The 1040: Self-Employment Taxes & (3) SE Adjustments on Page 1

•• To be continued… in October 2017••

Schedule SE: Self-Employment Taxes to report the Social Security and Medicare taxes due on the Net Profit from your self-employment.

  • Calculating and reporting the tax on line 57
  • Adjustment on page 1 of form 1040, line27 – for half SE tax paid

Page 1 Adjustments related to Self-Employment income

  • line 27: Deductible part of Self-Employment tax
    • flows from the Schedule SE
  • line 28: Self-Employment retirement plan deductions
    • much more generous than the Regular IRA contribution deduction
  • line 29: Self-Employment Health Insurance deduction
    • Up to your Net Profit from self-employment then rest to Schedule A

Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040 – The Schedule C: Part IV – Vehicle Information & form 4562-Depreciation

Part IV – Information on Your Vehicle on the Schedule C tells the IRS about the Vehicle used in your Business whose income and expenses are reported on this Schedule C.

You only have to fill out this Part IV if you listed Car and Truck expenses on Line 9 of the Part II – Expenses – and you are not depreciating the Vehicle, which would be reported on form 4562 – Depreciation and line 13 in the Part II – Expenses.

You depreciate the cost of the Vehicle when you own the vehicle and you are using actual vehicle expenses as compared to the Standard Mileage Rate.

You also must use this Part IV – Information on Your Vehicle when you use the Standard Mileage Rate and/or you are Leasing the vehicle.

You also must use this Part IV, when you use the actual vehicle expenses method, but you lease the car, instead of owning the car. This is because a Leased car is never depreciated.

See the Part IV image below:

line 43: lists the exact month, day and year you placed this Vehicle in service as used in your Business.

line 44: list the Business, Commuting, and Other miles this Vehicle was driven during the tax year. It is recommended you keep a log book in your Vehicle to record each Business use trip you drove the Vehicle for during the tax year. List the date, the purpose of the trip, what location you visited, the person you visited, and the mileage. You can also keep track of expenses in the log book, if you use the actual vehicle expenses method.

line 45: tells the IRS if this Vehicle used for your Business was also available for your personal use, after business hours. This would indicate to the IRS how the mileage use is segregated during the year.

line 46: tells the IRS if this is the only Vehicle you own, or if you have other vehicles available for your personal, non-business use.

line 47a: tells the IRS if you indeed kept a log book, which would provide evidence to support your Vehicle deductions.

line 47b: tells the IRS if you have written evidence to support the Vehicle deductions listed on the Schedule C. Keep a log book to prove expenses.

See Publication 463-Travel, Entertainment, Gift, and Car Expenses for explanations of expenses related to your Vehicle used in the Business.


The line 13 Depreciation was explained in a previous blog post. Please review at The 1040: The Schedule C: Part II – Expenses and scroll down the blog page to the line 13 explanation. See also form 4562-Depreciation and Amortization. and form 4562-Depreciation and Amortization-Instructions.

If you own your Vehicle, you can depreciate the cost of the vehicle over a five-year period to create a yearly deduction. There are many specific rules to follow when you depreciate a vehicle used in your Business. That explanation is beyond the scope of this Blog. Just post a comment on this blog post, or send me an email with your vehicle depreciation questions.


Click the hyperlink below for the post that explains the Self-Employment Taxes and the (3) Adjustments on page 1 of the form 1040 related to Self-Employment issues.

The 1040: Self-Employment Taxes & (3) SE Adjustments on Page 1


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040 – The Schedule C: Part III – Cost of Goods Sold

Cost of Goods Sold (COGS) is the method the IRS uses to define the cost you invested to produce your new inventory for sale, during the tax year.

This has been discussed in (2) previous posts. See The 1040: The Schedule C: Part I – Income for the Schedule C, line 4 description of COGS. See also the blog post The 1040: The Schedule C: Part II – Expenses for the line 22 description of Supplies and how they relate to the COGS. The IRS states in the instructions for the Schedule C on page C-14 that:

“In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.”

A great IRS resource is Publication 334-Tax Guide for Small Business.

Part III of the Schedule C has the lines 33 through 42 that calculate the Cost of Goods Sold for your Business activity that sells from inventory. The line 42 value then flows to line 4 on page 1 of the Schedule C.

  • Inventory can be defined by:
    • Product you have ready for sale to your Customers, from the previous tax year. This is most commonly called Beginning Inventory you have on January 1st of the new tax year – ready to be sold to your Customers.
    • Raw materials you purchase to produce the product you sell
    • Work in progress inventory that is not complete, ready to sell
    • New Finished products, ready to sell, that you manufacture during the current tax year, that adds to your available inventory to be sold.
    • Supplies or Raw Materials that physically become part of the finished product that you then sell to your Customers.

  • line 33: Method used to value closing inventory tells the IRS what method you used to arrive at the value of your inventory at the end of the year on December 31st at the close of business that day. Refer to your Accountant or Bookkeeper for the method your Business uses to value inventory.
    • The Cost method uses the actual costs you incurred during the tax year to purchase the raw materials to produce the product, plus any labor you paid to make the products. This is the most common method used to value Inventory.
      • It does not include any shipping costs you incurred, to deliver the purchased product to your Customers. Those are ordinary expenses related to Sales, not to Cost of Goods Sold.
      • To help keep track of varying Inventory costs during the year, many companies use the FIFO or First In, First Out method to account for their current Inventory value. This means the First inventory product produced, is the First product to be sold to a Customer.
        • The accounting or bookkeeping software used by the Business then keeps track of this flow of new product produced, and old product sold, thus moving out of inventory.
      • Companies can also use the LIFO, or Last In, First Out method to value their inventory during the year. This means the Last or most recent inventory product that was produced, is the First product to be sold to a Customer.
    • The Lower of Cost or Market method values the inventory at its original Cost, or the current Market value on December 31st – whichever is lower. This helps companies whose inventory might decline in value during the year, below the costs it took to originally produce the inventory.
    • Any Other method approved by the IRS. You must attach a statement to your tax return, to explain this Other method to the IRS.

line 34: Change in determining value of Opening/Closing inventory tells the IRS with a Yes/No answer if this is true. You have to attach an explanation to the IRS with your tax return, if you changed how you valued your inventory in January, as compared to how you now value your year-end inventory on December 31st.


line 35: Inventory at Beginning of Year is the wholesale value of your entire remaining inventory at the close of Business on December 31st of the previous tax year – based on your inventory value method.


line 36: Purchases less cost of items withdrawn for Personal Use is the entire expense you incurred during the tax year, to add to your inventory or to manufacture your product you sell from inventory. This includes the raw materials and supplies that actually go into the product that will be sold. These purchases throughout the year allowed you to produce additional products to add to your inventory, ready to be sold. If you used any of the products or inventory for your Personal Use, subtract the value of those items from this expense value.


line 37: Cost of Labor is the expense you incurred to pay your employees or other personnel to directly produce your product to add new completed inventory to your Business, ready to be sold to your Customers.


line 38: Materials and Supplies such as hardware and chemicals, used in manufacturing goods. Or perhaps fabric dyes you need to make the purse straps you now sell through your Internet based home business.


line 39: Other Costs include any other direct expense you need to make or manufacture your product as new inventory. Such as:

  • storage containers to hold the raw materials that go into the product
  • cost of freight and shipping to get the raw materials to your Business
  • overhead expenses you have for your dedicated manufacturing facility
  • packaging for the product so it is ready for sale

line 40: Add lines 35 through 39 which accounts for your Beginning Inventory and the Expenses during the year you incurred to produce new Inventory – ready to be sold to your Customers.


line 41: Inventory at the End of the Year is the total wholesale value of your Inventory at the close of Business on December 31st of the current tax year, based on your inventory value method.


line 42: Cost of Goods Sold is the result of subtracting your line 41 year-end inventory value, from the line 40 beginning inventory plus inventory expense value you incurred during the year.


