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  Sole-proprietor: Business owned by one person with no formal business organization  Independent contractor: Works independently and is paid for services provided  Common business types we see  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 wash) plus mileage log  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.

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  Fees for tax advice and tax preparation, legal fees regarding business matters  Line 18: Office expense  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  Repair is defined as keeping your business equipment in working order, e.g. repair of copier or compressor; NOT auto repairs  Line 22: Supplies  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 Total cost to run the business Pilot parameter: must be under $25,000

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  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)