Income Tax Solutions Chapter 7

Income Tax Solutions Chapter 7 - 105 Chapter 7...

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Unformatted text preview: 105 Chapter 7 Self-Employment Teaching Suggestions 1. Chapter 7 focuses on the reporting requirements for self-employed individuals. In this chapter, students learn how to calculate net profit (or loss) from a business operated as a sole proprietorship, as well as how to compute the self-employment tax. This chapter also covers the deduction for one-half of the self-employment tax and the deduction for Keogh, SEP and SIMPLE retirement plans. It is important for students to realize that the net profit (loss) reported on Schedule C is not always the same as the net income (loss) reported on the books of the business. For example, charitable contributions deducted on the books of the business are not deducted on Schedule C, but instead must be deducted on Schedule A. Other items of income and expense that do not appear on Schedule C include casualty and theft losses of business property, and gains and losses on the sale of business property. Three forms and schedules are introduced in this chapter: Schedules C and SE, and Form 8829. Completing these forms requires a sequencing of calculations. This is especially the case for self-employed taxpayers deducting expenses for business use of the home. Before Form 8829 can be filled out, Schedule C first must be completed through line 29, Tentative profit (loss). Once Form 8829 is completed, net profit (or loss) on Schedule C can be computed. Net profit (or loss) from Schedule C is then used to calculate self-employment tax on Schedule SE. Using net profit from Schedule C and the deduction for one-half of the self-employment tax on Schedule SE, the required contribution to the taxpayers retirement plan can be determined. 2. Several expenses deducted on Schedule C should be familiar to students. Some of these expenses have been discussed in earlier chapters in the context of employee expenses. In many instances, the same rules apply to employees and self-employed individuals (e.g., travel, car expenses), whereas for others the rules differ slightly (e.g., education expenses, office-in-the-home). Solutions to Questions and Problems 1. 701. Cash Method Accrual Method a. Cash from last years fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,200 $ 0 b. Cash from current years fees . . . . . . . . . . . . . . . . . . . . . . . . . 49,000 49,000 c. Fees billed, no cash received . . . . . . . . . . . . . . . . . . . . . . . . . 10,200 d. Cash for computer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e. Cash from bank loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f. Cash from client for loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....
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Income Tax Solutions Chapter 7 - 105 Chapter 7...

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