Business Income Form 1040 Lines 12 Pub 4012

Business Income Form 1040 Lines 12 Pub 4012 D-10 Pub 4491 Page 73 TAX-AIDE

Is it a Business? ● Profit motive ● Reasonable expectation of profit ● Means of livelihood ● Regular activity TAX-AIDE NTTC Training 2013 2

The Interview ● A conversation TAX-AIDE NTTC Training 2013 3

The Interview – A Conversation ● Prior year’s return ● Nature of business ● Where is the business conducted ● Net profit or loss ● Assets used in the business ● Record of income and expenses TAX-AIDE NTTC Training 2013 4

Notes: ● Taxpayer does not have to conduct regular full-time business activities to be self-employed ● Remember – all income is taxable unless the law says it isn’t! TAX-AIDE NTTC Training 2013 5

The Interview – A Conversation ● Review sources of income Forms 1099 -MISC What else? ● Review types of expenses Health insurance? Other out-of-scope expenses? TAX-AIDE NTTC Training 2013 6

Interview – Limitations On Scope ● No net loss ● Business expenses of $10, 000 or less ● Only sole proprietor No employees/no 1099 payments ● Can have more than one Sch C if more than one business Ø Do not combine businesses – if more than one business, need more than one Sch C TAX-AIDE NTTC Training 2013 7

Interview – Limitations On Scope ● No depreciation, amortization, or asset write-off (Form 4562) ● No deduction for business use of home, such as: Rent Utilities Homeowner/renter insurance Not even new simplified method! TAX-AIDE NTTC Training 2013 8

Interview – Limitations On Scope ● Cash method of accounting only ● Must materially participate in business ● Not a bartering business Exchange of services or property Value received is income! ● No prior year unallowed passive activity loss TAX-AIDE NTTC Training 2013 9

Interview – Limitations On Scope ● No inventory (resale business) Goods purchased for resale Goods produced for resale Even if bought for immediate resale or a particular job, it is still inventory ØUse of line 4, Cost of Goods Sold – out of scope TAX-AIDE NTTC Training 2013 10

Inventory Quiz Is this inventory? ● Furnishings bought by an interior designer for a specific client? YES – designer is selling the furnishings to the client Note: Answer could be NO if client buys the furnishings and designer charges a finding fee ● Fabric bought by an interior designer who will sew drapes for a client? YES – goods produced for resale are inventory TAX-AIDE NTTC Training 2013 11

Interview – Business Income ● Due diligence Does the client’s business sound reasonable If you have valid concerns that are not satisfied, you can decline to prepare return Speak privately with your Local Coordinator first if that’s what you decide TAX-AIDE NTTC Training 2013 12

What if it is NOT a Business? ● Income goes to Form 1040 line 21 ● Deductible items go on Schedule A Interest (home mortgage) Taxes Expenses to produce income (2%) Gambling losses to the extent of winnings (not 2%) TAX-AIDE NTTC Training 2013 13

If it is a Business – Line 12 TAX-AIDE NTTC Training 2013 14

Schedule C Quiz ● Is this a business? Income from recycling (only source of income) Yes Poll worker No Babysitter One-time executor fee No, unless in the business Caregiver Yes Who is a relative Who is not a relative TAX-AIDE No, unless in the business Yes NTTC Training 2013 15

Schedule C Input ● Use Schedule C (do not use Schedule C-EZ) ● Must be for either Taxpayer or Spouse Ø Jointly run business must be split into two Schedules C Self employment tax implications TAX-AIDE NTTC Training 2013 16

Schedule C Input The tax form TAX-AIDE NTTC Training 2013 17

The input form TW only (OOS) Use last year’s code or look up TAX-AIDE NTTC Training 2013 18

Business Code ● F 1 to help ● Click on Index ● Click on Business Codes for Sch C TAX-AIDE NTTC Training 2013 19

Business Code ● Select main category in side panel ● Select code from main screen TAX-AIDE NTTC Training 2013 20

Business Code – Practice ● Using Tax. Wise help, what is the business code for: Graphic designer 541400 Insurance agent 524210 Tutor 611000 TAX-AIDE NTTC Training 2013 21

Business Income The tax form ● All income must be reported ● All income goes on Line 1 TAX-AIDE NTTC Training 2013 22

Business Income – 1099 -MISC ● Reported to Taxpayer on Form 1099 MISC Box 7: Non-employee compensation Box 3: Other income (? ) (payer may have used wrong box) ØVery important to use 1099 -MISC that is linked with Sch C TAX-AIDE NTTC Training 2013 23

Business Income – 1099 -MISC ● If blank 1099 MISC on tree, use it ● Add more with “+” TAX-AIDE NTTC Training 2013 24

Business Income – 1099 -MISC ● If 1099 -MISC not on tree under Sch C, add it ● Choose a parent ● Choose Sch C TAX-AIDE NTTC Training 2013 25

Business Income – 1099 -MISC Not Sch C OOS OOS OOS TAX-AIDE OOS NTTC Training 2013 26

Business Income – Cash ● Cash or other income (no 1099 -MISC) Link from Line 1 to Scratch Pad TAX-AIDE NTTC Training 2013 27

Statutory Employee Statutory employee on Form W-2 ● Taxpayer wants to use Sch C ØInput on Sch C ØRegular Sch C rules apply for expenses TAX-AIDE NTTC Training 2013 28

Statutory Employee ● Statutory Employees include: Certain agents or commission drivers Full-time life insurance salespersons Certain homeworkers Traveling salespersons Ø Small employers may check the box in error TAX-AIDE NTTC Training 2013 29