See the example below of how to calculate the Cost of Goods sold:

  • You started a new home business selling fashion accessories on the Internet in February of 2016. You therefore had no beginning inventory.
  • During the course of the year you purchased $15,000 of the raw materials, fabric and trimmings required to manufacture your wholesale-priced fashion accessories, that you then sold through your Internet-based fashion business for a nice profit at regular retail prices. These include only the purchases that directly go into the finished product, ready for sale to your Customers. It would also include the $1,500 in fees you paid a Sample Maker who sewed your finished garments together.
  • At the end of the business day on December 31st of this first year, the value of your remaining in-progress and finished – but still unsold wholesale inventory – was $4,500. This wholesale inventory is ready to be sold January 1st of the following year at the full retail price, as new orders begin in the New Year for your popular products.
  • Your Cost of Goods Sold is therefore = $12,000, based on this formula:
    • Inventory at beginning of the year in February 2016 = $0
    • Raw materials purchased during the 2016 tax year = $15,000
    • Sample Maker fees for 2016 tax year = $1,500
    • $15,000 + $1,500 = $16,500
    • Inventory at the end of the year on December 31st, 2016 = $4,500
    • $16,500 minus $4,500 = $12,000 which is your Cost of Goods Sold

Click on the hyperlink below to learn how to input the Business Vehicle Information required in part IV of the Schedule C, and the form 4562 if you are required to Depreciate the cost of your Business Vehicle(s).

The 1040 – The Schedule C: Part IV – Vehicle Information & form 4562-Depreciation


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040 – The Schedule C: Part II – Expenses

Expenses for your Business are by far the most complicated aspect of reporting the business activity on the Schedule C form. Part II – Expenses lists (19) pre-defined expense categories possibly related to your business, (1) Other Expenses category for any other expenses not previously described in the first (19) categories of expenses, and (1) category for the Business Use of Your Home expenses.

See the Part II – Expenses image below:

A terrific IRS resource is Publication 535-Business Expenses that gives explanations and examples of many of these Business expense categories.


IRS Audit Warning: The IRS looks very closely at the Expenses you list on your Schedule C, as offsets to the income you earned with the Business.

If the IRS or the States audit you, you will have to prove all expenses listed on your Schedule C with backup receipts or other proof of the expense purchases. The IRS sometimes will disallow expenses they do not consider legitimate for the type of Business you operate. For example, this expense category was not allowed for a Broadway actress:

You would normally assume that a self-employed Broadway actress could deduct the expenses for her show-specific makeup, hair, and nail treatments. The IRS, though, does not allow these expenses – as they consider them Personal Grooming Expenses – that are not deductible. Here is one of their rulings related to this deduction category they do not allow:

“Grooming expenses (i.e., hair and nail maintenance) are inherently personal expenses, and amounts expended for grooming are not deductible regardless of whether an employer requires an employee to be well groomed. Hynes v. Commissioner, 74 T.C. 1266, 1292 (1980)”

The point to remember is your Business expenses have to be legitimate, and substantiated by the current Tax Laws.

As an Enrolled Agent, I can advise you on this subject of legitimate expenses for your Business. The explanations in this blog post will also give you substantiation for your expenses. Just post a comment on this Blog post, or send me an email question at Mike@TaxesAreEasy.com, if you have any questions about your possible Business expenses.

Refer to the following line-by-line explanations of the expense categories listed on the Schedule C. This is a very good introduction to Business expenses, but is no way an exhaustive explanation of every aspect you might have regarding Business expenses. Post a Comment or send me an email if you have further questions about any of your Business expenses.


  • line 8: Advertising expenses must be directly related to your business activities, for the purpose of promoting and generating new business.
    • Print, Internet, Radio, TV and other advertisements you buy
    • Mailers you create, brochures, business cards, give-away items
    • All other expenses you incurred to “Advertise” your services or product

  • line 9: Car and Truck Expenses are for vehicles and trucks you use to conduct your Business. You can deduct the actual vehicle/truck expenses or you can use the Standard Mileage Rate – 54¢/mile for the 2016 tax year. See Publication 463-Travel, Entertainment, Gift, and Car Expenses for good explanations of expenses related to your vehicles and/or trucks.
  • The rules to use the Standard Mileage Rate are:
    • You owned the vehicle and used the standard mileage rate for the first year you placed the vehicle into service for your Business
    • You leased the vehicle and are using the standard mileage rate for the entire term of the lease period
    • Multiply the number of business miles driven by that 54¢/mile rate
    • Add to this amount any fees you paid for parking and tolls related to the Business miles used for the vehicle
  • To claim the actual expenses for the vehicle used in your Business include the Business portion for:
    • Gasoline, oil, repairs, insurance, license plates, registration, etc.
    • Show the vehicle Depreciation costs on line 13 of the Schedule C
    • Show the Lease Payments on line 20a of the Schedule C
  • It is recommended you keep a log book to prove your business miles, and the expenses you incurred. List the date, the purpose of the business trip, the person you met with, the mileage for the trip, and the expenses.
    • You then will be able to generate a “percentage of business use” by comparing your business miles to your total miles for the year.

  • line 10: Commissions and Fees generally are expenses you need to incur to satisfy Federal, State or Local regulations related to your Business or Profession. They are also fees you paid to Government agencies, people or companies such as for:
    • Business licenses
    • Medical or other professional licenses
    • Fees to setup a vendor booth in a public place – such as a flea market
    • Inspection fees for your business facility
    • Transaction processing fees, like from credit card processing services
    • Referral and finder fees and sales commissions
    • Other fees which must be paid in the course of operating your business

  • line 11: Contract Labor is the people or companies you “hired” to perform a specific service, with a fixed project scope. These are not employees that you have paid salaries, wages and bonuses to. Contract Labor could be:
    • Freelance people you hired on a per-job basis
    • Independent contractors you hired to complete a specific job related to your business activities – not related to repairs and maintenance.
    • Marketing or research personnel you hired to expand your business or enhance your business image
  • If you paid any Contract Labor person or firm $600 or more and you did not withhold any taxes from those payments, you are required by the IRS to issue them a form 1099-MISC listing the total amount of fees you paid to them during the tax year. This is usually listed in the Box 7 on the form 1099-MISC, described as Nonemployee Compensation. You also file the same 1099-MISC copies with the IRS, so they can confirm this income is reported on the Individual income tax returns of the Contract Labor entities you hired and paid.

  • line 12: Depletion is the using up of natural resources by mining, drilling, querying stone, or cutting timber. This Depletion deduction allows an owner or operator to account for the reduction of a product’s reserve.
  • There are two ways of figuring depletion – Cost and Percentage
    • Cost depletion takes into consideration the following
      • Property’s cost basis used for depletion
      • Total recoverable units of mineral in the property’s natural deposit
      • Number of units of mineral sold during the tax year
    • Percentage depletion multiplies a certain percentage, specified for each mineral, by the gross income from the property during the tax year.
    • Either method can be used for mineral property
    • Cost depletion must be used for standing timber property

