Self Employment and Farming

Question 1

What Schedule is Section 1231 gain reported on?

Answer 1

Schedule D

Question 2

Can home office deductions create a loss on the Schedule C?

Answer 2

No

Question 3

Are property insurance and home repairs deductible on Schedule A?

Answer 3

No

Question 4

Is bank interest>$1,500 on a farm account reported on the Schedule F or Schedule B?

Answer 4

Schedule B

Question 5

A residence is deemed to have been used by the taxpayer for personal purposes if the home is used by an individual under a reciprocal arrangement, but only if rent is not charged.

Answer 5

A residence is deemed to have been used by the taxpayer for personal purposes if the home is used by an individual under a reciprocal arrangement, whether or not rent is charged.

Question 6

Qualified production property for the domestic production activities deduction generally includes tangible personal property, computer software, and sound recordings.

Answer 6

Qualified production property for the domestic production activities deduction generally includes tangible personal property, computer software, and sound recordings.

Question 7

To be deductible, trade or business deductions must be either ordinary or necessary.

Answer 7

The general rule is that, to be deductible, the amount must be both ordinary and necessary.

Question 8

An activity that results in a profit in any 3 of 5 consecutive tax years is presumed not to be a hobby.

Answer 8

A trade or business is a regular and continuous activity that is entered into with the expectation of making a profit. Regular means the taxpayer devotes a substantial amount of business time to the activity. An activity that is not engaged in for a profit is a hobby (personal).

Question 9

Meal and entertainment expenses incurred in carrying on a trade or business are deductible up to a 50% limit.

Answer 9

The amount deductible for meal and entertainment expenses is 50% of the actual expense. The IRS has denied deductions for any meal or entertainment expense over $75 for which the claimant did not provide substantiating evidence. Meal expenses are not deductible if neither the taxpayer nor an employee of the taxpayer is present at the meal.

Question 10

A partially worthless personal bad debt is deductible up to $1,000.

Answer 10

A nonbusiness bad debt is a debt other than one incurred or acquired in connection with the taxpayer’s trade or business. A PARTIALLY worthless nonbusiness bad debt is not deductible.

Question 11

The deduction for business gifts is limited to $25 per recipient per year.

Answer 11

Expenditures for business gifts are deductible. They must be ordinary and necessary. Deduction is limited to $25 PER RECIPIENT per year for excludable items. The $25 limit does not apply to incidental items costing (the giver) not more than $4 each.

Question 12

All start-up costs of a business are deductible as they occur.

Answer 12

Although taxpayers may immediately deduct start-up costs, the immediate deduction is only for the taxable year in which the business begins (i.e., not just any year they occur), and the deduction is limited to $5,000. The $5,000 limit is reduced, but not below zero, by the cumulative cost of start-up costs that exceed $50,000.

Question 13

As long as the business portion of a home is used more than 50% of the time for business, expenses incurred for the home office are deductible.

Answer 13

Expenses incurred for the use of a person’s home for business purposes are deductible only if strict requirements are met. Use of the business portion of a home by the taxpayer or family members for nonbusiness purposes results in complete disallowance of the deductions. A home office qualifies as a “principal place of business” if used by the taxpayer to conduct administrative or management activities of the taxpayer’s trade or business, and there is no other fixed location of the trade or business where the taxpayer conducts such activities.

Question 14

FICA contributions made by the employee are tax deductible by the employee, while those made by the employer are not deductible by the employer.

Answer 14

FICA contributions made by the employee are not tax deductible by the employee, while those made by the employer are deductible by the employer.

Question 15

A self-employed taxpayer’s applicable FICA tax rate is equal to the rate paid by employers.

Answer 15

The FICA tax liability imposed on net earnings from self-employment is equal to the sum of the employer’s and the employee’s portion of FICA tax.

Question 16

Employees pay Federal Unemployment Tax of 6.0% of the first $7,000 of wages earned

Answer 16

Employers are liable for 100% of FUTA tax. Employees do not pay any portion of FUTA.

Question 17

An employee’s gross income includes the cost of any fringe benefit supplied or paid for by the employer.

Answer 17

An employee’s gross income does not include the cost of any fringe benefit supplied or paid for by the employer that qualifies as no-additional-cost service, qualified employee discount, working condition fringe, de minimis fringe, qualified transportation fringe, or qualified moving expense reimbursement.

Question 18

Benefits provided to an employee by an employer are excludable if such benefits are provided as a working condition fringe benefit.

Answer 18

Benefits provided to an employee by an employer are excludable if such benefits are provided as a working condition fringe benefit.

Question 19

No amount may be excluded by an employee for employer-provided transportation.

Answer 19

Up to $255 per month may be excluded for the value of employer-provided transit passes and transportation in an employer-provided “commuter highway vehicle” between the employee’s residence and place of employment. Additionally, up to a $255-per-month exclusion is available for employer-provided parking. Employees may use both of these exclusions.

Question 20

All premiums paid by the employer for life insurance are included in the employee’s gross income.

Answer 20

Certain premiums paid by the employer are included in the employee’s gross income. The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee’s gross income. Premiums representing excess coverage (over $50,000) less any amounts paid by the employee on the insurance policy is the amount included.

Question 21

An employee may exclude costs incurred by an employer for care of dependents who are under the age of 13 or disabled that allow the employee’s gainful employment.

Answer 21

An employee may exclude costs incurred by an employer for care of dependents who are under the age of 13 or disabled that allow the employee’s gainful employment. The value of dependent care provided by an employer at an on-site facility is based on the value of services provided and not the actual cost.

Question 22

The value of meals furnished to an employee by or on behalf of the employer is not excluded from the employee’s gross income.

Answer 22

The value of meals furnished to an employee by or on behalf of the employer is excluded from the employee’s gross income if the meals are furnished on the employer’s business premises and for the employer’s convenience. The exclusion does not cover meal allowances.

Question 23

An employee must recognize income when an incentive stock option is granted.

Answer 23

An employee may not recognize income when an incentive stock option is granted or exercised depending upon certain restrictions. The employee recognizes long-term capital gain if the stock is sold 2 years or more after the option was granted and 1 year or more after the option was exercised.

Question 24

If the participant in a cafeteria plan chooses cash, such cash is gross income.

Answer 24

A cafeteria plan is a benefit plan maintained by an employer under which all participants are employees, and each participant has the opportunity to select between cash and nontaxable benefits. If the participant chooses cash, such cash is gross income.

Question 25

Payments or portions thereof used by a farmer for personal or living expenses do not qualify as farm expenses.

Answer 25

Payments or portions thereof used by a farmer for personal or living expenses do not qualify as farm expenses and are not reported on Schedule F; however, they may be deductible and reported elsewhere on Form 1040 and related schedules.

Question 26

A taxpayer engaged in a farming business may be able to average all or some of the current year’s farm income by shifting it to the 2 prior years (base years).

Answer 26

A taxpayer engaged in a farming business may be able to average all or some of the current year’s farm income shifting it to the 3 prior years (base years). To elect farm income averaging as a tax computation method, the taxpayer must file a Schedule J with the income tax return for the election year.

Question 27

Farmers may choose to treat commodity credit corporation (CCC) loans secured by pledged crops as taxable income in the year the loan proceeds are received.

Answer 27

Farmers may choose to treat commodity credit corporation (CCC) loans secured by pledged crops as taxable income in the year the loan proceeds are received. If the pledged crops are later forfeited to the CCC in full payment of the loan, any outstanding loan amount is taxable income.