Presentation on theme: "SCHEDULE C PILOT VOLUNTEER TRAINING Linda Paulson, Tax Services Coordinator."— Presentation transcript:
SCHEDULE C PILOT VOLUNTEER TRAINING Linda Paulson, Tax Services Coordinator
Objectives Parameters of project Schedule C income Schedule C expenses Home-based day care
Project Parameters Income guidelines Annual household net income of $50,000 or less for self-employed; $25,000 single filers Business expenses up to $25,000 Cash basis taxpayers only Business losses confined to a single tax year and with no carry back or carry forward Business use of the home – limited to day care providers (may either rent or own home) Section 179 depreciation allowed so long as total business expenses do not exceed $25,000 No businesses with inventory No net operating losses (NOLs) No businesses with employees Pilot locations agree to prepare returns electronically
Prototype Types of self-employed clients we serve Sole-proprietor: Business owned by one person with no formal business organization Independent contractor: Works independently and is paid for services provided Common business types we see Construction, janitorial/cleaning, sales, delivery/trucking, arts, barbers/stylists, daycare, tutors Common expenses Mileage, supplies, tools, contract labor If client operates more than one business, there will be a separate Schedule C for each business.
Business Identification TaxWise populates name and SSN Identify type of work Identify appropriate business code No entry in boxes C, D and E, unless these apply to client
Accounting Method Two basic accounting methods: cash and accrual Cash method: Report income when it’s received and deduct expenses when they are paid. Used by most small businesses. Accrual method: Report income when sale is made and expenses when incurred. Cash is king! Pilot Parameter
Schedule C Income Important to report all income, whether or not reported to IRS on a Form 1099-MISC. There are tax benefits such as the Earned Income Tax Credit, making Work Pay Credit, and Additional Child Tax Credit that can result in tax refunds based on self-employment income. Proper reporting of income is important for other purposes such as obtaining financing or selling business.
Schedule C Income Line 1: Gross Receipt or Sales Income from box 7 of the Form 1099-MISC (if received). Link from line 1 to 1099-MISC. For cash, check and other receipts, link from line 1 to scratch pad. Title scratch pad “Business Income.” Remainder of Part I computed by TaxWise.
Business Expenses – The Basics Per IRC §162 business expense deductions must be: Incurred in carrying on a trade or business Ordinary: normal, usual, or customary for others in similar business Necessary: prudent businessperson would incur same expense Reasonable: question of fact Some expenses are not deductible under various sections of the IRC: Fines, penalties, illegal bribes and kickbacks (example: parking tickets) Political contributions (example: political fundraiser) Lobbying expenses (with some limited exceptions) Personal expenses (but some are deductible as itemized deductions)
Schedule C Expenses Line 8: Advertising Newspaper, internet ads, business cards, radio announcements, etc. Line 9: Car and truck expenses CTC uses only the standard mileage rate because it’s generally more advantageous and fewer receipts required. There are two basic methods for tracking Actual expenses: Receipt required for every item (gas, oil, repairs, insurance, car wash) plus mileage log Standard mileage rate : 2010 rate of 0.50 cents per mile. Rate includes everything: gas, oil, repairs, insurance, depreciation, tires, inspection, etc. Enter mileage in Part IV on page 2 of C. Also, answer other questions in Part IV. For a Schedule C, the box below the mileage amounts needs to be checked in order to calculate mileage. The amount will flow to Line 9. Can also deduct parking and tolls.
