ALAN R. SUMUTKA



ACC-410 FUNDAMENTALS OF FEDERAL TAXATION


CASE 9 - TAX ISSUES OF THE SELF-EMPLOYED
It's one year later.  Bill is in the third year of his "not-so-new job" and Lauren is three years old.

For Pam, the "time was right."  On January 1, she "hung out her shingle" as "Pamela Adams, Computer Consultant," received her federal identification number (22-9213896), and began to work out of the house.  She bought a HP computer and laser printer ($3000), a Dell computer ($1800), a fancy desk ($2000), three chairs ($800), three filing cabinets ($500), and a photocopier ($1500).

She advertised her services in the local newspaper only once ($260).  The real break came when she joined a local organization of computer professionals (paid $360 in annual dues).  What a wise move.  Not only was she able to take several computer seminars offered by the organization which were very useful (cost of $420), but she made a number of friends and obtained client referrals from them.  By year-end, she received $33,800 in fees from her first client, as indicated on Form 1099-Misc.  Her other expenses were the usual:

Business insurance

$803

Credit card interest on business credit card 

123

Meals

320

Office expense/supplies

993

Professional subscriptions

190

Repairs

219

Travel 

820

REQUIRED:
PART A: RIA RESERCH - Is Pam entitled to a lifetime learning credit for the computer seminars that she attended?  Explain.

PART B: Obtain the following 2018 tax forms from the IRS web site at http://www.irs.gov (In the Fall semester, obtain draft tax forms from https://apps.irs.gov/app/picklist/list/draftTaxForms.html ): Form 1040 - US Individual Income Tax Return (including Schedules 1 thru 6), Schedule C - Profit or Loss from Business, Schedule SE - Self-Employment Tax, and Form 4562 - Depreciation and Amortization. Also, go to the 2018 forms listing and print the two pages of the 2018 Form 1040-ES - Estimated Tax Payment Vouchers. Do not print the instruction pages.

PART C:  Depreciation calculations:
- Compute the first year depreciation for each fixed asset.  Assume that Pam uses the Section 179 election on the photocopier.  What is the total depreciation for the year?  Ignore "additional first year depreciation." (Check figure: $2931)
- In handwriting, prepare Form 4562-Depreciation and Amortization.  For line 11, assume that the business income is $28,021. (Check figure: line 22 = $2931)

PART D: Business profit or loss calculations:
- Compute the net profit or loss from the business.  Don't forget to deduct the depreciation that you calculated above. (Check figure: $26,521)
- In handwriting, prepare Schedule C-Profit or Loss from Business.  Assume that the block B code is 541510, Pam is a cash basis taxpayer, and she made no payments that require a Form 1099.  (Check figures: line 31 = $26,521).

PART E: Qualified Business Income Deduction (Sec. 199A):

- To understand the nature of this new deduction, read paragraphs 6601 through 6635 in the text.

- Calculate the deduction amount and include on Form 1040, line 9 (check figure: $5,304).

 

PART F: Self-employment tax calculations.  As you know, Pam is the owner of her business and is considered to be self-employed.  Because Pam is not an employee, she doesn't get a paycheck, so the government cannot withhold social security and medicare taxes from her.  Therefore, the government imposes a "self-employment tax" on the profits of the self-employed. The tax is the equivalent of both the employer and employee portion of social security and medicare.  The tax is computed on a Schedule SE and is added to the income tax liability that a taxpayer owes. In your text, review Chapter 3, paragraph 3405 re: self-employment tax.  Note: the profits from her business are her "self-employment income."
- In handwriting, calculate Pam's (1) net earnings from self-employment [check figure: $24,492], (2) her self-employment tax [check figure: $3747], and (3) the tax deduction for the employer's share of the self-employment tax imposed, which is a deduction for AGI[check figure: $1874].
- In handwriting, prepare Schedule SE - Self-Employment Tax.  Use Section A - Short Schedule SE.  (Check figure: line 5 = $3747)

PART G: Assume Bill and Pam received information returns and their itemized deductions are $25,800. Also see the change in the amount of the child tax credit in the text, paragraph 9032. In handwriting, complete Form 1040 and Schedules 1-6, as appropriate. Do NOT prepare Schedules A, B or D. When complete, arrange and staple all forms and schedules in the proper sequence. Check figures: gross income = $101,228; AGI = $99,354; taxable income = $68,250; "total tax" (line 15) = $9,556; amount due = $5,645.

PART H: Estimated tax calculations:
- Will Bill and Pam owe a penalty?  Explain. (Assume prior year AGI = $86,826, "total taxes" = $8,260.)
- Would you recommend that Bill and Pam pay estimated taxes for the following year? (Review paragraph 9165 in text.)



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