  • line 13: Depreciation and Section 179 Expense Deduction is the annual deduction allowed to recover the cost or other basis of business or investment property and/or equipment having a useful life substantially beyond the current tax year. This Depreciation cost deduction represents the “wear and tear” on the property and/or equipment as you use it in your business, deducted over a certain time period defined by the IRS, for the specific type of property.
  • For example a new computer is depreciated over a 5-year period, which means its cost is gradually deducted on your Schedule C as an expense for five-years – based on the IRS depreciation table schedule that determines the deduction amount for each of those five tax years.
  • You can also depreciate improvements made to leased business property, like a new bakery you opened in a leased space, that you plan to operate for several years.
  • Inventory and Land are not depreciable.
  • Depreciation starts when you first use the property and/or equipment in your business or for the production of income. It ends when you take the property and/or equipment out of service, deduct all of its depreciable cost or other basis, or no longer use the equipment or property in your business for the production of income.
  • The Section 179 Expense Deduction allows you to expense (or deduct) part or all of the cost of certain property and/or equipment you bought in the current tax year for use in your business. This sometimes is more beneficial than taking the specified Depreciation deduction each year for the item, as it allows a much larger deduction in the first year the property and/or equipment is placed into service. New and Used property and/or equipment qualify for the Section 179 Expense Deduction.
  • Bonus Depreciation allows you to deduct 50% of the cost of certain items in the first year you placed them in service, instead of depreciating the entire cost over the full depreciation period. This 50% Bonus Depreciation only covers New equipment, not used or reconditioned equipment.
  • Some common types of property and/or equipment you might depreciate, and the Useful Depreciable Life periods the IRS assigns to them are listed below. The IRS refers to all items as Property.
    • 3-year property
      • Tractor units for over-the-road use
      • Any race horse over 2 years old when placed in service. (All race horses placed in service after December 31, 2008, and before January 1, 2017, are deemed to be 3-year property, regardless of age.)
      • Any other horse (other than a race horse) over 12 years old when placed in service.
      • Qualified rent-to-own property, under which some of your monthly payments are a rent premium, with the rest towards the eventual purchase of the property, based on the rent-to-own agreement.
    • 5-year property
      • Automobiles, taxis, buses and trucks
      • Office machinery (such as typewriters, calculators and copiers)
      • Computers and their associated peripheral equipment, like a printer
      • Any property used in research and experimentation
      • Breeding cattle and dairy cattle
      • Appliances, carpets, furniture, etc. used in residential real estate
      • Retail fixtures and shelving used in a retail business
      • Certain geothermal, solar, and wind energy property
    • 7-year property
      • Office furniture and fixtures (such as chairs, desks, and file cabinets)
      • Agricultural machinery and equipment
      • Railroad track
    • 10-year property
      • Any single-purpose agricultural or horticultural structure
      • Any tree or vine bearing fruits
    • 15-year property
      • Certain improvements made directly to land or added to it
        • Shrubbery, fences, roads, sidewalks
      • Any qualified leasehold property improvements
      • Any qualified restaurant property
    • 20-year property
      • Farm buildings
    • 27 1/2-year property
      • Residential Real Estate
    • 39-year property
      • Nonresidential Real Estate
    • 40-year property
      • Foreign Residential Real Estate, like an apartment you owned and rented in Paris, France – while you lived and worked in the U.S. as a French-born U.S. Resident Alien taxpayer. A U.S. Resident Alien must report all “Worldwide Income” and must file a regular U.S. Individual 1040-Series Income tax form each year, while residing and working in the U.S. This foreign rental income is reported on the U.S. Tax Return, on the form 1040, on the Schedule E.
  • Depreciation is shown on form 4562-Depreciation and Amortization.

Depreciation is a very complicated tax topic that cannot be completely explained in a Blog post. See these references from the IRS form 4562-Depreciation and Amortization-Instructions and Publication 946-How to Depreciate Property. You can also post a question in the Comments section  or send me an email at Mike@TaxesAreEasy.com.


  • line 14: Employee Benefit Programs (other than on line 19) are contributions you made to benefit programs for your employees that are separate from Pension and Profit-Sharing contributions listed on line 19.
    • Employee Accident and Health Insurance Plans
    • Group-Term Life Insurance
    • Dependent Care Assistance Programs
    • Education assistance
    • Adoption assistance
    • Transit or Commuting Assistance
    • Meal Service or Cafeteria Facility Benefits

  • line 15: Insurance (other than Health) is for Business insurance expenses:
    • Property insurance
    • General liability insurance
    • Workers compensation insurance
    • Fire, theft and flood insurance
    • Renter’s insurance for offsite office or storage space
    • Errors and omissions insurance
    • Malpractice insurance
    • Business interruption insurance

  • line 16: Interest you paid on any debt obligation you had related to the Business operations for the year.
    • line 16a: Mortgage (paid to banks, etc.)
      • On a mortgage for property used in the Business
      • You should receive a form 1098-Mortgage Interest Statement from the Bank showing the total Mortgage Interest you paid during the tax year
    • line 16b: Other
      • On credit cards used to finance purchases for the Business
      • On loans to finance the operations of your Business or for the purchase of vehicles used in the Business
      • Investment interest on a Margin Account with a Brokerage Firm
      • Interest you paid to another Individual who loaned you money

  • line 17: Legal and Professional Services paid to professionals you hired to perform short-term professional services required by your Business.
    • Attorney fees
    • Accountant fees
    • Enrolled Agent fees
    • Tax Professional fees
    • Fees incurred to answer Audits by the IRS or any of the States
    • Payroll and Benefit Services
    • Professional Association Membership Fees
    • Web Design and Online Resume Fees
    • Consulting Fees paid to various Professionals you hire on a short-term basis to give Business advice and suggestions to expand your Business
  • If you pay these people or businesses $600 or more during the year for their services, you must issue them a 1099-MISC form. You must also send a copy of the 1099-MISC form issued to these entities, to the IRS for their cross-referencing purposes.

  • line 18: Office Expense includes expenses for the operation of your physical Business location, that are not part of the everyday expenses for consumable, tangible Supplies. They maintain the Office functions, providing a safe, clean and secure working environment for yourself and your employees.
    • Cleaning services
    • Coffee and water services
    • Pantry food service
    • Computer data backup services
    • Offsite paper filing storage and shredding services
    • Trash collection and pest control services
    • Security alarm monitoring services

  • line 19: Pension and Profit-Sharing Plans is the deduction for contributions you made on behalf of and for the benefit of your employees to a pension, profit-sharing, or annuity plan. These include SEP, SIMPLE and Qualified Plans you setup for your employees. Typically a retirement plan specialist will help you setup these Business retirement plans. You can refer to Publication 560-Retirement Plans for Small Business for a more in-depth explanation of all the plans available to a small business. Be aware you also have to file yearly reporting 5500-series forms with the IRS to report the contributions made to the employees. Your retirement specialist can also help you with these yearly reporting requirements.

  • line 20: Rent or Lease reports the business portion of your rental costs.
    • line 20a Vehicles, Machinery and Equipment is for:
      • Vehicles and trucks rented or leased, and used in your Business
        • If the lease is for more than 30-days, you have to reduce your lease payment deduction by what is called the Inclusion Amount. This is covered in Ch. 4 of the Publication 463 mentioned above in line 9.
      • Machinery and Equipment rented and used in your Business
    • line 20b Other Business Property is for:
      • Rent or lease payments for office space in a building
      • Renting of storage locations for your Business
      • Rents for warehouse, showroom, etc. spaces
      • Any other rent you pay for Real Estate Property related to the operation of your Business

  • line 21: Repairs and Maintenance are expenses paid to “fix” items in your Business, and do not increase the life use or value of the property. These are sometimes called Incidental Repairs. They repair and/or maintain the usefulness of the equipment or property. For instance:
    • Plumbing repairs
    • Routine maintenance on your heating and cooling systems
    • Painting
    • Repairing light fixtures, etc.
    • Repairing a machine used in your business, like your office copier
    • Maintenance agreements for your business equipment or property
    • The cost of the hired labor needed to complete the repairs
  • Do not deduct the value of your own labor, if you completed the repairs.
  • Do not deduct the amounts spent to Restore or Replace Property, as those must be Depreciated as a capital asset to the Business.

  • line 22: Supplies (not included in part III – Cost of Goods Sold (COGS) are any Supplies you needed to purchase to run your business that are not related to the production of an Inventory product that is sold to a customer. These line 22 Supplies have nothing to do with a Product you produce for sale to your Customers.
  • Cost of Goods Sold includes all the expenses you incurred to produce the Product to be ready to ship to the customer, or make it available to sale.
  • The costs of shipping the products to the Customer are line 22 Supplies.
  • Supplies are the consumable, tangible items you buy and replace frequently as you use them in your Business operations.
    • Office Supplies and Postage
    • Shipping for Sales of Inventory to Customers
    • Shipping for non-Inventory purposes
    • Bathroom supplies and toiletries
    • Kitchen supplies
    • Just about anything you could buy at Staples or Office Depot, for example, to use in your office to allow yourself and your employees to do their work and support the normal operations of the Business.
  • These line 22 Supplies must have a “useful life” of less than one year.
  • Supplies with a “useful life” of more than one year, have to be depreciated as a capital asset to your business. For example, a new printer you purchased at Staples has to be depreciated over a 5-year period.

