Schedule C Pilot

Linda Paulson, Tax Services Coordinator
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
Types of self-employed clients we serve
Common business types we see
Sole-proprietor: Business owned by one person with no formal business
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
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
Political contributions (example: political fundraiser)
Lobbying expenses (with some limited exceptions)
Personal expenses (but some are deductible as itemized
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
 If later sell asset, may have to recoup in year of sale the depreciation
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
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
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
 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
Meals are deducted on Sch C in Part V “Other
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
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, 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
 Taxes
owed = $1,000/4 = $250 quarterly payments
Linda Paulson
(512) 610-7378
[email protected]

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