[tingtuzii]

From the information provided, determine the amount of gross income to be reported on the individual income tax return and indicate the amount excluded from tax (if any):

#7 Schedule C revenue of $50,000, COGS $10,000, office supplies of $1000, business meals of $4000, FICA taxes of $2600, and salary to the sole proprietor for $25,000.

Becker’s answer: included $37,000 (=50,000 – 10,000 – 1000 – 50%x4000); excluded FICA taxes $5200, 50% x 4000.

Should gross income include both salary to the sole proprietor and net business income/loss in this question? I also deducted 50% of FICA to arrive gross income. My answer is 37,000 + 25,000 – 50%x 2600. For the excluded amount, i have no idea about how to get the $5200. Can some one hep me out?

[Anonymous]

First the FICA part, $52,000 total amount where the business is responsible for $26,000 (Schedule C) and the taxpayer is responsible for the other half (reduced by the 1/2 deduction on the form to avoid him paying “twice”). None of FICA is reported in Gross Income as the amounts are used later in the tax owed calculation. ie: you don't net it so you can use it later.

The question is asking you to calculate Gross Income from a Sole Proprietor. Think about it this way, the Sole Proprietor is taxed on everything that comes into his business (revenues), not on what he takes out (salary). It is assumed that since he has control of his business everything is essentially a “salary”.

If you include the Net Income from the business AND his salary you are taxing him twice (which is what is done if he owned a Corporation). The information provided to you is what you would calculate “like” a Net Income as the expenses for FICA are reported in another section of the tax form (if you included the FICA expenses as a deduction to he “Net” and also reported it would be a duplicate entry and he would be under reporting his income).

Here is what your equation is doing:
$37,000 Net Income on Business
$25,000 (Adding addition amount to taxable basis, not needed)
($26,000) (Reducing taxable basis, this will be done later)

Final Result: $10,000 Taxable basis (37+25-26-26 {later in the form})
Actual Result: $11,000 Taxable Basis (37-26{later in the form})

[Author]

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