  • line 23: Taxes and Licenses are the taxes and regulatory licenses you have to pay and/or acquire related to the start and continued operation of the Business, such as:
    • Real estate and personal property taxes on business assets
    • Employer share of FICA taxes, otherwise known as Payroll taxes
    • Federal and State Unemployment and Disability Insurance taxes
    • Business permits and licenses
    • Software licensing and renewal fees

  • line 24: Travel, Meals and Entertainment covers your personal travel and meals for Business purposes, and your Client entertainment expenses.
    • See Publication 463-Travel, Entertainment, Gift, and Car Expenses .
    • line 24a: Travel is your expenses for lodging and transportation connected with overnight travel for business while away from your Tax Home. Your Tax Home is your main place of Business. It is recommended to keep a log book describing the purpose of the trip and how it relates to your Business operations.
      • If this travel away from your Tax Home lasts more than 1-year, you will not be able to deduct the expenses.
      • The travel away from your Tax Home has to be “temporary” which the IRS considers to be less than 1-year
      • You can keep the actual travel expenses, or you can take what is called a Per Diem rate specified for the location you travel to. For example, see GSA (General Services Administration) Per Diem Rates Look-Up. Just type in the Zip Code for the city to see its Per Diem rates for Travel, Meals, and Incidental Expenses (M&IE).
    • line 24b: Deductible Meals and Entertainment are expenses for your meals while traveling away from your Tax Home, and for business-related meals and entertainment with your Clients, or potential Clients.
      • These Client Meal and/or Entertainment expenses have to be directly related or associated with the active conduct of your Business
      • They cannot be lavish or extravagant, per reasonable IRS standards
      • Incurred while you were present at the Business Entertainment or Meal, during which your Business matters were discussed
      • You cannot deduct expenses for a facility, like a hunting lodge, usually considered for entertainment, amusement or recreation.
      • You cannot deduct membership dues, like tennis or golf clubs
      • You can use the Standard Meal Allowance for your own personal Business travel related meals, instead of keeping the records.
        • This is listed as the M&IE rate in the above web link
      • Only 50% of your Business-related Meals and Entertainment are deductible as expenses
        • 80% is deductible if you are subject to the DOT (Department of Transportation) hours of service rules, like a truck driver

  • line 25: Utilities are these various services provided to the Business:
    • Electric, Gas and Water fees
    • Internet Access fees
    • Phone and Cell Phone service – only related to the Business

IRS Audit Warning: The IRS will only allow you to deduct the full expenses for a Cell Phone and Carrier Agreement, if it is used 100% for your Business.

You can deduct the “Business Percentage of Use” of your total cell phone and carrier agreement, but be prepared to prove to the IRS how you arrived at that percentage of business use. Keep a log book of your business use of your cell phone, to then prove to the IRS Auditor.

Or get a second cell phone, that you would then only use for Business purposes.


  • line 26: Wages (less employment credits) are the wages, salaries, and bonuses paid to your regular employees, less any employment tax credits you took for providing those wages. Whatever you pay your regular salaried employees should be reported on this line 26.
    • In most cases you are required to file a Form W-2 – Wage and Tax Statement for each of your salaried employees, by the end of each January. You send a copy of the W-2 to the IRS, the State(s), and the Employees.
      • You must also file the form 941 quarterly to remit the Payroll or FICA taxes you withheld from the paychecks of your Salaried employees
      • You must then file the form 940 once a year to report the payments you made to the Unemployment Tax system, for your employees
      • You most probably must also file similar forms with the State, to report the Payroll and Unemployment payments related to the State
    • Verify these Wage reporting procedures with your Accountant, Bookkeeper or Payroll Service
    • Do not report wages paid to yourself, the owner of the Business
      • This is considered a withdrawal of profits, not a salary
    • Do not report Freelance or Independent Contractor labor, as that is reported on the line 11, as Contract Labor. You must issue the form 1099-MISC to these people and to the IRS, if you paid them $600 or more in fees for the services they provided to your business.

  • line 27a: Other Expenses (from line 48 in Part V – Other Expenses) are any other expense related to your Business that was not described or listed on the pre-determined expense categories on lines 8 through 26. These are entered as individual descriptions with an expense value, and summarized in Part V – Other Expenses on page 2 of the Schedule C. This is a good place to describe unusual expenses so the IRS receives this list when you file your tax return. Some expenses just do not fit the predetermined categories of expenses as listed on lines 8 through 26. These descriptions tell the IRS the uniqueness of the Other expenses.
    • Some Examples for a Broadway Actress:
      • Head shot photos
      • Acting and voice lessons
      • Theater research for this Broadway Actress, by attending other plays
      • Dance lessons and massage therapy
      • Sheet music costs
    • Gifts to Clients are limited to $25 per person. This was first passed in 1962 and has not been raised since. $25 in 1962 is worth about $201 today, in 2017 dollars. Keep track of whom you gave the gift to, the business relationship to you, and a description of the gift.
    • Organizational Costs (up to $5,000 in the first year)
      • In the first year you form and begin the Business, you can deduct up to $5,000 of Organizational Costs. These include:
        • Cost to form and file the business with Local and State officials
        • Legal and Professional fees used to setup the Business
        • Any other cost incurred to legally setup the Business
    • Start Up Costs (up to $5,000 in the first year)
      • In the first year you form and begin the Business, you can deduct up to $5,000 of Start Up Costs.
        • An analysis of potential markets, etc. for your new Business
        • Advertisement expense for the opening of the new Business
        • Salaries and wages of your initial employees that are being trained for the opening of the new Business, like a new restaurant.
        • Travel and other costs to sign up new distributors, suppliers and customers for the new Business.
        • Salary and fees for Consultants hired to launch the new Business
        • Web site development, online resume fees, etc.
    • Amortize Organizational and Start Up Costs over 180-months, 15-years
      • Any Organizational or Start Up Costs over the $5,000 limit have to be Amortized (deducted yearly) over a 15-year period. Amortization is an equal, gradual deduction of a cost, over a set period of time.

  • line 30: Expenses for Business Use of Your Home is the deduction for the part of your home or apartment, that is Regularly and Exclusively used for your Business. See Publication 587-Business Use of Your Home.
    • That part of your home or apartment, serves as your principal place of Business, or where you perform your work or assemble products.
    • The place in the home or apartment where you store Inventory
    • A place where you meet Clients or Customers, in the normal course of your Business activities.
    • The Simplified Method of calculating your Home Office deduction:
      • Multiply your allowable square footage that represents your Home Office by $5. The maximum allowed square footage is 300SF, so that limits your maximum deduction to 300SF time $5 = $1,500.
    • The Regular Method is calculated using form 8829 – Expenses for Business Use of Your Home. See also the instructions at form 8829 – Expenses for Business Use of Your Home-Instructions.
    • The Home Office deduction cannot exceed your Schedule C line 29 Tentative Profit.
    • If you are a salaried employee claiming a Home Office deduction, you must have a letter from your Employer requesting you setup this home office, for the convenience of your Employer. You cannot deduct Home Office expenses as a salaried employee, if you setup the Home Office for your own convenience – that was not requested by your employer.
    • IRS Audit Warning: The IRS looks very closely at the Home Office Expenses you claim on your Schedule C. You must be ready to prove its Exclusive and Regular use, as critical to the operation of your Business.
      • For example, I know of a concert pianist who has a grand piano in his Manhattan apartment, in the Living Room he only uses to practice. An Enrolled Agent friend of mine, said the State of New York is challenging this Home Office deduction.
      • Your Home Office has to pass the Exclusive and Regular use tests, which means this Home Office area is used Exclusively for your business on a Regular basis. You cannot use this Home Office area for any of your personal or family needs.

Tentative Profit or (loss): All of your lines 8 through 27a expenses are totaled onto line 28 as Total Expenses – before your Business Use of Home expenses. Line 28 is then subtracted from your line 7 Gross Income. This results in your Tentative Profit or (loss) shown on line 29.


Net Profit or (loss): The expenses for the Business Use of Your Home, listed on line 30 is subtracted from the line 29 Tentative Profit or (loss). This then results in line 31, as your final Net Profit or (loss) from your self-employment as calculated on this Schedule C. This then flows to the first page of the form 1040, line 12.

This line 31 Net Profit is also used on the Schedule SE to calculate your Self-Employment tax, which is the Social Security and Medicare tax you must pay on the line 31 Net Profits you made through your Self-Employment business. You do not pay Self-Employment tax if your line 31 shows a Net Loss.


Line 32 asks if you showed a Net Loss on line 31, is all the money you invested in the Business “at risk”? If you answer Yes, then you can deduct the full loss shown.

If only some of your money invested in the Business is at risk, then your loss will be limited. Form 6198 – At-Risk Limitations will calculate this for you. See also the Form 6198 – At-Risk Limitations-Instructions.


Cost of Goods Sold is the next blog post related to the Schedule C. This explains the costs incurred to produce your inventory. Click the hyperlink below.

