1. Schedule K-1
Entire Lesson
Pub 4491 – Part 3
NTTC Training – 2014

2. Schedule K-1
Reports taxpayer’s share of income, other distributions, deductions, and credits from
Estates and Trusts (Form 1041)
Domestic Partnerships (Form 1065)
S Corporations (Form 1120S)
K-1s for Foreign Partnerships (Form 8865) are out of scope
NTTC Training – 2014

3. Intake and Interview Look for K-1s Verify in scope!
Carefully review any K-1s to make sure they are in scope. Nothing is more discouraging to the taxpayer than having them go through the intake process and wait to have their return prepared only to be told that their return is out of scope.
See Pub 4012, pg D-3 for specific K-1 instructions
NTTC Training – 2014

4. Schedule K-1 In-scope K-1s contain ONLY Anything else is Out-of-Scope
Interest income (taxable and tax- exempt)
Dividends (ordinary and qualified)
Capital gains or losses (long or short)
Royalty Income
Foreign Tax paid for passive activities
Anything else is Out-of-Scope
Interest and Dividend line numbers not listed for K-1s as they vary
NTTC Training – 2014

5. Note: may be Prior year form but be current income for taxpayer when entity is on a fiscal, not calendar, year.
Schedule K-1 (Form 1041) 15
Watch dates - could be fiscal year rather than calendar year K-1
NTTC Training – 2015

6. Schedule K-1 (Form 1065) 15
NTTC Training – 2015

7. Schedule K-1 (Form 1065)
Capital account is not basis. It is similar to determining net worth
A partner’s basis is not reflected anywhere on Schedule K-1. Sch K-1 does reconcile a partner’s capital account but the ending capital account is rarely the same as the partner’s basis. Each partner should maintain personal record of adjustments to basis. The basis of a partner’s interest can never be negative.
If end of year capital account is negative, return is out of scope
NTTC Training – 2014

8. Schedule K-1 (Form 1120S) 15
NTTC Training – 2015

9. K-1 Interest Income Also look for exempt interest income
Box number varies by form
Look on the back of the form for the code descriptions
NTTC Training – 2014

10. Reporting Income from K-1
Pub 4012, pg D-3 et seq
Do NOT use TaxWise K1 worksheet
Interest or Dividend Stmt – list payer as [Company] K1
Net Capital Gain/Loss – Sch D Line 5 for short-term, line 12 for long-term using scratch pad
One of very few direct entries on Sch D
NTTC Training – 2014

11. Reporting Income from K-1
Pub 4012, pg D-27
Schedule E for royalties
Foreign Tax paid on Form 1116
Foreign Tax Credit (Individual) NOT for (Estate, Trust)
In Scope only for: Simplified Limitation Election (SLE) line 48 $300(S)/$600(MFJ)
Balance of form in scope only if certified for International
Passive income: interest, dividends, royalties, rents, and annuities, capital gains(not active business or trade)
NTTC Training – 2014

12. Foreign Tax on K-1 Box number varies by form
Must be coded as Passive income
Will be covered in later lesson
Emphasize
Only the simplified method for foreign tax credits is in scope, unless certified for International
NTTC Training – 2014

13. Quality Review Verify in scope Verify tax year Verify entries
On respective worksheets and forms
Not on K-1 in TaxWise
NTTC Training – 2014

14. Exit Interview Will need to explain if out of scope
NTTC Training – 2014

15. Schedule C – Profit or Loss from Business (Sole Proprietorship)
TY 2015 Scope Sch C
Schedule C – Profit or Loss from Business (Sole Proprietorship)
NTTC – Dallas 2015

16. Schedule C Key References
Schedule C – Profit or Loss from Business (Sole Proprietorship) Guidelines for Preparing Schedule C….
Publication 4491 Part 3 Lesson 10
Form 1040 Line 12
TY 15 NTTC Training Files #16
NTTC – Dallas 2015

