Schedule C Pilot

Report
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



Common business types we see


Sole-proprietor: Business owned by one person with no formal business
organization
Independent contractor: Works independently and is paid for services provided
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

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.


wash) plus mileage log
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


Line 18: Office expense



Fees for tax advice and tax preparation, legal fees
regarding business matters
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


Line 22: Supplies


Repair is defined as keeping your business equipment in
working order, e.g. repair of copier or compressor; NOT
auto repairs
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
 Pilot parameter: must be under $25,000
the business
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
 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
[email protected]

similar documents