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Leture Fundamentals of Taxation 2014 - Chapter 6: Self-employed business income

When you have completed this chapter, you should understand the following learning objectives: Describe how income and expenses for a self-employed individual are recognized and reportedm, explain the concept of ordinary and necessary business expenses, explain the calculation of depreciation for trade or business assets,. | Chapter 6 Self-Employed Business Income “A fine is a tax for doing something wrong. A tax is a fine for doing something right.” -- Anonymous 1 Chapter 6, Self Employed Business Income, Schedule C. LO #1- Income and Expenses of the Self-Employed Trade or Business – any activity that is engaged in for profit Self-employed income is reported on Schedule C 6-2 2 If an activity is engaged in for profit, it is considered a trade or business and the income/loss is reported on Schedule C. LO #1- Income and Expenses of the Self-Employed Gross receipts include Direct sales to customers Work performed as an independent contractor Amounts reported to a “statutory employee” Independent contractors usually receive a Form 1099-MISC to report income 6-3 3 All receipts received for the Schedule C business are considered income. Often, an independent contractor will receive a Form 1099-MISC from the payer of the income. LO #1- Income and Expenses of the Self-Employed Cost of Goods Sold - reduction from sales to produce gross profit Accrual Method of Accounting – must be used if inventory is a material income-producing factor 6-4 4 Typically, the cash method of accounting is used for most Schedule C businesses. However, if inventory is a material item, the inventory and cost of goods sold must be accounted for with the accrual method of accounting. LO # 2 Ordinary & Necessary Trade or Business Expenses To be deductible, expenses must be ordinary, necessary, and reasonable Ordinary – expenses must be customary or usual Necessary – expenses that are appropriate and helpful rather than essential Reasonable – expenses must be reasonable in amount and reasonable in relation to their purpose 6-5 5 Ordinary, necessary, and reasonable expenses are deductible on Schedule C. LO # 2 Ordinary & Necessary Trade or Business Expenses Forbidden Expenses Bribes, kickbacks, and other illegal payments Lobbying and political expenses Fines and penalty payments Not deductible even if ordinary, necessary, | Chapter 6 Self-Employed Business Income “A fine is a tax for doing something wrong. A tax is a fine for doing something right.” -- Anonymous 1 Chapter 6, Self Employed Business Income, Schedule C. LO #1- Income and Expenses of the Self-Employed Trade or Business – any activity that is engaged in for profit Self-employed income is reported on Schedule C 6-2 2 If an activity is engaged in for profit, it is considered a trade or business and the income/loss is reported on Schedule C. LO #1- Income and Expenses of the Self-Employed Gross receipts include Direct sales to customers Work performed as an independent contractor Amounts reported to a “statutory employee” Independent contractors usually receive a Form 1099-MISC to report income 6-3 3 All receipts received for the Schedule C business are considered income. Often, an independent contractor will receive a Form 1099-MISC from the payer of the income. LO #1- Income and Expenses of the Self-Employed Cost of Goods Sold - reduction from