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Sole Proprietor Income Deductions
Analyze official rules and instructions to complete a Schedule C and related required tax forms, to reflect income and deductions related to self-employment as a sole proprietor.
Note: Completing a tax form requires specific steps that need to be executed in a sequence. The assessments in this course are presented in sequence and must be completed in order. Incorrect entries in previous assessments will result in incorrect entries in future assessments. Do not complete Assessment 2 until you have submitted and received faculty feedback for
Assessment 1.
The use of Schedule C is required when the individual’s business is not incorporated or formed as a partnership or limited liability company.
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and assessment criteria:
• Competency 1: Analyze the background of the federal income tax system.o Analyze official information to identify tax forms required for a sole proprietorship
• Competency 2: Analyze the basics of individual income tax return preparation.o Analyze official rules and instructions to determine eligible business tax credits.o Analyze official rules and instructions to determine eligible deductions.o Analyze official rules and instructions to correctly compute SE tax and SE deduction.o Interpret official rules and instructions to record correct entries on all tax forms.
Sole Proprietor Income Deductions
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Context
“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” — Ronald Reagan.
If an individual is searching for a tax strategy to offset his or her income from a primary job, being self-employed on the side is quite possibly one of the best options, along with being a real estate property owner or an investor. Each of these has the advantage of allowing an individual to reduce current income by any losses suffered from freelancing, renting out property, or investing.
However, the individual takes on additional work for the filing process. Schedule C must be completed, a task that requires an individual to know much more about the tax rules for recognizing income and maximizing expenses than many persons are willing to invest the time to research.
Question to Consider
To deepen your understanding, you are encouraged to consider the questions below and discuss them with a fellow learner, a work associate, an interested friend, or a member of the business community.
• What are the financial advantages of self-employment?• Can a person have multiple Schedule Cs?• What are the financial implications of hiring employees versus independent contractors?
Resources
The following resources are required to complete the assessment.
Internet Resources
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.
RS.gov is the homepage for the federal IRS Web site. Use the tabs at the top of the page to navigate the site. The Interactive Tax Assistant and Tax Trails are tools that walk you through a series of questions to find answers to tax questions.
Download the appropriate forms and publications from the IRS Web site to complete this assessment.• IRS.gov. (n.d.). Retrieved from http://www.irs.gov/• IRS. (n.d.). Interactive tax assistant. Retrieved from http://www.irs.gov/uac/Interactive-Tax-Assistant-(ITA)-1• IRS. (n.d.). Tax trails. Retrieved from www.irs.gov/Individuals/Tax-Trails%2d%2d%2dMain-Menu
Suggested Resources
FORM 1040: SCHEDULE C SELF-EMPLOYED BUSINESS INCOME
Taxpayers who attribute a large portion of their taxable income to operating a self-employment business or trade must complete Schedule C to determine the presence of a business income or loss. The income from this endeavor is netted with related ordinary and necessary business expenses to calculate the increase or decrease in AGI that result from the self-employed trade or business.
In addition to completing and filing Schedule A with the taxpayers Form 1040, it may be necessary to file Schedule SE (Self-employment Tax), as well as Forms 8829 (Expenses for Business Use of Your Home) and 4562 (Depreciation and Amortization).
• J. K. Lasser Institute. (2015). Your income tax 2015: For preparing your 2014 tax return. Hoboken, NJ: Wiley.
• J. K. Lasser Institute. (2014). Your income tax 2014: For preparing your 2013 tax return. Hoboken, NJ: Wiley.
• Herman, T. (2014, February 16). Home-office deduction simplified. The Wall Street Journal, p. 2.
• Flynn, K. E., Belak, P., & Soltis, G. (2014). Understanding individual tax compliance: Advanced deductions and related issues. Journal of Business Case Studies, 10(4), 425–440
• Korb, P. J., & Williams, J. L. (2014). Simplified option versus regular method for home office deductions. The CPA Journal, 84(12), 36–39.
• Intuit Inc. (2015, January 26). Intuit’s QuickBooks Online Self-Employed integrates with Stripe, simplifying tax reporting for on-demand economy workers [Press release]. Business Wire.
• Everett, J. O., Hennig, C. J., Raabe, W. A., & Sonnier, B. M. (2013). Tax planning opportunities for individual net operating losses. Journal of Taxation, 119(3), 108–116.
Sole Proprietor Income Deductions
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Internet Resources
Access the following resources by clicking the links provided. Please note that URLs change frequently. Permissions for the following links have been either granted or deemed appropriate for educational use at the time of course publication.• lynda.com. (n.d.). Income tax fundamentals: Accounting tutorials. Retrieved from http://www.lynda.com/Business-Accounting-tutorials/Income-Tax-Fundamentals/188210-2.html• IRS. (n.d.). IRS videos. https://www.youtube.com/user/irsvideos.
o The IRS has a channel on YouTube devoted to income tax information in a video format. There are numerous videos available to help you with the course assessments. Videos are available with closed captions and in ASL and multilingual versions. You can search this channel by topic.
Assessment Instructions
Note: The assessments in this course are presented in sequence and must be completed in order. In Assessments 2–5, you will work step-by-step toward completing a 1040 tax return and all the necessary related forms, based on a provided scenario. Do not complete Assessment 2 until you have submitted and received faculty feedback for Assessment
1.Calculating correct entries for self-employment requires significant research. For those are who self-employed, entries from self-employment tax forms are necessary to complete the 1040 form.
For this assessment, use information and publications from IRS.gov and the other IRS resources linked in the Resources under the Required Resources heading to research the regulations and complete the appropriate self-employment schedules, based on the provided scenario.
Sole Proprietor Income Deductions
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Complete the following:
• Read the information provided in the scenario below.
• Download the appropriate forms and publications from IRS.gov to complete this assessment.
• Complete the entries on tax forms required for a sole proprietorship return.
• Analyze official rules and instructions to correctly compute SE tax and SE deduction.o 1040sc.o 1040sse.
• Determine whether Jacob’s business is eligible for any tax credits.o Is Jacob’s business eligible to use the Work Opportunity Credit and Disabled Access Credit?
• Determine eligible business deductions.
• Interpret official rules and instructions to record correct entries on all related self-employed schedules.
• Submit the tax forms.
Scenario
Jacob Weaver is a contractor operating as a sole proprietorship (EIN 99-3456789).
• 2016 net income: $133,000.
• Clients owe him a total of $53,000 for work completed in 2016.
• 2016 estimated tax payments: $25,000.
• Jacob and Taylor bought their first house in 2016.
• He is using a bedroom in his house as a home office. The room is 15′ x14′.
• He has one half-time employee, Martin, who had been unemployed since returning from Afghanistan and is disabled.o Martin worked for Jacob for 20 hours a week, for 41 weeks of 2016.o Martin earned $10,500.o Jacob had to spend $7,350 for disabled access equipment for Martin
Sole Proprietor Income Deductions
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