17. Schedule C Profit From Business (Sole Proprietorship)
Independent Contractor*
*Reference:
Publication 926 Household Employer’s Tax Guide
Independent contractors may be Household employees dependent upon conditions involving financial, directional, assets used control factors (> $1700 ) OUT of SCOPE
NTTC – Dallas 2015

18. Schedule C Input Use Schedule C (do not use Schedule C-EZ)
Must be for either Taxpayer or Spouse
Jointly run business must be split into two Schedules C
Self employment tax implications
Community property laws are disregarded for self-employment tax purposes
If jointly run business, Taxpayer needs to specify the split ratio
NTTC Training - TY2015

19. Schedule C Income
Forms 1099-Misc Box 3 (Other income) or Box 7 (non-employee compensation)
Form 1099-K (Merchant Card and Third Party Payments)
Tax payer records or cash receipts
NTTC – Dallas 2015

20. Business Income – 1099-MISC
Reported to Taxpayer on Form MISC
Box 7: Non-employee compensation
Box 3: Other income (?)
(Ask what income was for - payer may have used wrong box)
Very important to use 1099-MISC that is linked with Sch C
Consider the business – is it likely that the Taxpayer would have cash income? If so, ask about it.
All income must be reported.
At this time, unknown whether TW will have a 1099-K form input screen
If yes, use as appropriate
If not, input 1099-K income on Scratch Pad, not 1099-MISC
Note, if any adjustment is required to the amount reported on 1099-K, return is out-of-scope
NTTC Training - TY2015

21. Business Income – 1099-MISC
Not Sch C
Not Sch C
OOS
OOS
OOS
OOS
OOS
Emphasize
Use of box 3 or box 7 varies by payer – taxpayer decides whether or not there is a business
Box 9 – if checked means that the Taxpayer has a resale business and is out of scope
Box 6 in some states is used to report caregiver compensation paid by the state or municipality
OOS
OOS
OOS
OOS
OOS
OOS
OOS
OOS
NTTC Training - TY2015

22. Understanding Form 1099-K Payment from card transactions and/or
In settlement of 3rd party networks
Gross payments > $20,000 and
> 200 such transactions
One form from each payment entity
OUT of SCOPE if adjustments to 1099-K are required
NTTC – Dallas 2015

23. Form 1099-K
NTTC – Dallas 2015

24. Form 1099-K Gross Receipts Schedule C Part I Select Scratch pad
Enter individual respective 1009-K Box 1 value(s) or summary of all 1099-Ks on detail line(s)
Enter appropriate descriptive Information for the detail sheet
NTTC – Dallas 2015

25. Form 1099-K Tax Withheld ….
Enter all Box 4 Federal Income Tax values, as appropriate
Enter all Box 8 State Income Tax values, as appropriate
NTTC – Dallas 2015

26. Schedule C Expenses- Basics
Increased from $10,000 to $25,000
Simplified Home Office Deduction Still out of Scope.
NTTC – Dallas 2015

27. Business Expenses Ordinary and necessary to the business
Not against public policy
Cannot deduct fines or penalties
All permissible expenses should be claimed
If not claiming an expense results in a tax benefit that would not otherwise occur, then it must be claimed (i.e. if it improves EIC for example)
Review how good records help taxpayers: Refer to 4012 F-13
Monitor the progress of their business
Prepare their financial statements
Identify source of receipts
Keep track of deductible expenses
Prepare tax returns
Support items reported on tax returns
Ask: What are examples of business-related supporting documents?
Answer: Sales slips, paid bills, invoices, receipts, deposit slips, canceled checks.
NTTC Training - TY2015

28. Schedule C Expenses- Additional
Does not file Form 1099-Misc for payments of $600 for services performed by people not considered employees
No prior year un-allowed passive activity losses
Is not required to file Form Depreciation and Amortization
NTTC – Dallas 2015

