Schedule C - Sole Proprietorship Profit & Loss (flows to Form 1040) Flashcards Preview

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Flashcards in Schedule C - Sole Proprietorship Profit & Loss (flows to Form 1040) Deck (21):

Deductions taken for Schedule C - Sole Proprietorship 


Business start-up costs = $5K

Section 179, 1st year expensing = $25K

Business gifts = $25/person

Service awards = $400/person


How is pre-paid interest on loans taken out for business purposes treated tax-wise? SCHEDULE C item

Pre-paid interest is pro-rated between the tax years then deducted accordingly. EX - I took out a $100K loan to start my solo CPA practice on 12/1/2012, payable on 11/30/2013. I paid $12K interest upfront. Life of loan is 12 months, hence $1K interest per month. $1K interest deduction goes to 2012 and $11K interest is deducted on my 2013 tax return's Schedule C.


Accounting method for construction contracts and why do we use it?

Percentage-of-Completion method to compute the income recognized each year based on the percentabge of the contract completed that year.  We use this to show what amount of the income is taxable for that year.

Report this in Schedule C and this will flow to the 1040 and we specify the accounting method as "Percentage-of-Completion" in "Other" on Line F.  Don't try to memorize the form, just know it is reportable.

EX - Grandpa has a side business as a construction contractor.  He has a contract to build a house for 2 years.  He has to report the income based on how much of the contract was completed each year.


How is COGS treated for tax purposes?

Valued at lower of cost or market (LCM)

Cost valuation methods are specific ID, FIFO, and LIFO


What are the requirement(s) for using LIFO for valuing your inventory for computing COGS?

Anytime you use LIFO for tax purposes, you must also use LIFO for your books.  Can't switch between methods.  LIFO is what you assign to your COGS while the ending inventory is valued at FISH (First In, Still Here = older and usually lower costs).  We like LIFO b/c usually gives us a much lower taxable income


Why can a drug dealer deduct the cost of his illegal drugs from his gross income?

Because the illegal drugs are the goods that he sold and that translates as COGS.  The only difference is the cost of illegal drugs are not deductible.  Still have to pay taxes on the earnings (even though that drug dealer is a moron for filing a Sched C)


When are business expenses deductible?

When they are ordinary, necessary, and reasonable expenses incurred in the trade or business


What is the threshold for maintaining supporting documentation for business meals, entertainment, and travel?

Anything over $75 must have receipts


What's the allowable deduction for business meals or entertainment?

50% of the business meals/entertainment expenses


Are transportation and travel expenses deductible for commuting from taxpayer's home to his/her place of buisness?

No, the only time we deduct travel expenses are when they are incurred for commuting between job locations.  Commuting between home and job is excluded.


How much can we deduct for business gifts given to employees, vendors, suppliers, and the like?

Max is $25 per receipient


When do we deduct a business's bad debt?  Can we do a partial deduction?

In the year it becomes worthless, e.g. a customer's credit is uncollectible. Can deduct 100% or part of the debt, depending on how much of that debt is worthless.


How is a hobby different from a business?  What is the tax treatment on hobbies?

A hobby is an activity NOT engaged in for profit.  Yet, we still include any income generated by a hobby in our gross income.  We can only deduct the hobby expenses up to the amount of hobby expenses LESS 2% of AGI.


EX - Earned $85K at a company.  Make and sell artisan breads on the weekends and earned $5K.  Out of pocket expenses for baking and selling breads are $8K.  


$85K + $5K = $90K AGI

Deduct the expenses up to $5K, but subject to 2% AGI.  Therefore:

$5K - (2% x $90K = $1.8K)  = $3.2K itemized deduction allowed to take



Supposed you work for XYZ Company as an accountant and you loaned the company $1,000 in 2012.  Terms are to repay in full in 2014.  The company was unable to repay you for the loan.  What can you do as the taxpayer?

Deduct the loss from your 2014 tax return as a short-term capital loss. The loss is a nonbusiness bad debt, which is deductible as a STCL.


Business Bad Debt vs. Nonbusiness Bad Debt 

Business bad debt - incurred in your own business and deductible (100% or partial, depending on how much is worthless).  You had your law practice loan $20K to another law practice, which did not get repaid.  You get to deduct that $20K as a bad business expense on your Sched C.

Nonbusiness bad debt - incurred outside of your business and deductible only when 100% worthless AND as a Short Term Capital Loss

EX - you loaned $20K to the law firm that you work for, but have any ownership in firm.  Not engaged in the law firm for profit other than to get a paycheck.  The law firm folds and fails to repay back the $20K to you.  You get to deduct it as a STCL.  Remember the cash is a short-term capital asset.


Why do we need to know Uniform Capitalization rules (UNICAP) for Schedule C - 1040?

  • Rule states all costs incurred, both direct and indirect, in purchasing, holding, or manufacturing/constructing property or inventory for reseale must be capitalized as part of the cost of the assets OR inventory
    • We care about this b/c this affects our COGS to arrive at taxable income.  Remember COGS is coming from the inventory
  • Applies to retailers/wholesalers w/ average annual gross receipts of >$10M over 3 years
  • Does NOT apply to advertising, selling, and R&D expenditures, and property held for personal use



True or false - a net operating loss (NOL) is only for business.

False, NOL can be for either a business or personal to the taxpayer, e.g. experienced a personal casualty loss.  


How is a NOL applied?

Carry back 2 years, forward 20 years


What makes up the NOL from a business?

The individual taxpayer's personal and dependency exemptions and excess nonbusiness deductions over nonbusiness income are NOT applicable to computing the business NOL.  Remember not to mix facts on the non-business items with computing a business NOL.  


Calculating a personal NOL

Deduct the amount of personal casualty from the individual taxpayer's personal income.  The NOL stands in place of Taxable Income.  So, we do NOT apply any personal/dependency exemptions.  Taxable Income is before personal/dependency exemptions.


Calculating a business NOL

Deduct the BUSINESS expenses from the BUSINESS income.  The NOL stands in place of Taxable Income.  So, we do NOT apply any personal/dependency exemptions.  Taxable Income is before personal/dependency exemptions.