The 1040 – The Schedule C: Part III – Cost of Goods Sold


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040 – The Schedule C: Part I – Income

 

The second step of the Schedule C, after you have described your business, is to report the Gross Income for your business for the tax year. This is done by completing the Part I – Income section of the Schedule C. See the image below.

line 1: Gross Receipts or Sales summarizes the total gross income from receipts and/or sales the Business received during the current tax year. The income sources are:

  1. Personal Services you provided to clients, or Products you sold to customers, that had you generate an Invoice for those services and sales.
    1. You have some sort of paper trail, to prove the income and payments
  2. Cash you received for personal services performed or products you sold, that has no paper trail. Remember the IRS rule for income is “You must report all income, except income that is exempt by law.” No exceptions.
  3. Personal services income reported to you in box 7 of the form 1099-MISC. See this link for a sample form 1099-MISC Box 7.

line 2: Returns and Allowances lists any product-based refund you gave to your customers who purchased your products.

  1. Returns are a cash or credit refund you gave to customers who returned defective, damaged, or unwanted products.
  2. Allowances are a reduction in the selling price of products, instead of a cash or credit refund.

line 3 subtracts these Returns and Allowances from your Gross Receipts and Sales total, from line 1. This is called your Net Receipts.


line 4: Cost of Goods Sold is the total cost you incurred during the tax year to purchase and produce the inventory for your product sales. Include the expenses that went into the product that was actually sold to the Customer. The direct Supplies you purchased that went into or helped produce the product are also included, like dyes for fabric or thread to stitch the fabric. Any expense you incurred that went into the product, or allowed or assisted the manufacture of the product, is included in the Cost of Goods Sold calculations.

This is calculated in Part III – Cost of Goods Sold on page 2 of the Schedule C. Refer to the Blog post The 1040 – The Schedule C: Part III – Cost of Goods Sold for a more detailed explanation. An example:

  • You started a new home business selling fashion accessories on the Internet in February of 2016. You therefore had no beginning inventory.
  • During the course of the year you purchased $15,000 of the raw materials, fabric and trimmings required to manufacture your wholesale-priced fashion accessories, that you then sold through your Internet-based fashion business for a nice profit at regular retail prices. These include only the purchases that directly go into the finished product, ready for sale to your Customers. It would also include the $1,500 in fees you paid a Sample Maker who sewed your finished garments together.
  • At the end of the business day on December 31st of this first year, the value of your remaining in-progress and finished – but still unsold wholesale inventory – was $4,500. This wholesale inventory is ready to be sold January 1st of the following year at the full retail price, as new orders begin in the New Year for your popular products.
  • Your Cost of Goods Sold is therefore = $12,000, based on this formula:
    • Inventory at beginning of the year in February 2016 = $0
    • Raw materials purchased during the 2016 tax year = $15,000
    • Sample Maker fees for 2016 tax year = $1,500
    • $15,000 + $1,500 = $16,500
    • Inventory at the end of the year on December 31st, 2016 = $4,500
    • $16,500 minus $4,500 = $12,000 which is your Cost of Goods Sold

line 5: Gross Profit subtracts this Cost of Goods Sold value, from your line 3 Net Receipts.  Line 3 again is your Gross Receipts minus your Returns and Allowances.


line 6: Other Income includes the following possible miscellaneous categories of income you had for your Business:

  1. Finance reserve income
    1. Which typically is the interest paid on this business reserve fund
  2. Scrap sales
    1. Scrap is the excess unusable material that is left over after a product has been manufactured. This leftover amount has minimal value, and is usually sold off for its material content costs.
  3. Bad debts you recovered, if you use the Accrual accounting method
  4. Interest payments you received, such as on notes or account receivable if you use the Accrual accounting method
  5. State gasoline or fuel tax refunds you received
  6. Credit for biofuel claimed on form 7478
  7. Credit for biodiesel and renewable diesel fuels on form 8864
  8. Credit for federal tax paid on fuels
  9. Prizes and awards related to your business
  10. Any other kind of miscellaneous income your business received

Line 7: Gross Income adds the line 6 Other Income total and the line 5 Gross Profit, to arrive at the final Gross Income total for your business. This is the “Bottom Line” number that states the final income your business generated for the current tax year.


Click the hyperlink below for the next blog post that explains how to list your Self-Employment Expenses reported on the Schedule C.

The 1040: The Schedule C: Part II- Expenses


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040 – The Schedule C: Describe Your Business

This Blog post is about your Self-Employment Business and how you describe that business activity reported on the Schedule C form.

The IRS defines a business as:

“An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business.”

You also will be considered Self-Employed if you receive Nonemployee Compensation income reported to you in Box 7 of the form 1099-MISC. This most often is how Freelance Income is reported to you, or to report income you earned outside your regular salary job – for miscellaneous jobs you complete for Individuals or Companies without being considered their salaried employee.

If someone pays you $600 or more in freelance or contract work income – they must send you a 1099-MISC form listing the total payments in box 7. They also are required to send a copy of the same 1099-MISC to the IRS.

Actors, performers, dancers and other entertainers are also often issued these 1099-MISC with Box 7 forms. We see this in NY City quite often, particularly when the Actors travel outside the City for Summer Stock Theatre work they book for themselves during the Broadway off-season.

You will report your Business Income on the 2-page form Schedule C. See also the 18-page Schedule C-Instructions. The main sections of the Schedule C we will learn in this and the next (4) Blog posts are:

  • Form Heading: Business information that describes the business
  • Part I – Income: Reports the gross income for the business
  • Part II – Expenses: Lists all expenses for the business; calculates the Business Use of Home costs, then calculates the Net Profit or Loss
  • Part III – Cost of Goods Sold: calculates the inventory cost for the year
  • Part IV – Vehicle Information: describes your Vehicle(s) used for business
  • Part V – Other expenses: list the other expense categories that cannot be described with the pre-determined categories listed in Part II – Expenses

A terrific IRS resource to learn about issues related to a small business and self-employment is Publication 334-Tax Guide for Small Business.


Business Entity classification:

Your business entity information is entered into the Form Heading at the top of the Schedule C. The three business entities that can be reported on the Schedule C are:

  • Sole Proprietorship (SP)
    • The simplest business form under which one can operate and own a business
    • The (SP) is not a legal entity separate from the owner
    • The (SP) is the person who owns the business and is responsible for its debts
    • A Sole Proprietorship is an unincorporated business with a single owner who pays personal income tax on profits earned from the business
    • A Sole Proprietorship is most often doing business under that same person’s name, as creating a separate business or trade name is not necessary
    • The Sole Proprietor is the single individual who acquires the benefits and risks of running an enterprise
    • There is no legal distinction between the assets and liabilities of the (SP) and those of its owner. All the personal assets of a Sole Proprietor are at risk.
  • Single-Member LLC (Limited Liability Company)
    • An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes)
    • A disregarded entity refers to a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner
    • If a single-member LLC does not elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on its owner’s federal tax return. If the owner is an individual, the activities of the LLC will generally be reflected on:
      • Schedule C – Profit or Loss From Business
      • Schedule E – Supplemental Income and Loss
        • Income from Rental Properties, Royalties, Partnerships, S-Corporations, Trusts, and Estates
      • Schedule F – Profit or Loss From Farming
    • An individual owner of a single-member LLC that operates a trade or business is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.
    • The assets of the LLC (Limited Liability Company) are separate from the single-member. The personal assets of the single-member LLC owner are separate from the LLC. This Limited Liability is a prime advantage of choosing the LLC as your business entity, as compared to the Sole Proprietorship entity.
  • Qualified Joint Venture (Husband and Wife)
    • A qualified joint venture is a joint venture that conducts a trade or business where (1) the only members of the joint venture are a married couple who file a joint return, (2) both spouses materially participate in the trade or business, and (3) both spouses elect not to be treated as a partnership.
    • A Qualified Joint Venture, for purposes of this provision, includes only businesses that are owned and operated by spouses as co-owners, and not in the name of a state law entity (including a limited partnership or limited liability company)
    • Each Spouse is required to complete their own form Schedule C listing the Income and Expenses attributed to their share of the Qualified Joint Venture business activities. Each Spouse also pays their own Self-Employment taxes.

The top of the Schedule C contains the Form Heading, where the general information that describes the business entity is entered. See the image below. You must complete the lines A through J by providing the required information and by answering the Yes/No questions.

Name of Proprietor and Social Security Number is your name and SSN if your business does not have a separate name, and uses your name as the title of the business. This is most often considered a Sole Proprietorship.


