Schedule C Chapter 5 pp. 127-158 2012 National Income Tax Workbook™

Schedule C p. 127 Worker classification Verifying income Hobby losses Travel expenses Car and truck expenses

Learning Objectives p. 128 Determine if worker is employee Spot signs of omitted income Help avoid hobby loss challenge Determine if job is temporary Figure business auto deduction

Worker Classification pp. 128-129 Rev. Rul. 87-41 lists 20 factors Divide into three categories Behavioral control Financial control Relationship of parties File Form SS-8 for IRS to decide

Section 530 Relief pp. 129-130 Revenue Act of 1978 Employer may be off hook Reporting consistency (Form 1099) Substantive consistency Reasonable basis Worker files Form 8919 for FICA

Fringe Benefits for Nonemployees p. 130 Nontaxable benefits generally limited to employees Working condition fringes can be provided to contractors Taxable benefits must be treated as pay on Form 1099-MISC

Voluntary Classification Settlement Program p. 131 Eligible businesses may reclassify workers for future tax periods Limited employment tax liability for past treatment as nonemployees (about 1% of 1-year compensation) Audit protection for prior periods

I.R.C. § 3509 Liability p. 131 Employment tax audit assessment Income tax failure-to-withhold penalty is 1.5% of compensation FICA tax failure-to-withhold penalty is 20% of employer share of FICA Employer still owes full FICA share

Application Process pp. 132-135 File Form 8952; allow 60 days If accepted, pay in full at closing Example 5.1: one or more groups Figure 5.1: Computation of liability Example 5.2: Use Form 8952 to calculate required payment

Information Reporting p. 136 IRS taking aim at information reporting to reduce tax gap Schedule C filer may receive Form 1099-MISC Form 1099-K Schedule C filer may need to file Form 1099-MISC or other 1099s

Cash-Intensive Businesses pp. 137-139 Misappropriation techniques: Skim cash before recording it Steal cash after it is recorded Create fraudulent disbursement

Clues to Unreported Income p. 137 Lifestyle not in synch with income Pattern of losses or low profits Deficit in cash-T accounting Increase in assets/decrease in debt not supported by reported income Unusually low profit margin or sales

Examination Methods pp. 137-138 Match source documents for same transaction Match receipts with deposits Check for unreported sales Example 5.3: Sales mismatch Example 5:4: Invoice mismatch

Indirect Methods pp. 138-139 Compare income and expenditures to estimate unreported income Example 5.5: Too many expenses Example 5.6: Omission of draws Example 5.7: Increase in assets Practitioner Note: Court cases

Hobby Losses pp. 140-142 Are losses creating tax benefit? IRS challenge is possible if losses occur for 3 years in 5-year period (6 of 7 years for horse activities) Regulation identifies 9 factors Take look at gambling, direct sales

Hobby Losses pp. 142-143 File Form 5213 if needed to postpone IRS determination Figure 5.4 is action plan to help clients satisfy the 9 factors if business losses continue

Travel Expenses pp. 144-148 Commuting is never deductible (but benefit may be excludable) Local trips to conduct business are deductible (Example 5.8) Costs of travel away from tax home are deductible if reasonable and necessary for business

Tax Home pp. 144-145 Locality of main place of work If no main place of work, look at: Locality of residence, if some of client’s work is in that locality Whether living costs are duplicated Whether family shares that home

Temporary Work Location pp. 145-146 Expected to last (and does last) no more than 1 year Example 5.10: Job ended early Example 5.11: Part-time at home Example 5.12: 2 short-term jobs Example 5.13: 2-year assignment

Substantiation pp. 146-148 Amount, date, place, purpose Accountable plan: Timely report to payer and return any excess funds Daily allowance: Reimburse at rate not exceeding federal per diem to reduce recordkeeping Examples 5.14 and 5.15

Deduction Limitation p. 148 Payer generally may deduct only 50% of meal, entertainment costs 80% deduction allowed for some transportation workers If reimbursement, was it treated as compensation?

Business Standard Mileage Rate pp. 149-151 55.5¢ per mile for 2012 Only available if chosen first year the vehicle is used in business Not available for fleet (5 or more) or if non S/L depreciation used Examples 5.16, 5.17, and 5.18

Standard Mileage Rate pp. 150-151 Add property tax, parking, tolls Add interest if not employee Example 5.19: Business use only SMR depreciation reduces basis Figure 5.6 and Example 5.20 (sale results in taxable gain)

Depreciation pp. 152-153 Annual dollar limits for passenger autos and light pickup trucks Example 5.21: I.R.C. § 280F prevents full MACRS deductions

I.R.C. § 179 Deduction pp. 154-156 $25,000 limit for SUVs (Ex. 5.22) Asset must be purchased from unrelated party (Ex. 5.23) “Hotel” assets are eligible (Ex. 5.24) If use varies, refigure basis annually § 1245 recapture on sale (Ex. 5.25)

Listed Property p. 156 All property used for transportation Unless business use > 50%, must use straight-line depreciation Business use must be substantiated Some aggregation is OK: Ex. 5.26 Sampling also allowed: Ex. 5.27

Other Issues pp. 156-158 Depreciation recapture required if business use drops to 50% or less Example 5.28: Report as SE income Leased auto? Check inclusion amount Trade-in is like-kind exchange Nonbusiness use of company car is taxable income

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