SOLUTION: ACC 121 RSCC Compute the Profit & Loss Statement for Tax Consulting LLC Excel Task

SCHEDULE C (Form
1040 or 1040-SR)
Department of the Treasury
Internal Revenue Service (99)
Part I
Profit or Loss From Business
(Sole Proprietorship)
Go to www.irs.gov/ScheduleC for instructions and the latest information.

Attach to Form 1040, 1040-SR, 1040-NR, or 1041; partnerships generally must file Form 1065.

Income
Gross receipts or sales. See instructions for line 1 and check the box if this income was reported to you on
1
Form W-2 and the “Statutory employee” box on that

form was checked
Returns and allowances . . . . . . . . . . . . . . . . . . . . .
Subtract line 2 from line 1 . . . . . . . . . . . . . . . . . . . .
Cost of goods sold (from line 42) . . . . . . . . . . . . . . . . . .
Gross profit. Subtract line 4 from line 3 . . . . . . . . . . . . . . . .
Other income, including federal and state gasoline or fuel tax credit or refund (see instructions)
Gross income. Add lines 5 and 6 . . . . . . . . . . . . . . . . . .
2
3
4
5
6
7
Part II
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2
3
4
5
6
7
Expenses.
8
Advertising . . . . .
9
Car and truck expenses (see
instructions). . . . .
10
Commissions and fees .
11
Contract labor (see instructions)
12
Depletion . . . . .
13
Depreciation and section 179
expense deduction (not included in
Part III) (see instructions) . . . . .
14
Employee benefit programs (other
than on line 19) . .
15
Insurance (other than health)
16
Interest (see instructions):
a Mortgage (paid to banks, etc.)
b Other . . . . . .
17
Legal and professional services
8
9
10
11
12
13
14
15
18
Office expense (see instructions)
19
Pension and profit-sharing plans .
20
Rent or lease (see instructions):
a Vehicles, machinery, and equipment
b Other business property . . .
21
Repairs and maintenance . . .
22
Supplies (not included in Part III) .
23
Taxes and licenses . . . . .
24
Travel and meals:
a Travel . . . . . . . . .
b Deductible meals (see instructions) . . .
. . . .
25
Utilities . . . . . . . .
26
Wages (less employment credits) . 27a
Other expenses (from line 48) . . b Reserved
for future use . . .
16a
16b
17
Total Expenses
Net Profit or Net Loss
}
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1
18
19
20a
20b
21
22
23
24a
24b
25
26
27a
27b
OMB No. 1545-0074
2019
n.
Form 1065.
Attachment
Sequence No. 09
1
2
3
4
5
6
7
18
19
20a
20b
21
22
23
24a
24b
25
26
27a
27b
EA REVIEW: PART 1
Study Unit 3
Business Deductions
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EA 1 SU 3
1
Table of Contents
3.1 Business Expenses
3.2 Business Meals
3.3 Rental Property Expenses
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EA 1 SU 3
2
Introduction
• Gross income is reduced by deductions to compute taxable
income.
o No amount can be deducted from gross income unless
allowed by the Internal Revenue Code (IRC).
• Above-the-line deductions are deducted from gross income
to arrive at adjusted gross income (AGI).
o Several deductions and credits are limited by reference
to AGI.
• Below-the-line deductions are deducted from AGI to arrive
at taxable income.
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EA 1 SU 3
3
Reimbursed
Employee Expenses
• Business expenses for self-employed taxpayers are generally
deductible.
• However, as a result of the Tax Cuts and Jobs Act (TCJA), the
unreimbursed business expenses of employees are
nondeductible for tax years 2018 through 2025.
• If reimbursed expenses of an employee equal expenses and
the employee makes an accounting of expenses to the
employer, the reimbursements are excluded from the
employee’s gross income and the employer may deduct the
expenses (accountable plan).
o This rule also applies if reimbursements exceeding
expenses are returned to the employer and the
employee substantiates the expenses.
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EA 1 SU 3
4
Reimbursed
Employee Expenses
• If excess reimbursements are not returned or the employee does not
substantiate them, they are included in the employee’s gross income and
none of the expenses are deductible by the employee (nonaccountable
plan).
o For tax years 2018 through 2025, the employee’s 2%-of-AGI
miscellaneous itemized deduction allowance is repealed.
• An exception to disallowed employee deductions for business expenses is
the above-the-line adjustment to income for certain business expenses of
reservists, performing artists, and fee-basis government officials.
o The qualified employee reports these expenses on Form 2106.
• An employer reports the reimbursed expenses on Schedule C.
• Reimbursements for transportation not exceeding $0.58/mile for 2019 are
considered adequately substantiated by a record of time, place, and
business purpose.
• The employer decides which plan to use, and this determines the
employee’s tax consequences.
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EA 1 SU 3
5
Business Expenses
3.1
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EA 1 SU 3
6
Expenses of a
Trade or Business
• A deduction from gross income is allowed for all ordinary
and necessary expenses paid or incurred during a tax year in
carrying on a trade or business.
o A sole proprietor claims these deductions on Schedule C.