  • lines C and D: Business Name is used if your business or single-member LLC has a name different from your personal name. The Employer ID number (EIN) can be obtained from the IRS website and issued immediately, which then can be used to open a business checking account, submit sales and payroll taxes, etc.

  • line E: Business Address is your own personal home address or the separate address of the business if located outside where you live.

  • line F: Accounting Method can be Cash, Accrual, or Other (Hybrid). Please consult with your Accountant or Bookkeeper as to what Accounting Method you should use, that is most appropriate to your Business activities. The person or company that manages your business books, will advise you on the Accounting Method they use for your business.

  • Cash Accounting is the typical accounting method for sole proprietors and single-member LLC’s – who do not have and sell from inventory. They typically only provide personal services, and do not sell products. You record cash when you receive it, and record expenses when you pay for them. Income is reported when constructively received during the tax year. Expenses are recorded when you pay for the expense during the tax year. Your payments are considered constructively received when you have access to the money by way of a check, or the deposit has been registered into your business bank account. You only report payments when you have been actually paid, and only list expenses after you paid for the expense item.

 

  • Accrual Accounting is most often used when the business keeps and sells from an Inventory of products. A home based business selling fashion accessories through the Internet is a good example of an inventory based business. You have to purchase the raw materials and fabrics to manufacture the finished goods, which then builds up the completed inventory you sell to customers with their online orders. Accrual accounting counts income when all the activities to complete the sale have been satisfied to earn the payment, even if you have not yet been paid for that sale. The expenses are counted when you have possession of the expense item, even if you have not yet paid the invoice for the purchased products. Accrual accounting works well when your customers take days or weeks to pay you, and likewise when you take days or weeks to pay your suppliers. It gives you a more up-to-date snapshot of your cash flow and financial activity, even if all your invoices or expense bills have not been paid.

 

  • Other, or Hybrid Accounting uses a combination of the Cash and Accrual accounting methods. For instance you could still meet the requirement to use the Accrual method to track your inventory, but use the Cash method for all the other transactions related to your business.

 

  • General Accounting Rules for a Self-Employed Business:
    • If you report income using the cash method, you must also report expenses using the cash method.
    • If you report income using the accrual method, you must also report expenses using the accrual method.
    • Income and expenses must be reported using the same method, whether it is cash or accrual.
    • If you have inventory, you need to report inventory sales and purchases using the accrual method.
      • You can record all other transactions with either cash or accrual accounting.

  • line G: Material Participation means you actively participated in the business during the tax year, and satisfy one of these seven IRS tests:
    1. You participated in the activity for more than 500-hours during the tax year. 500-hours divided by a typical 40-hr work week, gives 12 1/2-weeks or an equivalent to one, three-month quarter.
    2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year.
    3. You participated in the activity for more than 100-hours during the tax year, and you participated at least as much as any other person for the tax year. This included individuals who did not own any interest in the activity.
    4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500-hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you participated in the activity for more than 100-hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4).
    5. You materially participated in the activity for any 5 of the prior 10 tax years.
    6. The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
    7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis for more than 100-hours during the tax year. Your participation in managing the activity does not count in determining if you meet this test if any person (except you):
      • received compensation for performing management services in connection with the activity
      • spent more hours during the tax year than you spent performing management services in connection with the activity (regardless of whether the person was compensated for the services).

  • line H: Started or Acquired Business in this tax year tells the IRS this is the first year this business is being reported on a Schedule C. This is important because in the first year you can deduct as direct expenses the first $5,000 of Organizational Costs and the first $5,000 of Start Up Costs. The IRS also checks for “Gaps” in your Schedule C filing history, particularly if it relates to prior assets you are Depreciating.

  • line I: Payments requiring 1099 forms to be issued relates to your responsibility to issue a 1099-MISC form to the IRS to report any person who provided $600 or more in personal services to your business.
    • For instance: You are a licensed Architect who hires a draftsperson to help you throughout the year to produce computer-generated drawings for your projects. If you pay that draftsperson $600 or more in fees they charged you for their personal services during the tax year, you must issue them a 1099-MISC form listing the total amount you paid them in Box 7 listed as Nonemployee Compensation. You must also file a copy with the IRS. The IRS then cross-references this reported 1099-MISC income with the draftsperson’s Individual tax return, and their records.

  • line J: Required 1099 forms filed with IRS? tells the IRS you indeed sent them the 1099-MISC forms you indicated by a Yes answer in line I. This then alerts the IRS to cross reference your 1099-MISC filings with their computers. They match them with your Social Security Number, or the Employer ID Number (EIN) for your Schedule C business.

The IRS also matches this submitted 1099-MISC information with the Individuals you paid during the year, as reported on your 1099-MISC submitted forms. Those individual’s social security numbers or Employee ID Numbers (EIN) are listed on your submitted 1099-MISC forms. The IRS then reviews their Individual tax returns, to verify they reported this income listed on your submitted 1099-MISC forms.


Click the hyperlink below for the next blog post that explains how to list your Self-Employment Income reported on the Schedule C.

The 1040: The Schedule C: Part I – Income


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040: The (8) New Income Categories

The (11) income categories from the forms 1040EZ and 1040A are carried forward and incorporated into the 1040 form. If you have not been able to read and study the (2) previous posts about these (11) income categories, please do that now so you are familiar with these Income types. Those blog posts are The 1040EZ: Who Can Use this Form? and The 1040A: (7) New Income categories. The (11) previous Income categories are:

  • Wages, Salaries and Tips
  • Taxable Scholarships or Grants
  • Taxable Interest – that can be over $1,500 on the 1040A and 1040 forms
  • Tax Exempt Interest
  • Ordinary Dividends
  • Qualified Dividends
  • Capital Gain Distributions
  • IRA Distributions
  • Pension and Annuity Distributions
  • Unemployment Compensation
  • Social Security Benefits

The (8) new income categories added to the form 1040 are:

  • line 10: Taxable refunds, credits, or offsets of state and local income taxes
  • line 11: Alimony received
  • line 12: Business income or (loss)
  • line 13: Capital gain or (loss)
  • line 14: Other gains or (losses)
  • line 17: Rental real estate, royalties, partnerships, S-corps., trusts, etc.
  • line 18: Farm income or (loss)
  • line 21: Other income

This blog post will give an introduction to these (8) new income categories. Subsequent blog posts will explain some in more detail.


Taxable refunds, credits, or offsets of state and local income taxes affects taxpayers who use the Itemized Deduction feature and also deducted State or Local taxes as a Itemized Deduction on line 5a of their Schedule A form. See the image below of the Schedule A line 5a:

If you receive a State tax refund in the same tax year that you deducted State and Local taxes on your Federal Schedule A, line 5a, as an Itemized Deduction, you most often have to report that State refund as ordinary income the following year on line 10 of your 1040 form.

This is because you received a federal income tax benefit – lower line 43 Taxable Income – due to you being able to deduct your State and Local taxes on the Schedule A. The IRS considers you then received a double benefit with that State refund, so they require you to report it as income the following year on their IRS 1040 tax return.

The State will mail you the form 1099-G that shows your previous year refund amount on line 2 of the form, or they will make the 1099-G available for download from their website. See the form 1099-G.

Pages 23 & 24 of the 1040 Instructions have the line 10 explanation and worksheet State and Local Income Tax Refund Worksheet that calculates if any of your previous year State refund(s) are taxable the following year on your Federal 1040 form.

If you received any State-specific credits in your State refund – those are not to be included as potentially taxable in the line 10 calculation. For example in New York City, some people receive a Rent-based credit/refund. This would not be part of the taxable New York State refund calculated by the worksheet.

This line 10 requirement does not apply to you if you took advantage of the Standard Deduction the previous year and did not Itemize your Deductions. It also does not apply if you instead used the General Sales Taxes itemized deduction value on line 5b. Taxpayers in States without an income tax, like Florida, use the General Sales Tax line 5b deduction.

All tax software calculates this line 10 Taxable Refund for you, but you have to give the details of your previous year’s Federal and State tax returns – so the software can determine if all or part of the previous year’s State tax refund is taxable on your current year IRS 1040 form.


Alimony received is income you received from a former spouse, per the stipulations of your divorce or separation agreement settlement. It is sometimes also referred to as Separation Maintenance.