Schedule C Expenses Line 10: Commissions and fees Any fees paid to sell products or referral fees paid to bring in new customers are listed on this line. Line 11: Contract labor This line is intended to identify businesses using independent contractors. CTC does not prepare tax returns for clients who have employees. Must issue Forms 1099 to contractors paid $600 or more in tax year Line 12: Not applicable Line 13: Depreciation Annual deduction allowing client to recover the cost of business equipment that has more than one year of useful life. Pilot parameters allow only section 179 depreciation; any other is out of scope Can elect to depreciate a business asset in the same year–“Section179 election” If later sell asset, may have to recoup in year of sale the depreciation claimed
Schedule C Expenses TaxWise entry for section 179 depreciation From line 13 of Sch C, link to Form 4562 On line 6(a) of 4562, link to Asset Worksheet Complete description of item, the asset type, and date placed in service Line 1a, enter cost of item “No” to Special Depreciation Allowance Line 5 in Section 179 portion, enter amount of item TW completes entries on 4562 and line 13 of C
Schedule C Expenses Line 14: Not applicable for CTC clients Line 15: Insurance (other than health) Premiums for business liability insurance Line 16a: Mortgage Interest Rare for CTC clients. 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
Schedule C Expenses Line 17: Legal and professional services Fees for tax advice and tax preparation, legal fees regarding business matters Line 18: Office expense Stationery, paper, stamps, printer toner, etc. Line 19: Not applicable Line 20: Rent or lease a. If the client rented or leased machinery or equipment this is where to list it b. If the client had to rent business property, e.g. office or storage space, a barber who rents a chair at a salon, list it here
Schedule C Expenses Line 21: Repairs and maintenance Repair is defined as keeping your business equipment in working order, e.g. repair of copier or compressor; NOT auto repairs Line 22: Supplies These are materials purchased for business use or supplies needed for the operation of equipment Line 23: Taxes and licenses Business taxes such as real estate taxes Most common for CTC are permits and licenses, e.g. the cost of barber’s or cosmetologist’s license NOT federal or state income taxes
Schedule C Expenses 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). Overnight travel required 50% of meals and entertainment expenses for business trips can be deducted Rare for CTC clients Line 25: Utilities List here electric and other utility costs of business office If client operates home-based day care, utility costs belong on Form 8829 “Expenses for Business Use of Your Home”
Schedule C Expenses Line 26: Wages Not applicable; out of scope Line 27: Other expenses On page 2 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 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. Total cost to run the business Pilot parameter: must be under $25,000
Profit/Loss 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 Pilot parameter – if loss, total loss must be taken in current tax year Line 30: Form 8829 –Expenses for Business Use of the Home Pilot parameter – CTC may claim this expense only for home-based day care
Home-based day care Office in Home – Line 30 Day care providers are an exception to the exclusive use rule. Use is calculated based on hours of day care provided. Office in the home expenses cannot cause net loss from the business activity Office in home deduction is limited to business gross income in excess of other business expenses (ordering rules apply) Form 8829 is used to report office in home expenses. Expenses are classified as direct (for office only) or indirect (for entire home).
Home-based day care TaxWise entries for office in home Link to Form 8829 from Schedule C, Line 30. If entire home used for day care, lines 1 and 2 same amount. Otherwise, enter square footage used for day care on line 1 and total home on line 2. Ex. of time-space calculations: Sue uses 1,500 sq ft of her 2,000 sq ft home for day care Day care operates 12 hrs/day, 5 days/week, 50 weeks/year 1,500/2000=75% 3,000(12x5x50)/8,760(24x365)=34.25% 34.25% of direct expenses; 25.69% of indirect
Home-based day care If the home is rented, rent is entered as an indirect expense on line 18. If the home is owned, there are complex depreciation rules. Seek assistance as to whether we will complete this tax return. Meals are deducted on Sch C in Part V “Other Expenses” Actual – separate receipts Standard meal rate (2010) Breakfast $1.19 Lunch $2.21 Dinner $2.21 Snack $.66
Completing C and return Line 31: Net profit (or loss) Here is net profit or loss. TaxWise transfers the total to the 1040, line 12. Self-employment tax is automatically calculated by TaxWise. Line 32: If the client has a loss, check box 32A “All investment is at risk” For our self-employed clients all of their investment is at risk. They are not investors or silent partners. They could lose it all. Quality review: ensure that the completed return is QRd by a Schedule C pilot-certified volunteer following standard QR steps
Estimated taxes Pay-as-you-go tax system applies to self-employed Few CTC clients pay estimated taxes www.irs.gov, Form 1040-ES www.irs.gov Complete based on 2010 income Payment coupons and mailing instructions will print Form can be confusing. Option: divide amount owed for 2010 by 4 and suggest client mail this amount each quarter. Taxes owed = $1,000/4 = $250 quarterly payments
QUESTIONS? Linda Paulson (512) 610-7378 Linda.firstname.lastname@example.org