• Trade/Business
o Regular and continuous activity that is entered into with
the expectation of profit.
• Regular means the taxpayer devotes a substantial
amount of business time to the activity.
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EA 1 SU 3
7
Expenses of a Trade/Business
• To be deductible, an expense must be both
o Ordinary and
• The expense normally occurs or is likely to occur in
connection with businesses similar to the one
operated by the taxpayer claiming the deduction.
▪ The expense need not occur frequently.
o Necessary.
• The expenditure must be appropriate and helpful in
developing or maintaining the trade/business.
• Expenses must also be reasonable to be deductible.
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EA 1 SU 3
8
Expense Treatment
• Allocation
o Only the portion of an expenditure that is attributable to
business activity is deductible.
o A reasonable method of allocation may be used.
• It must clearly reflect income.
• Compensation
o Cash and the FMV of property paid to an employee are
deductible by the employer.
• Rent
o Advance rental payments may be deducted by the lessee only
during the tax periods to which the payments apply.
o Even a cash-method taxpayer must amortize prepaid rent
expense over the period to which it applies.
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EA 1 SU 3
9
Travel
• While away from home overnight on business, travel expenses are
deductible.
o Deduction is allowable for
• Transportation,
• Lodging, and
• Meal expenses in an employment-related context.
o No deduction is allowed for
• Personal travel, except for directly related business expenses
incurred while at the destination,
• Travel expenses for the taxpayer’s spouse unless certain
requirements are met,
• Attending investment meetings, or
• Travel as a form of education.
o Substantiation
• A taxpayer must substantiate the time, place, and business
purpose of expenses paid or incurred in travelling away from
home.
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EA 1 SU 3
10
Travel
• To determine a taxpayer’s principal place of business for purposes of travel expenses,
the location of an individual’s tax home must be determined.
• When a taxpayer has multiple places of business, the IRS examines the following
factors:
o The total time spent at each location
o The degree of business activity at each location
o The relative income earned at each location
• Taxpayer’s Tax Home
o The taxpayer performs part of his or her business in the area surrounding his or
her main home and uses that home for lodging while doing business in the area.
o The taxpayer has living expenses at his or her main home that are duplicated
because his or her business requires him or her to be away from that home.
o The taxpayer has not abandoned the area in which both his or her traditional
place of lodging and his or her main home are located, members of his or her
family live at his or her main home, or (s)he often uses that home for lodging.
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EA 1 SU 3
11
Travel
• Transportation
o While traveling taxpayers may either
• Deduct actual expenses for automobile or
o Services, repairs, gasoline, depreciation,
insurance, and licenses
• Use the standard mileage rate.
o Taxpayer may also deduct the standard mileage
rate plus parking fees, tolls, etc., in lieu of actual
expenses.
• $.58 per mile for 2019
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EA 1 SU 3
12
Foreign Travel
• Traveling expenses of a taxpayer who travels outside the United
States away from home must be allocated between time spent on
the trip for business and time spent for pleasure.
o No allocation is required for costs of getting to and from the
destination when
• The trip is for no more than 1 week,
• The taxpayer can establish that a personal vacation is not
the major consideration, or
• The personal time spent on the trip is less than 25% of
the total time away from home.
o A deduction for travel expenses will be denied to the extent
that they are not allocable to the taxpayer’s business when
the trip is longer than 1 week.
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EA 1 SU 3
13
Transportation Expenses
• Transportation expenses for employees include taxi fares, automobile
expenses, tolls, parking fees, and airfare.
o These expenses are treated as travel expenses if the employee is
away from home overnight.
• Otherwise, they are transportation expenses.
o Commuting costs are nondeductible
• If a self-employed individual needs to transport tools to work, a
deduction will be allowed for additional costs incurred to
transport the tools to work.
o Taxpayer may deduct actual automobile expenses or use the
standard mileage rate.
• $.58 per mile for 2019 plus parking fees and tolls
o Personal vs. Business Use
• Expenses must be allocated between personal and business
use.
• Only business expenses may be deducted.
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EA 1 SU 3
14
Insurance Expense
• Trade or business insurance expense paid or incurred during
the tax year is deductible.
o A cash-method taxpayer may not deduct a premium
before it is paid.
o Prepaid insurance must be apportioned over the period
of coverage.
o Self-employed persons may deduct from gross income
100% of amounts paid for health insurance premiums.
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EA 1 SU 3
15
Bad Debts
• A bad-debt deduction is allowed only for a bona fide debt
arising from a debtor-creditor relationship based upon a
valid and enforceable obligation to pay a fixed or
determinable sum of money.
o The specific write-off method must be used for tax
purposes.
o The reserve method is used only for financial accounting
purposes.
• Worthless debt is deductible only to the extent of adjusted
basis in the debt.
o Since cash-basis taxpayers have no basis in accounts
receivable, they generally have no deduction for bad
debts.