This is considered by the IRS as ordinary income and must be reported on line 11 of the form 1040. You must also provide the payer of this Alimony with your social security number, as that payer can take a line 31a Adjustment deduction for paying that Alimony. Your social security number is then listed on line 31b of their 1040 tax return.

The IRS cross-references both of your social security numbers, most importantly to make sure the recipient of the Alimony reported it as ordinary income on their 1040 tax form. If the IRS cannot verify this, they might disallow the line 31a Adjustment deduction for the payer of the Alimony.


Business income or (loss) is income you received from Self-Employment. The IRS defines this Business Income as “If you operated a business or practiced your profession as a sole proprietor.” This is reported on the Schedule C form which lists your gross income and all expenses. Your Net Profit or Loss then flows from the Schedule C to line 12 of the form 1040. The next several blog posts will explain Self-Employment income, the Schedule C, and other tax forms related to your own business income.


Capital gain or (loss) are the proceeds or losses recorded when you sell a Capital Asset, such as a stock or bond. Most often these transactions need to be reported on the form 8949 – Sales and Other Dispositions of Capital Assets and the Schedule D. Your net profit or loss from these investments is then listed on line 13 of the 1040. A separate blog post will explain these.


Other gains or (losses) are the proceeds or losses recorded when you sold or exchanged assets used in a trade or business. These asset sales are listed on the form 4797 – Sale of Business Property. Your net profit or loss from these business-related asset sales is then listed on line 14 of the 1040. A separate blog post will explain these.


Rental real estate, royalties, partnerships, S-corps., trusts, etc. are reported on the Schedule E with the income reported to the taxpayer on various forms, like the 1099-MISC and the K-1 forms. The total gain or loss from these investments is then listed on line 17 of the form 1040. A separate blog post will explain these categories of income.


Farm income or (loss) are the proceeds or losses from operating a farm. This is reported on the Schedule F form. The Net Profit or Loss from the Farm Operation then flows from the Schedule F to line 18 of the form 1040. A separate blog post will explain this, and also what constitutes a Farm Operation.


Other income listed on line 21 of the form 1040 is any other category of income, not described on lines 7 through 20a of the form 1040, such as:

  • Prizes, Awards, Lottery and Gambling winnings
  • Jury Duty pay
  • Reimbursements of deductions you took in an earlier year, such as Medical Expenses, Real Estate Taxes, or Home Mortgage Interest.
  • Rental of personal property – not in the business of renting such property
    • For example, you rented your snow blower during last Winter’s blizzard
  • Hobby income, not engaged in for profit
  • A Net Operating Loss (negative value on line 21) from a Business, etc.

A separate blog post will explain these.


Click the hyperlink below to learn about Self-Employment and how that activity will generate a Business Income or Loss. You will begin learning about the Schedule C – the form used to report this sort of Business Income. The first step is to describe your business on the Schedule C.

The 1040 – The Schedule C: Describe Your Business


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.

The 1040: Who Can Use this Form?

The 1040 “U.S. Individual Income Tax Return” is the most complex tax form the IRS provides to Individuals, to report any and all Tax Stories. The 1040 builds and expands on the features of the intermediate 1040A form.

If you have not done so already, I suggest that you read and study the (2) blog posts that explain the form 1040EZ, and the (11) blog posts explaining the form 1040A. You can see those posts listed to the right, in the Recent Posts section. You need to verify if either of those two previous 1040-series forms can accommodate your Tax Story.

If they cannot, then you are required to use this form 1040 to file your taxes with the IRS – to report your more complicated Tax Story, that the previous 1040EZ and 1040A forms cannot accommodate.


Click to open the 2-page IRS form 1040 into a new browser window, to refer to as we learn about the form. You can then toggle between the several 1040 blog posts and the 1040 form. As a reminder, you can print or save any of these PDF tax forms – to use as a printed desktop reference.

Click the link below for the 106-page form 1040A instruction booklet from the IRS, as IRS form 1040-Instructions. The explanations in these many form 1040 blog posts are substantiated by the Tax Laws explained in the IRS instruction booklet. The instructions are very well written and frequently give terrific examples to demonstrate the Tax Laws pertinent to the form 1040.

There will be approximately 35 blog posts in this series to explain the form 1040 form ( in progress to be completed for late 2017, early 2018 ).

Just click the blue underlined hyperlink button at the bottom of each blog post, to progress to the next blog post in the series. We start with the top of page 1 of the form 1040, then work through each line to the end of page 2. The form 1040 is very complicated, so it takes many, many blog posts to adequately explain each line of the form.

All of the features of the 1040EZ and 1040A forms, are carried forward and incorporated into this third 1040 form. If your Tax Story cannot be accommodated by those first two 1040-series forms – you must use the form 1040.

This first 1040-related blog post will outline the additional features of the form 1040, so you have an introduction to the complexity of the form. Subsequent blog posts will explain every form 1040 feature in detail.


The tax form 1040 can at times be incredibly complicated, because it is designed to encompass any and all circumstances relating to an Individual’s Tax Story. The many additional Income, Adjustment, Deduction, Credit and Tax categories make it very complicated. You will see that below as these many new features are listed and described.

The best way to initially learn the form 1040, is to only focus on the features of the form that affect your own Tax Story. As you progress through the blog posts for the first time, just concentrate on what is relevant to your own Tax Story.

The other information not related to your present Tax Story will be there to learn – if your Tax Story gets more complicated in the future. It is most often too overwhelming to attempt to learn every feature about the form 1040 – your first time through reading and studying these blog posts.

In the future you can learn about the new circumstances that might arise to change or complicate your particular Tax Story. At that point you could review the blog posts or use the search feature to find the new tax form features you need to learn. For instance, these are some circumstances that might happen to your Tax Story in the future – that you would then need to learn about, to properly report on your 1040 form tax return:

  • Self-Employment information for a new home-based business you started
  • How to report Rental Income for that beach house you started renting
  • How to take advantage of the Itemized Deduction feature to report large unreimbursed medical expenses or unreimbursed job-related expenses
  • How to take a credit, for that $35,000 Tesla Model 3 you are considering
  • How to file the taxes for the Nanny you hired, to care for your newborn
  • How to report your new HSA (Health Savings Account) contributions and distributions that your salary job now provides as a benefit to you
  • How to take the Adoption Credit for your new adopted child

One of the primary purposes of this entire “Taxes Are Easy” blog – is to be a complete reference for your Tax Story – which can explain every line on your tax return. To keep that promise, some of the blog explanations of the complex form 1040 features, by necessity, have to go into great detail.

The 1040 form might test your patience for that line-by-line level of detail – as explained in the blog posts.

If you get frustrated or overwhelmed with learning the form 1040 for your particular Tax Story, just submit a comment on any blog post with your question, or send me an email at Mike@TaxesAreEasy.com. I’ll help you create a “form 1040 lesson plan” that will explain your unique Tax Story, without the other 1040 information you do not need to learn at this point.

The goal is for you to understand your own Tax Story – by understanding every line on your tax return. With the 1040 form, though, there are many lines on the form – that could possibly never affect your Tax Story.

Ignore those for now, and just concentrate on what is pertinent to your current Tax Story. You can always come back to those tax details later, to learn more about the features of the form 1040 – as your evolving and more complicated Tax Story will dictate.


The Filing StatusExemptions and Dependents sections at the top of page 1 of the form 1040 are exactly the same as introduced on the form 1040A. Please refer to these three 1040A blog posts that explain these topics, if you have not reviewed and studied these posts already.

The 1040A: Filing Status and The 1040A: Qualifying Children & Relatives and The 1040A: The Personal and Dependent Exemptions


The Income categories listed on page 1 are expanded on the form 1040, and include every income category brought forward from the forms 1040EZ and 1040A. See these previous posts that explained the Income categories from the forms 1040EZ and 1040A. They were The 1040EZ: Who Can Use this Form? and The 1040A: (7) New Income categories.