Statutory Employee ● Statutory employee: Go to bottom of W-2 input form Ø Check the box TAX-AIDE NTTC Training 2013 30

Business Income – W-2 Statutory Employee (cont. ) – Sch C Input Ø Check the stat employee box by Line 1 Ø Enter income amount from W-2 on scratch pad linked to Line 1 Do not mix Statutory Employee income with any other income TAX-AIDE NTTC Training 2013 31

Business Income Quiz What types of income should you expect to see for: ● A wedding singer Checks and cash (gratuities!) ● A graphic designer 1099 -MISC if > $600 Checks or cash for small jobs TAX-AIDE NTTC Training 2013 32

Business Expenses ● Ordinary and necessary to the business ● Not against public policy Cannot deduct fines or penalties ● All permissible expenses should be claimed ØCan affect other items, e. g. EIC TAX-AIDE NTTC Training 2013 33

Business Expenses The tax form TAX-AIDE NTTC Training 2013 34

Business Expenses The input form Car mileage deduction from page 2 Not home office Do not use for car mileage TAX-AIDE NTTC Training 2013 35

Other Business Expenses ● Use for business expenses not described in lines 8 -26 For more lines, link from last line to new Other Expense Sch C Line 48 form TAX-AIDE NTTC Training 2013 36

Business Expense Quiz Are these items deductible? In scope? ● Commissions and fees paid ● Contract labor payments ● Legal and professional services ØOnly if less than $600 per payee ØMore than $600 requires 1099 to be issued (OOS) TAX-AIDE NTTC Training 2013 37

Business Expense Quiz Are these items deductible? In scope? ● Employee benefit programs ● Pension and profit sharing ● Wages ØOut of scope – all relate to employees TAX-AIDE NTTC Training 2013 38

Business Mileage ● Actual expense method – out-of-scope OR ● Standard mileage rate method TAX-AIDE NTTC Training 2013 39

Business Mileage Standard mileage rate includes: • Car depreciation • Gasoline, oil, etc. • Repairs and maintenance • Insurance • Car registration (non-tax portion) Standard mileage rate does not include: • Parking • Tolls • Car registration (business part of property tax portion) TAX-AIDE NTTC Training 2013 40

Business Mileage The tax form TAX-AIDE NTTC Training 2013 41

Business Mileage The input form ● Sch C Pg 2 Check the box and verify the rate – 56. 5¢ for 2013 TAX-AIDE NTTC Training 2013 42

Business Mileage Quiz ● TP claims business mileage and keeps records ● TP has car accident while on business ● Is insurance “deductible” deductible? ØNo – insurance (or the cost of selfinsuring) is included in standard mileage rate TAX-AIDE NTTC Training 2013 43

Business Mileage Quiz ● TP claims business mileage and keeps records ● TP pays to valet park car to attend a business meeting ● Is valet fee deductible? ØYes, parking and tolls are deductible in addition to standard mileage rate TAX-AIDE NTTC Training 2013 44

Business Expense – Outside Office ● Rent ● Office expenses (postage, supplies, etc. ) ● Insurance ● Taxes ● Business telephone and utilities ● NOT HOME OFFICE TAX-AIDE NTTC Training 2013 45

Business Expense – Computer ● Out of scope ● Requires depreciation or write-off using Form 4562 ØMay claim supplies (paper, toner) used for business TAX-AIDE NTTC Training 2013 46

Business Expenses – Telephone ● Business telephone – dedicated line used only for business 100% deductible ● Mixed-use home phone Basic service not deductible Only actual cost of business calls deductible ØCannot deduct cost of phone itself – requires Form 4562 TAX-AIDE NTTC Training 2013 47

Meals and Entertainment ● Special documentation rules apply if over $75. 00 Must have receipt (showing where, when, and how much) Must document business nature of meal or entertainment TAX-AIDE NTTC Training 2013 48

Business Expense – Meals and Entertainment Usually only 50% deductible – enter full amount, TW does the math TAX-AIDE NTTC Training 2013 49

Business Gifts ● Limited to $25 per recipient per year ● Does not include logo’d articles of $4 or less each (e. g. , a logo’d pen) TAX-AIDE NTTC Training 2013 50

Business Income ● Tax. Wise will automatically flow business net profit to other parts of the return: Self-employment tax (Lesson 27), except statutory employee Roth or traditional IRA (Lesson 19) Earned income credit (Lesson 29) ØProceed methodically through each area TAX-AIDE NTTC Training 2013 51

Business Income Quality Review ● Do all 1099 -MISC in Tax. Wise agree with originals – EIN, payer name, address, etc. ● Does Sch C net profit agree with client’s records ● How does net profit compare to prior year – is it reasonable TAX-AIDE NTTC Training 2013 52

Business Income Quality Review ● Does client have education expenses that could (should) be deducted on Sch C ● How does the state look TAX-AIDE NTTC Training 2013 53

Business Income Client Summary ● Emphasize need to keep good records Can be paper or electronic Assures all income is accounted for Assures no expenses are forgotten Greatly facilitates tax return preparation TAX-AIDE NTTC Training 2013 54

Business Income Questions? Comments? TAX-AIDE NTTC Training 2013 55

Let’s Practice In Tax. Wise ● Open return for Kent/Bryant in Tax. Wise ● From Pub 4491 W pp 62 -63, enter business income and expenses for Mary ● Verify refund monitor TAX-AIDE NTTC Training 2013 56