loss from Business
129
Profit or Loss from Business
CLASSWORK 4:
Laura K. Washington (SSN 233-15-6774) is a licensed
day-care provider. She operates her business in her
home for 4 days a week and 5 hours a day for 52
weeks. Laura uses 8 of the 10 rooms in her home for
her business. She had a profit of $8,500, which she
reported on her Schedule C.
Laura started her day-care business in May 2005. At
that time the adjusted basis of her house was
$75,000 including a land value of $10,000. The fair
market value of her house was $88,000 including a
land value of $15,000.
130
Profit or Loss from Business
Her expenses for the year were:
Mortgage interest
Insurance
Roof repairs
$3,800
1,200
2,100
Real estate taxes
$1,700
Utilities
1,250
Painting the house 1,500
Complete Form 8829 for Laura.
131
Profit or Loss from Business
132
Profit or Loss from Business
133
Questions & Answers
134