The (8) new Income categories on the form 1040 are:

  • line 10: Taxable refunds, credits, or offsets of state and local income taxes
  • line 11: Alimony received
  • line 12: Business income or (loss)
  • line 13: Capital gain or (loss)
  • line 14: Other gains or (losses)
  • line 17: Rental real estate, royalties, partnerships, S-corps., trusts, etc.
  • line 18: Farm income or (loss)
  • line 21: Other income

A separate Blog post will explain each of these in detail. I will also explain in the blog posts the general income producing categories shown below, and the particular forms and schedules required to report such income:

  • Self-Employment income reported on the Schedule C
  • Capital Gains and other Investment Income reported on the Schedule D
  • Rental Income reported on the Schedule E
  • Royalty, Partnership , S-Corp.Trust and Estate income that is reported to you on the various 1099-MISC and K-1 forms, and then reported on the Schedule E
  • Farm Income reported on the Schedule F

The Adjustment categories listed on page 1 are expanded on the form 1040, and include the (4) Adjustment categories brought forward from the form 1040A. You can review the (4) 1040A Adjustments on the previous blog post at The 1040A: (4) New Adjustment categories. The (10) new Adjustment categories on the form 1040 are:

  • line 24: Certain business expenses of reservist, performing artists, and fee-based government officials
  • line 25: Health savings account deduction
  • line 26: Moving expenses
  • line 27: Deductible part of self-employment tax
  • line 28: Self-employed SEP, SIMPLE, and qualified plans
  • line 29: Self-employed health insurance deduction
  • line 30: Penalty on early withdrawal of savings
  • line 31a: Alimony paid
  • line 35: Domestic production activities deduction
  • line 36: (10) miscelaneous write-in adjustments

A Blog post will explain these in detail.


The Itemized Deductions feature is added to line 40 on page 2 of the form 1040. You report these on the Schedule A form. Itemized Deductions can potentially give you a much larger deduction than the Standard Deduction. You can utilize either the Standard or Itemized Deduction on the form 1040, to give you the largest reduction of your final Taxable Income. A blog post will explain the Itemized Deduction feature and the Schedule A.

If you remember, the Standard Deduction was the only option on the forms 1040EZ and 1040A. You cannot use the Itemized Deduction feature on the forms 1040EZ or 1040A. Please review the blog post The 1040A: The Standard Deduction if you have not already studied this post.


Income Phaseout Levels for Itemized Deductions and Personal and Dependent Exemptions for higher-income taxpayers. These Phaseout Levels are a component of The Affordable Care Act, and limit these (2) deductions when your income rises above the defined threshold levels. A Blog post will explain these in detail.


The Nonrefundable and Refundable Credits are expanded on the form 1040. Please review these previous 1040A posts that explained the credits available on the form 1040A. All of these 1040A form credits are carried forward to and included in the form 1040. The 1040A: the (5) Nonrefundable Tax Credits and The 1040A: Payments and (4) Refundable Credits

Several Nonrefundable Credits have been added to the form 1040:

  • line 48: Foreign tax credit
  • line 53: Residential energy credits
  • line 54: Other (11) miscellaneous credits
    • General business credit
    • Credit for prior year minimum tax
    • Mortgage interest credit
    • Credit for the elderly or the disabled
    • Adoption credit
    • District of Columbia first-time homebuyer credit
    • Qualified plug-in electric drive motor vehicle credit
    • Qualified electric vehicle credit
    • Alternative motor vehicle credit
    • Alternate fuel vehicle refueling property credit
    • Credit to holders of tax credit bonds

Several Refundable Credits have been added to the form 1040:

  • line 72: Credit for Federal Tax on fuels
  • line 73: Other (4) miscellaneous credits
    • Notice to Shareholder of Undistributed Long-Term Capital Gains
    • Health Coverage Tax Credit
    • Credit for Repayments
    • Tax payments made during the year, that do not go on any other line

A Blog post will explain these in detail.


The many Regular Additional Taxes will be explained that can only be reported on the form 1040. All the tax categories introduced on the forms 1040EZ and 1040A carry forward to the form 1040. Some of the new taxes reported on the form 1040 are rarely used and imposed on your tax return, but they will be explained so you are aware of them. The many new regular tax categories are reported and combined onto line 44:

  • Tax on your normal taxable income above the $100,000 threshold that uses the Tax Computation Worksheet, instead of the Tax Tables used for the previous 1040EZ or 1040A forms.
  • Tax calculated using the Qualified Dividends and Capital Gains Tax Worksheet, to give you the lower Capital Gains tax rates on Qualified Dividends and Long-Term Capital Gain investments you were paid
  • Tax calculated using the Schedule D Tax Worksheet if you reported more sophisticated investment income on the Schedule D
  • Reporting tax on your child’s interest and/or dividends – form 8814
  • Reporting a child’s unearned income above $2,100 – form 8615
  • Tax on lump sum distributions – form 4972
  • Tax on section 962 election
  • Recapture of an Education credit from previous years – form 8863
  • Tax relating to a section 1291 fund
  • Tax on farming or fishing income averaging on the Schedule J
  • Foreign earned income tax worksheet if you claimed an exclusion for foreign income excluded from U.S. Taxation.

A Blog post will explain these in detail.


The Alternative Minimum Tax (AMT) on line 45 is explained in its own blog post, as this is by far the most confusing and misunderstood tax the IRS imposes on “higher-income” taxpayers.

The U.S. Congress passed the AMT in 1969 to ensure a few very high-income taxpayers at that time, paid a minimum amount of tax. An earlier report to Congress had documented that in 1967, 155 taxpayers with adjusted gross incomes above $200,000 – had paid no income tax, as they had maximized their legal deductions to create a zero tax liability for themselves. That $200,000 threshold would be equivalent to $1.17 million dollars today, adjusted for the succeeding many decades of inflation.

Congress deemed this unfair, and created an additional layer of taxes above the regular income tax rates – called the Alternative Minimum Tax. This was designed to force these 155 very high-income taxpayers to pay a certain minimum amount of tax, even if their regular tax liability was zero because they legally took enough deductions to zero out their tax bill.

Congress, though, never properly indexed the AMT threshold amounts for inflation, so many upper-middle class taxpayers today are liable for this additional tax. The AMT was never intended to “capture” any middle-class taxpayer as it has done for many decades now. This is a huge revenue source for Congress, so there is strong resistance to repeal the AMT law, or adjust the income thresholds that trigger the AMT tax.

President Trump in 2017 has proposed through his Tax Reform agenda to eliminate the Alternative Minimum Tax (AMT). It will be interesting to observe the “battle” this will setup with a resistant Congress that never wants to repeal the AMT. Follow my “Tax Update” blog posts beginning in December 2017 for any news on this matter. See that blog post at Tax Law Updates & News.


The Other Taxes are reported on the form 1040 that encompass the remaining taxes Congress has written into the Tax Laws, including the high-income Affordable Care Act Taxes that begin in 2010. They are:

  • line 57: Self-Employment taxes reported on the Schedule SE
  • line 58: Unreported social security and medicare tax on tip income – form 4137, and Unreported social security and medicare tax on salary income – form 8919
  • line 59: Additional tax on IRAs and other qualified retirement plans
  • line 60a: Household employment taxes – schedule H
  • line 60b: First-time homebuyer credit repayment
  • line 62a: Additional medicare tax – form 8959
  • line 62b: Net investment income tax – form 8960
  • line 62c: the remaining (27) miscellaneous tax categories for seldom-used categories that only affect a small number of Taxpayers each year

A Blog post will explain these in detail.


One Payment category has been added to the form 1040:

  • line 71: Excess social security and tier 1 RRTA tax withheld

This happens typically to high-earner taxpayers who switch jobs during the year, when the multiple jobs combined withheld too much Social Security tax from their paychecks.

The wage income cap for regular wages subject to Social Security tax in 2016 was $118,500 – for a maximum withholding amount of $7,347.

If the taxpayer earned above $118,500 from their multiple jobs – the several employers combined often withhold above that $7,347 limit of Social Security tax. This line 71 will refund the excess Social Security tax withholding that was collected above that $7,347 limit. A Blog post will explain this in detail.


Click the hyperlink below to begin the blog post that will explain the (8) new Income categories added to the form 1040.

The 1040: The (8) New Income Categories


Feel free to comment on these blog posts, or send me an email at Mike@TaxesAreEasy.com

Blog Written Content ©2017 Michael D Meyer. All rights reserved.

PDF IRS forms, instructions & publications – ©2017 Department of the Treasury Internal Revenue Service IRS.gov


Legal Disclaimer: Nothing written or expressed in this Blog shall be construed as legal, accounting, or tax advice. This Blog is for informational purposes only, to inform Individuals about the IRS tax forms required to file an individual tax return, and the instructions that accompany such IRS tax forms.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any tax transaction or filing any tax form.