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Schedule C Pilot Volunteer Training

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

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Schedule C Pilot Volunteer Training

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  1. Schedule C PilotVolunteer Training Linda Paulson, Tax Services Coordinator

  2. Objectives • Parameters of project • Schedule C income • Schedule C expenses • Home-based day care

  3. 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 179depreciation 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

  4. 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.

  5. 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

  6. 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

  7. 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.

  8. 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.

  9. 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)

  10. 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.

  11. 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

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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”

  17. 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

  18. 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

  19. 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).

  20. 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

  21. 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

  22. 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

  23. Estimated taxes • Pay-as-you-go tax system applies to self-employed • Few CTC clients pay estimated taxes • www.irs.gov, Form 1040-ES • 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

  24. QUESTIONS? Linda Paulson (512) 610-7378 Linda.paulson@foundcom.org

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