1. Schedule C Chapter 5 pp
2012 National Income
Tax Workbook™

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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. 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

14. Indirect Methods pp
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

15. 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

16. Hobby Losses pp
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

17. Travel Expenses pp
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

18. 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

19. 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

20. 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

21. 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?

22. 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

23. 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)

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

25. 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)

26. 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

27. Other Issues pp
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

28. Questions?