[REG] Business income and deductions, income tax+SE tax

1. Tax year

1) Calender Y: 1/1~12/31

2) Fiscal Y (11개): 4/1~3/31

3) 52~53 week tax year: ex)Last Sunday of Aug

* Change of tax year: must get IRS approval

 

2. Tax accounting method

1) Accrual method

2) Cash method

   - Rev: Cash, property is received

   - Deduction: Cash, property is paid

      예외 1) Prepaid exp -> Amortize over a period

              2) Capitalizable expenditure(Equipment, machine, Furniture) -> Depreciation over the useful life  

              3) Cash method cannot be used in the case of Biz with inventory > Go accrual

 

3. Gross income

    Cash, property = FMV, cancellation of debt

 

4. Deductions(Expenses)

1) Automobile exp (actual exp, standard mileage rate)

2) Capitalizable exp

   2)-1 Depletion(Natural resources)

       - Cost method ( Units sold / Total expected units X Cost)
       - Percentage method 

   2)-2 Depreciation(Tangible property)

   Accelerated Cost Recovery System(ACRS). ~1986, 175%
   Modified Accelerated Cost Recovery System(MACRS), ~1987, 200%, 

       - No salvage value

       - Class(useful life)

Personal property (MACRS)           5yrs office equipment           7yrs furniture & fixture

Real property (MACRS, ST)        residential real property 27.5        non-residential real property 39

 

        - Averaging convention

         Property: 보통은HY -> 4Q에 몰려있으면 MQ,    Building: ST

Half year convention  - Personal property  - depre in Y of purchase and disposal

Mid Quarter convention  - Personal property  - purchase in 4Q more than 40% of Y

Mid month convention - Real property(building) - depre in M of purchase and disposal

        

   Sec. 179 expense election

      - tangible personal property

      - purchase Y 1050K+ regular depreciation(up to 2,620K)

        

 

     2)-3 Amortization(intangible property),  ST monthly basis

      - Computer software: separately purchased, 3yrs (36M)

      - R&D_100%ded in first year/ Amort over 5yrs

      - Sec 197 purchased intangibles, 15yrs(180M)

           : Goodwill, patent, covenant not to compete, Gov license(주류판매권) > regardless of covered life

      - Internally created patent, 17yrs(204M)

      

3) Business travel expenses, deductible (sch C, line24a)

        transportation, lodging, meals(50%), expenses incident to travel

        *  If foreign travel is primarily personal in nature (e.g., a vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.

       * commuting expenses are not deductible

 

4) Business meal expenses, 50% deductible  (sch C, line24b)

   record expense, 

 

5) Entertainment expenses, not deductible

 

6) Business gift (schC, line27), up to $25

    limited to $25/recipient each Y

 

7) Business use of home expense, % usage of home

    exclusive and regular use test to deduct

    excess home expenses can be carried forward indefinitely

 

8) Farm income and expenses

    Revenue and exp > sch F

    farm income > Sche SE

     Loss > NOL

 

9) Net operating loss(NOL) (Form 1040, Sch1, Line 8a)

business deduction > income

2018, 2019, 2020	carry forward indefinitely   2018, 2019 offset 100% income 2020 offset 80% income
2021~	no carry back, carry forward indefinitely offset 80% income

 

10) 20% Business deduction

Owners of pass-through entities (sole-proprietorship, Scorp, partnership, limited liability) can exclude 20% of their qualified business income

 

* Not Qualified business income 

S corp	Partnership
investment income, salary	guaranteed payment *k-1, taxable gross income

   Biz income

<Biz expenses>

<Guaranteed payments>

Ordinary Biz income/loss

* deduction is limited to 20% taxable income in excess of net capital gain + qualified dividends 

* deduction reduces individual taxable income not AGI(below the line deduction)

* taxable income below $163,300, full deduction

 

 

10) Interest expense on business loans deduction

limited to the sum of

- biz int income + 30% of adjusted taxable income(ATI) + floor plan financing int expense

limitation does not apply if annual gross receipts are $29M / less for the prior three taxable years

disallowed biz int expense carried forward indefinitely

 

Prepaid interest 

prorated over the time for which payment is made, just like accrual

deduct the current year's int and amortize the balance over the next two years

 

11) Salary from Self-employed corp, not deductible

considered a draw and is not an allowable business deduction against the gross income of the self-employment activity

* health insurance for self-employment, not deductible on sch C, AGI

 

12) legal referral fees, deductible

 

13) Tax, not deductible on sch C, an itemized deduction

 

5. Tax

Income tax, Self-employment Tax

Self-employment Tax(15.3%)

- basis 92.35% of self-employment income

- medicare(2.9%) + social security(12.4%)

* under $400, NoTax 

 

6. Hobby Profit and Loss

hoppy income > other income

Three-of-Five year presumption profit >business

not business expense not deductible

 

7. Business loss limitation

allowed to deduct overall "excess business loss" for the year

Sch C, Rental activities, income/loss from flow-through entities

MFJ: 578K, other: 289K