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EA 1 SU 3
16
Bad Debts
• Business Bad Debt
o Incurred or acquired in connection with the taxpayer’s trade
or business.
o Partially worthless business debts may be deducted to the
extent they are worthless and specifically written off.
• Treated as an ordinary loss.
• Nonbusiness Bad Debt
o Debt other than business bad debt.
• Investments are not treated as trade or business.
o Partially worthless nonbusiness bad debt is not deductible.
o Wholly worthless nonbusiness bad debt is treated as a shortterm capital loss.
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EA 1 SU 3
17
Worthless Securities
• Worthless corporate securities are not considered bad
debts.
o Generally treated as a capital loss
• Loss on Deposits
o Occurs when a bank, credit union, or other financial
institution becomes bankrupt or insolvent
o Treated as a personal casualty loss, which is
nondeductible
• Can also be treated as a nonbusiness ordinary loss
arising from a transaction entered into for profit
• If no election is made, the default classification is a
short-term capital loss subject to a $3,000 annual
limit.
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EA 1 SU 3
18
Business Gifts
• Expenditures for business gifts are deductible.
o They must be ordinary and necessary.
o Deductions will be disallowed unless the following records
are kept:
• Amount (cost) of the gift,
• Date of the gift,
• Description of the gift,
• Business purpose of the gift, and
• Business relation of the recipient to the taxpayer.
o Deduction is limited to $25 per recipient per year for
excludable items.
• Does not apply to incidental items (e.g., advertising)
costing not more than $4 each, and other promotional
materials involving signs and displays.
• Husband and wife are treated as 1 recipient.
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EA 1 SU 3
19
Employee
Achievement Awards
• An employee achievement award is tangible personal property awarded
as part of a meaningful presentation for safety achievement or length of
service.
• Tangible personal property does not include cash, cash equivalents, gift
cards/coupons/certificates, vacations, meals, lodging, event tickets,
stocks, bonds, and other securities.
• Qualified Plans
o An employee achievement award provided under an established
written program that does not discriminate in favor of highly
compensated employees.
• If average cost of all awards is >$400, it is not a qualified plan.
• Deduction is limited to $1,600 for the year.
• Nonqualified Plans
o Up to $400 of the cost of all employee achievement awards is
deductible by an employer.
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EA 1 SU 3
20
Miscellaneous Deductions
Related to Real Property
• Depreciation
o Deduction is permitted for obsolescence or wear and tear of property used in a
trade or business.
• Reforestation Cost
o Amounts paid or incurred for reforestation may be expensed in the current year
up to $10,000.
• Any remaining balance is amortized over a period of 7 years.
• Vacant Land
o Interest and taxes on vacant land are deductible.
• Demolition
o Demolition costs, undepreciated basis, and losses sustained are not deductible.
• Allocate to basis of land
• Abandoned Assets
o Loss is deductible in the year assets are actually abandoned with no claim for
reimbursement.
• Amount of loss equals adjusted basis in abandoned property.
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EA 1 SU 3
21
Start-up Costs and
Organizational Expenditures
• Start-up costs include the costs of investigating the creation
or acquisition of an active trade or business, to prepare to
enter into the trade or business, to secure suppliers and
customers, and to obtain certain supplies and equipment.
• Taxpayers can deduct $5,000 of start-up costs and $5,000 of
organizational expenditures in the taxable year that
business begins.
o Any start-up costs and organizational expenditures in
excess of the $5,000 limit are capitalized and amortized
over a 15-year period.
o These amounts are reduced, but not below 0, by the
cumulative amount of these costs that exceed $50,000.
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EA 1 SU 3
22
Additional Deductions
• Medical Reimbursement Plans
o The cost of such plans for employees is deductible by
the employer.
• Political Contributions
o Contributions to a political party or candidate and,
generally, lobbying expenses are not deductible.
• Lobbying activity equates to appearances before and
communications with any local council with respect
to legislation of direct interest to the taxpayer.
• Up to $2,000 of direct cost of lobbying activity at the
state and federal level is deductible.
o If direct costs exceed $2,000, no deduction is
allowed.
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EA 1 SU 3
23
Additional Deductions
• Debt of Another
o Payment of a debt of another party is generally not
ordinary for a trade or business and is thus not
deductible.
• A legal requirement or definite business requirement
renders the payment deductible.
• Intangibles
o The cost of intangibles must generally be capitalized.
• Amortization is allowed if the intangible has a
determinable useful life or if a code section
specifically allows for it.
• Tax-Exempt Income
o An expenditure related to producing tax-exempt income
is not deductible.
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EA 1 SU 3
24
Additional Deductions
• Public Policy
o A trade or business expenditure may be nondeductible if allowing the
deduction would frustrate public policy.
• Examples are fines and penalties paid for violation of the law,
illegal bribes and kickbacks, and expenses of illegal drug dealers.
• Impairment-Related Expenses
o Expenses of a handicapped individual for attendant care services at his
or her place of employment are deductible expenses.
• The expenses are claimed under other itemized deductions for the
individual’s return.
• Miscellaneous Expenses
o Misce …
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