29. Business Expense –e.g. Computer
Out of scope
Requires depreciation or write-off using Form 4562
May claim supplies (paper, toner) used for business
Asset write-off (either immediate or through depreciation) is out of scope
Computer and peripherals are also “listed property” which require documented business use in order to claim depreciation or write-off
Supplies used for business are not assets – if they are used for business, they are deductible
NTTC Training - TY2015

30. What can be Depreciated
1: Owned by the taxpayer
2: Used in a trade or business or income producing activity, and
3: Have a useful life that extends beyond the year placed in service
Asset write-off (either immediate or through depreciation) is out of scope
Computer and peripherals are also “listed property” which require documented business use in order to claim depreciation or write-off
Supplies used for business are not assets – if they are used for business, they are deductible
NY3 Instructor WorkshopNovember2015

31. NY3 Instructor Workshop- November 2015
Leased Property
Depreciable only if the taxpayer retains incidents of ownership
Legal title to the property
Legal obligation to pay for the property
Pay maintenance and operating expenses
Responsibility for taxes
Risk of loss if property is lost/damaged
Asset write-off (either immediate or through depreciation) is out of scope
Computer and peripherals are also “listed property” which require documented business use in order to claim depreciation or write-off
Supplies used for business are not assets – if they are used for business, they are deductible
NY3 Instructor Workshop- November 2015

32. Schedule C Conditions Uses cash method of accounting for business
Does not have net loss from business
Does not have any employees
Has no cost of goods sold & no inventory at any time during the year
NTTC – Dallas 2015

33. Schedule C Conditions …..
Claims mileage at standard rate rather than actual maintenance, repair, fuel, insurance costs for vehicle
Has no out of scope expenses
NTTC – Dallas 2015

34. Schedule C Expenses- Special Consideration
Net cost of health insurance on Schedule A on behalf of family/dependents
1040 Line 29 as adjustment to income for health insurance is OUT OF SCOPE
Expenses for equipment
NTTC – Dallas 2015

35. Pending NYS Instructions
TY 2015 ABLE Accounts
Pending NYS Instructions
NTTC – Dallas 2015

36. NY3 Instructor Workshop – November 2015
Scope – ABLE [Section 529A] Accounts (Achieving a Better Life Experience)
States can offer specially designed, tax-favored ABLE accounts to people with disabilities who became disabled before age 26
For federal tax purposes
Contributions are after-tax dollars and can be made by any person
Contributions (reported on new Form 5498-QA) must be in cash and are not deductible for federal income tax purposes (states may differ)
New as of Dec 2014 to support those with disabilities diagnosed under age 26
Similar to Section 529 education accounts
Up to $100,000, doesn’t affect eligibility for aid programs
NY3 Instructor Workshop – November 2015

37. NY3 Instructor Workshop – November 2015
ABLE Accounts
Total annual contributions cannot exceed the gift tax exclusion in a single year, currently $14,000 for 2015
Distributions from an ABLE account (reported on new Form 1099-QA) that are used for qualified disability expenses of beneficiary during tax year are excluded from gross income
If contribution to ABLE account and other gifts to same beneficiary exceed $14,000, taxpayer subject to gift tax.
Broad definition of qualified disability expenses - include, but are not limited to, expenses for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services, legal fees, expenses for oversight and monitoring, funeral and burial expenses
NY3 Instructor Workshop – November 2015

38. ABLE Accounts
Distributions that exceed qualified disability expenses of beneficiary
Subject to an additional tax of 10% on amount not used for qualified expenses
Included in gross income of beneficiary (Form 1040, Line 21)
Non qualified Distributions are Out of Scope
Sep 2015 Regional Meetings

39. ABLE Accounts
Most states have not completed process to create their state programs
SPEC believes taxpayers who are able to create this type of account will generally not be taxpayers we customarily see
Non qualified distributions are out of scope
Sep 2015 Regional Meetings

40. Form 5498-QA ABLE Account Contribution Information
NTTC – Dallas 2015

41. Form 1099-QA Distributions from ABLE Accounts
NTTC – Dallas 2015

42. NTTC Training – 2014