Reporting Business Income

Transcription

1 Reporting Determine how to report business income Recognize Out-of-Scope (for VITA) circumstances Identify "red flags" when preparing a Schedule C tax return with EIC Tell taxpayers which records to maintain Know how to enter information that completes Schedules C & SE

2 When you report you Enter Forms W-2 and/or 1099-MISC and/or Form 1099-K Link to or create one or more Schedule C s as appropriate Complete Schedule C or CEZ, Profit or Loss from Business (Sole Proprietorship) Enter business income, excluding that included by Taxslayer Enter allowable, appropriate expenses TaxSlayer will compute net income => Form 1040, Line 12 Taxslayer will complete Schedule SE, Self-Employment Tax => Adjustment to income on Form 1040, Line 27 => Other Taxes on Form 1040, Line 57 Statutory Employees do not pay Self-Employment tax, as they pay Social Security & Medicare taxes, while their employers pay matching taxes 2

3 VITA Out of Scope Required to file Form(s) 1099 (contractors) Hobby income or not-for-profit activity Expenses exceed $25,000 across all Schedule C/C-EZ Returns and allowances Uses cost of goods sold Expenses for employees Business-use-of-home expenses Casualty losses Actual vehicle expenses (vs. mileage-based) Depreciation or write-offs Vehicle lease > 30 days Non-cash-accounting method (accrual accounting) Net loss Did not materially participate (Line G, Schedule C; no equivalent on CEZ, but same rule applies) Received credit-card/other payments, any or all of which not includible in income Reference: Pub 4012, page D-18; Link & Learn training, next-to-last slide 3

4 Reporting and Expenses Ask sufficient questions of taxpayers to be satisfied: The taxpayer actually conducts a business The taxpayer has records to support income and expenses, or can reasonably reconstruct income and expenses records Taxpayer s business income and expenses may be derived from: Records of cash/cash-equivalent payments Cash payments to self-employed taxpayers must be included as business income, even if not reported on Form 1099-MISC Records of expenses Form 1099-MISC (Non-employee compensation, box 7) Form W-2 (Statutory Employee) Form 1099-K (Payment Card & 3 rd -Party Network Transactions) Reference: Link & Learn training 4

5 Reporting and Expenses - Caution Certain situations involving business income should raise "red flags Lacks records, lack of typical expenses, all-cash or primarily-cash business, and The income reported maximizes EIC amount Reference: Link & Learn training 5

6 Types of Business Expenses Business expenses must be ordinary and necessary to be deductible Review examples of types of business expenses from L&LT topic Find details in Schedule C Instructions Refer to Pub 4012 Travel Expenses chart Deductible Transportation Expenses chart 6

7 Creating a Schedule C, Profit or Loss from Business

8 Types of Business Expenses in Scope (cont d) See Publication 4491 for clarifications & examples Advertising Car and Truck Expenses Commissions & Fees Insurance* Other Interest Legal & Professional Services Office Expense Rent or Lease of equipment* Repairs & Maintenance* Supplies Taxes and Licenses Travel/Meals and Entertainment* Utilities Reference: Pub 4012, Schedule C, esp. Page D-20. See also Pub

9 Creating a Schedule C / CEZ 9

10 Creating a Schedule C Questions 10

11 Creating a Schedule C Entering Income 11

12 Creating a Schedule C General Expenses 12

13 Creating a Schedule C Car and Truck Expenses 13

14 List of Schedule C s on a return Having entered a 1099-MISC, Taxslayer will ask you if you want to create a Schedule C, or 14

15 Business Records Mileage Expense Deduction Your taxpayer should have records for the deduction Passive methods, like Uber/Lyft recording (may miss off-meter miles) Other intelligent device applications Paper records If they don t demonstrate proper record-keeping, encourage it! 15

16 Business Mileage - Your Main Place of Business If a taxpayer travels to multiple locations, she/he must determine her/his Main Place of Business (regular or main job) to determine which driving is Commuting (not deductible) vs. Business (deductible): The location at which she/he: Spends the most time Conducts the most work Derives the most income Generally, mileage from taxpayer s residence to the first location visited, and from the last location to residence, are Commuting mileage; between the 1 st & 2 nd, 2 nd & 3 rd, etc. are Business miles. Reference: Pub 4012, Page F-12 16

17 Business Mileage Home is Main Place of Business Taxpayer s Main Place of Business is her/his home Doesn t have a business-office location apart from her/his home Performs administrative and/or production functions => Does not have commute mileage all non-personal mileage is business mileage 17

18 Reference: Publication 4012, page F-12 18

19 Reference: Publication 4012, page F-12 19

20 Self-employment income &1099- MISC

21 Form 1099-MISC, Non-Employee Compensation (Box 7) 21

22 Form 1099-MISC Entry - first section 22 Reference: Pub 4012, Schedule C, Page D-15.

23 Form 1099-MISC Entry second section 23 Reference: Pub 4012, Schedule C, Page D-16.

24 1099-MISC Processing in TaxSlayer After entering a 1099-MISC, TaxSlayer will ask you to either create a Schedule C on which to report the income, or associate with an existing Schedule C Such income is automatically reported on that Schedule C Withholding reported on the 1099-MISC will not appear with the Schedule C, but *will* appear on Form 1040 Reference: Pub 4012, Page D

25 Associating a 1099-MISC with a Schedule C Lesson 3 Filing Basics 25

26 Associating a 1099-MISC with a Schedule C next step Lesson 3 Filing Basics 26

27 Associating a 1099-MISC with a Schedule C - verification 27

28 Where self-employment 1099-MISC income appears on Schedule C 28

29 Seeing 1099-MISC and where they report You can view where 1099-MISC s are being reported on the return, giving quick visibility how you ve reported them. 29 Reference: Pub 4012, Schedule C, Page D-17.

