Business Finance Homework Help

Taxpayer Project: Part 4

Chapter 9 provided an overview of businesses. We learned about business expenses and various tax rules regarding accounting methods. In Part 4 of the Taxpayer Project, you will add to your taxpayer story by providing information about your taxpayer’s small business, which they will operate as a sole proprietorship.

Instructions for Part 4:

Complete the following questions to add to your taxpayer information. Specific requirements are listed in each question.

It is recommended that you type your answers, so that you may later Copy-Paste as you organize the final project.

Remember to consider adding nuanced, misleading, or additional information to add difficulty/complexity to your taxpayer’s story.

Taxpayer Project: Part 4

1. What is your taxpayer’s small business?

2. Is this small business a “specified service”? Why is this important?

3. Is your taxpayer’s business cash or accrual basis? What are some tax-specific rules regarding cash or accrual basis that may differ from financial accounting that you should be aware of if you are preparing your taxpayer’s return? (just discuss the method, cash or accrual, relevant for your taxpayer)

4. Create an income statement for your taxpayer’s small business. Review all remaining questions and the examples on the last page before starting, to help guide you with selecting your items of expense. Choose about 10 expenses that make sense for your taxpayer and their business. Do not include any depreciation or amortization expense. We will add this in Part 5. Your taxpayer’s business should be profitable.

	Amount Reported by Taxpayer
Revenue
Less:	Less:
Net Business Income:

5. After reviewing your taxpayer’s income statement, you have several questions. Identify 5+ expenses that you want more information about, in order to determine deductibility. What information does the taxpayer provide to you related to these 5 expenses? (See examples on the last page). Provide enough detail so that the reader can make the determination of how much is deductible in the current year.

6. For each of the 5+ expenses you receive more information about in question 5, are they deductible (in full or in part)? Why or why not?

7. Your taxpayer followed financial accounting rules when creating their income statement. Look back on your responses in question 3. Provide 2 more pieces of information that can potentially affect your taxpayer’s taxable business income because of their accounting method (cash or accrual). For example, if they are cash basis do they have checks they haven’t cashed and aren’t currently included in revenue? Are any of the expenses on the income statement prepaid expenses? If they are accrual basis, did they receive advance payment and have unearned revenue that potentially needs to be included in revenue? Do they have any prepaid expenses not included in expenses that potentially are deductible for tax purposes? Was bad debt expense or warranty expense estimated? Provide enough detail so that the reader can make the determination of whether an adjustment to the income statement is needed in the current year, for tax purposes.

8. For each of the 2 pieces of information you receive more information about in question 7, what is the effect on the income statement, if any? (i.e. is the revenue going to go up or down? Is a certain expense going to go up or down? By how much?) Explain.

9. You realized your taxpayer forgot their automobile expenses for using their personal vehicle for business. What information do they provide to you regarding their automobile use?

10. Based on the information provided in question 9, calculate the amount that your taxpayer can deduct for tax purposes for use of their personal automobile in their business.

11. Copy-Paste your taxpayer’s income statement from question 4 below, then for each line item, determine the amount included and deductible. What is net business income to be recognized on the tax return?

	Amounts Reported by Taxpayer	Amounts Recognized on the Tax Return
Revenue
Less:	Less:	Less:
Net Business Income:

Examples for Part 4 of the Taxpayer Project: Sally and Jim (MFJ)

(Note: These examples do not meet all requirements.)

	Amount Reported by Jim	Amount Deductible and Included in AGI
Revenue	350,000	350,000
Less:	Less:	Less:
Insurance	12,000
Supplies	50,000
Rent	18,000
Wages to employees	37,000
Utilities	10,000
Marketing	100,000
Taxes	9,000
Contributions	1,000
Fees	500
Meals	3,000
Entertainment	2,000
Miscellaneous	1,500
Net Business Income:	92,000

Jim’s business is Cash Basis. All items of revenue and expense represent cash received and cash paid in 2020. You ask a few follow-up questions and learn the following:

The $9,000 of taxes is composed of $6,000 of Federal Income taxes (related to the prior year tax return) and $3,000 of sales and payroll taxes.

The $1,000 of contributions is a contribution to the town mayor’s reelection campaign. The mayor is very friendly towards businesses, so Jim wants him to win the election.

The $500 of fees represents fines for parking violations that Jim received while making business deliveries.

You confirm that all meals and entertainment expenses were directly related to business.

The $1,500 of Miscellaneous expenses is groceries that Jim bought for his family. Jim accidentally used his business credit card.

The $100,000 marketing expense is reasonable in amount. Jim opened a new store and paid for a very large ad campaign to promote new business.

The rent expense of $18,000 is a prepaid expense. On July 1, 2019 Jim paid $18,000 for 18-months of rent for July 1, 2019 to December 31, 2020.

Jim forgot about his automobile expenses. He used his personal car to make deliveries for his bakery business. He drove his personal car 3,000 miles for personal purposes and 7,000 for business purposes in 2019. In addition, Sally drove the car 2,000 miles for commuting.