30 1099-K s Merchant and 3 rd -Party Network Payments

31 1099-K: Merchant and 3 rd -Party Network Payments Reports the proceeds of payment card & 3 rd -party network transactions made to the taxpayer Uber, Lyft, Doordash, and a growing number of PSE s Reported as a business income May deduct related business expenses Self-employment tax will be assessed as for any other small business PSE s have been designing their own 1099-K s Multiple income items may be shown (bonuses, etc.) Multiple expense items (tolls, for example) On-the-meter mileage, if collected Likely understates true business miles Lesson 3 Filing Basics 31

32 Expenses summary (not an endorsement) 32

33 Form 1099-MISC Process as for other 1099-MISC (not an endorsement) 33

34 Form 1099-K 34

35 Reporting 1099-K income in Schedule C You may combine multiple 1099-K for similar work for multiple PSE s under the same Schedule C; you must manually total the amounts 35

36 Statutory Employees

37 Statutory Employee - defined Independent contractors under the common law rules, but treated as employees by statute for certain employment taxes IF they fall within one of four categories and meet three conditions: A driver who distributes non-milk beverages, or meat or fruit or baked goods, or laundry or dry cleaning, and is paid on commission A full-time insurance salesman whose principle business is selling annuity contracts or life insurance, primarily for one company An individual doing piece-work assembly at home of employer-provided materials to employer s requirements that are delivered by employer A full-time traveling or city salesman who sells employer s goods in specific industry, turning-in orders to employer for fulfillment; the goods are supplies or for resale in the customers business, etc. The work is personally done by the person; The individual does not have a substantial investment in necessary equipment or property necessary other than transportation; The services are performed on a continuing basis for the same payer 37

38 W-2 for a Statutory Employee 38

39 39

40 Entering a W-2 for a Statutory Employee Business income or Poorly labelled. You *may* create, or *may* select an *existing* Schedule C on which to report this income 40

41 Statutory Employee W-2 You manually enter this, and must keep it consistent with the associated W-2( s) 41

42 Medicaid Waiver Payments IRS Notice

43 Reporting Qualified Medicaid Waiver Payments IRS Notice : This notice provides that certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program, described in this notice, are difficulty of care payments excludable under 131 of the Internal Revenue Code. Medicaid Waiver Payments help provide services to people who would otherwise be in an institution, nursing home, or hospital to receive long-term care in the community. Allows states to provide services to consumers in their homes and in their communities In California, under DHCS (Department of Healthcare Services), In- Home Supportive Services (IHSS) 43

44 Reporting Qualified Medicaid Waiver Payments (cont d) Patient and caregiver must reside in the same residence Sometimes unrelated, but often a sibling caring for a sibling, an adult child caring for a parent, or a parent caring for a child Indicators: A W-2 with a individual named as the Employer/Payee, with a mailing address of PO Box 940, Roseville, CA, and the Federal EIN is consistent with other such cases The W-2 has no Social Security or Medicare withholding, and no Federal or State withholding The income is excluded from taxable income (Federal, State) The income also does not qualify the recipient for EIC and other federal credits dependent on (taxable) Earned Income 44

45 Reporting Medicaid Waiver Payments in TaxSlayer If received on a W-2 very simple: Enter the W-2, taking care to report all boxes accurately Check the box Medicaid Waiver Payment in Box 1 Everything else will be done for you Note that Publication 4012 guidance as of October 2017 is very wrong If received on a 1099-MISC, go to Line 21 -> Other Income not reported elsewhere, report the description as Notice , and amount as $0 If on 1099-MISC and you are in this business, enter the payments under Gross Receipts on Schedule C Income section. In Other Expenses, enter the Notice the Description and the amount as a positive number. Publication 4012, Page D

46 Reporting Medicaid Waiver Payments Step 1 W-2 Entry 46

47 Lesson 3 Filing Basics 47

48 Summary While some business-income situations are out-of-scope for VITA, for those in-scope you can help self-employed taxpayers report income, expenses, and thus net-income from a small business or businesses This lesson covered: Where to find and how to report business income and expense information in tax slayer That all income, including cash income, and only relevant/appropriate expenses should be reported Advising taxpayers regards what records to maintain; encourage the taxpayer do their homework to have reporting records in case a return is questioned How to report Statutory Employee earnings What constitute qualified MediCare Waiver payments, and how they are excluded from gross income Being aware of certain situations involving Schedule C and EIC that should raise red flags Reference: Link & Learn training, last slide 48

49 Questions? References Publication 4491, Publication 4491-X Publication 4012, Income, & Deductions Advanced Certification, (training) presentation Schedules C & SE Instructions TaxSlayer Help webpages Contact information Pete Shyvers (Santa Clara City Library VITA) Mobile: pete9360@sbcglobal.net 49